Valuing a business.

[MichaelM]

I'm looking for as many varying opinions as I can - does anyone have a view/any experience on valuing an established small business whose net profit is greater than 20% of the turnover?



I've heard 5 x net profit + value of stock/eqpt + goodwill. Is that about right?

 

[rsvdaz]

I asked the same question about a year ago, take a look at this thread:

https://www.cyclechat.net/

 

[themaverick]

Can be a can of worms. Asking on here may give you more of a headache than you expect. Lot of "I'm right and you are not" types. I would google it and also call your accountants if you own the business and looking to sell or if you are looking to buy call a reputable firm of accountants.

 

[endoman]

it's worth what someone will pay, end of. Had 2 business valued professionally for several hundred K, got bugger all for either.

 

[leyburnrunner]

agree with endoman.
youcan do all your fancy-schmansy calcs but there's a difference between theory and the real world.

 

[Red Light]

Lots of ways you can value a business but valuing a small business is an art not a science and at the end of the day its worth what someone is prepared to pay for it. There are some rough rules of thumb for the ball park you should be in.

Price to Earnings ratio. Depending on the industry sector, growth prospects, market sentiment etc it can vary between 5 and 20 times. So take earnings and mulitply it by 5 and 20 to get a price range. P/E ratio is what you will see quoted for public companies.

Price to Revenue Ratio. Some companies are not in profit but they still have value so they use price to revenue ratios in the 1-3 times ballpark

Balance Sheet. What is the net asset value of the business. A company could have low revenue and low profits but have £10m in the bank. In which case its probably worth nearer £10m than the P/E or P/R ratios would suggest.
Goodwill is basically only what the gap between the net asset value and the purchase price. It is assumed that the difference is because the business has intangible value e.g good relationships with customers and suppliers, the brand, people etc that make it worth more than the assets are worth.

Discounted cash flow. If the business is a casg generator you can work out what the Net Present Value of the cash flowing into the business is. It basically takes this years cash income, adds next year's but discounted by a percentage because cash next year is worth less than cash this year and then repeats the exercise for all the years into the future. For any sensible discount rate, going out ten years should be enough

Comparables. Look at what other similar businesses are valued at or have been sold for. The Argos Mid-Market Indexgives you some data on what the current valuations are.

But the more evidence you can gather about what the company is worth the better bargaining hand you have when it comes to price negotiations. So when they make an offer you can counter with "that's ridiculous, 3 months ago Acme Company up the road sold for 10 time that and they had half the revenue and profit we have."

 

[ASC1951]

I'm looking for as many varying opinions as I can ...

Why? If it was me, I would want a small selection of informed opinion.

does anyone have a view/any experience on valuing an established small business whose net profit is greater than 20% of the turnover?

That's about as sensible as asking the combined brains of Cycle Chat for advice on a lump in your neck. Sure, you'll get lots of free comment - and that is pretty much what it will be worth.

What you actually need to know is "a) how much is this business worth in principle? b) how much is it worth to me? and c) how much will the other party accept/pay for it?"
You should expect to pay for a), b) is a matter for you and you won't know c) until you start negotiations.