how to value a business for sale

[sammyboy]

Hi, in the initial stages of selling our business.. is there a formula or similar to work out what it is worth?? thanks

[Jexley]

I've heard people talk about it's value being along the lines of what it can earn in 3 years (sometimes it's 5), but a lot of it depends on who can run it as well as it's value to someone that doesn't know what they're doing (ie, not you) may be lower as that earning potential will decrease for every line item that they can't do properly.

Curious to hear if there's something formal though, because I'm looking at selling (and then buying) in a few years too.

[jasonm]

I've heard annual turnover is a rough figure, obviously assets, liabilities and whatnot will affect it.

[sammyboy]

thanks for advice.
Due to ill health i need to sell my business...i dont know where to start. can anyone give me any direction ? Based in Melb, who can i get to do an accurate valuation and what is the best way to move forward to initiate a sale??

[JamesMillar]

Hi Sammyboy

I'd be happy to give you some advice and direction on this. There is too much to cover online so feel free to contact me at our office - details below.

James

[bizbuysellcoach]

Hi Sammyboy,

I do hope you getter back to feeling better very soon.

As for your business, the good news is, it's really quite simple to sell your business even without the expense of a business broker but it's entirely up to you.

Here's another option you could consider looking at, along with the kind offer from James.

The Bizsale Kit has been created for business owners like yourself who just need some guidance and help to get started and see you through the business selling process with information and tools from people who have been in your shoes and can offer you expert insight.

The Bizsale kit also provides you with an accurate valuation tool to work out the true value of your business yourself or if you prefer, sit with you accountant and go through it together. This is a low cost alternative to a business broker. Keep in mind, you do most of the work involved in selling your business even if you have a broker, so it may make sense to sell it yourself with the help of your accountant to save money.

It's worth having a look and see if it's something you'd be comfortable with.

Wishing you good health and success in the future.

[altima]

According financial management theory to valuate business you should:
1. Project cash that this business will bring to owner for very long period (in theory even in perpetuity)
2. Find out appropriate discount rate. Basically that is expected interest rate for similar kind of investment, classical formula is I=Irf+Lp+Rp
where:
Irf - risk free interest rate (like RBA rate)
Lp - liquidity premium - the harder and longer is to sell assets, the bigger Lp. For example for real estate it is bigger then for ASX stock
Rp - risk premium - premium for risk. For example it is close to 0 for government insured deposit in bank and much higher for emergent markets stocks

I would say that for small private business that discount rate should be not less than 20%
3. Discount your future income using interest rate you calculated and sum it.

Most tricky issue here is to project cash flow, that is pretty individual for every business.

If you have valuable assets (like real estate for example), often make sense to value them separately, many big company even pass assets ownership to special entity. The reason that with real estate as separate asset the I is lower than with small business in general, so if you use the same discount rate it will not be beneficial for you.

[larryolivier]

Originally Posted by sammyboy

Hi, in the initial stages of selling our business.. is there a formula or similar to work out what it is worth?? thanks

Contact me sales@hillsideconsultants.com.au. We conduct market appraisals on businesses on a daily basis (large and small) and will be happy to provide you with a free guide for your type of business.

Beware most business brokers! Especially if they require 'listing fees' and advertisng money up front. Only have to list 200 businesses a year at $1,000 listing fee each and you don't have to sell a business to earn a good living.

[JohnPhillips]

Originally Posted by sammyboy

thanks for advice.
Due to ill health i need to sell my business...i dont know where to start. can anyone give me any direction ? Based in Melb, who can i get to do an accurate valuation and what is the best way to move forward to initiate a sale??

I recently sold my business and saught the advise of our accountant before doing so. I suspect I made at least 20K more than I'd expected because of the insight they gave us. I'd reccomend talking to your accountant about this.

[bizbuysellcoach]

Hi, great points for establishing the value of a business for sale. Here are a few key drivers of business valuation:


THE KEY DRIVERS OF BUSINESS VALUE

The better professional business valuers consider the following factors when valuing a business:

 MARGIN. The greater the positive difference between all business costs and sales, the more valuable is a business.

 GROWTH. A growing business has a higher value than a business that is static or in decline.

 ASSET UTILIZATION. A business that uses the least amount of assets and uses them efficiently is more valuable.

 FINANCIAL ENGINEERING. A business that actively seeks to optimize its weighted average cost of capital (WACC – the mix of equity and debt funding the business carries) and minimize its working capital is more valuable.

 RELATIVE BUSINESS RISK. A small business that is comparatively less risky when assessed against the business risk factors is more valuable.

Business valuation calculation can be quite complex when selling a business, in-fact a small business can have more than one value depending on the buyers or vendors perspective.

For example, a business can have a different value to an owner-operator buyer than it does to an investor buyer, or to a competitor wishing to expand, or to a supplier or customer wanting to vertically integrate. Unfortunately, it can also have quite a different value again to a liquidator!

Information is vital to get all areas of the business taken into account which impact the valuation.

Free tips for valuing your business can be found here:

'Insider Tips for Selling Your Business'