Valueing a Company??

[Clodbuster]

I've just been approached out of the blue to sell my company. I am getting on in life and it may be opportune to consider it at this point.

However I haven't a clue how to value the company outside the obvious physical assets and stock etc. I will be sitting down wih my accountant but would like other opinions if someone is prepared to suggest a method of valueing a company.

Many thanks.

[Vikas]

There are a few methods but these depend on what the company does.

For small unlisted companies a multiple of cashflow or gross profit are quite common.

[MyAccountantOnline]

I've just been approached out of the blue to sell my company. I am getting on in life and it may be opportune to consider it at this point.

However I haven't a clue how to value the company outside the obvious physical assets and stock etc. I will be sitting down wih my accountant but would like other opinions if someone is prepared to suggest a method of valueing a company.

Many thanks.

Your accountant will be the very best person to advise you on this.

Their are several methods of valuing a company/goodwill/shares and he/she will be able to explain all of that for you.

[Rhodes100]

In fact your accountant may be the worst person to advise you on your businesses probable selling price. Accountants sometimes have very strange ideas sometimes about valuing a business. I have heard of accountants telling small business owner clients that their business is worth 8 times profits.

A business transfer agent is at the sharp end of the market and they know how much similar businesses are sold for. Your accountant on the other hand has probably never sold a business in his life.

Some business transfer agents offer a valuation service, if your business is worth a fair figure, then a Pinders Report is the authority.

[MyAccountantOnline]

In fact your accountant may be the worst person to advise you on your businesses probable selling price. Accountants sometimes have very strange ideas sometimes about valuing a business. I have heard of accountants telling small business owner clients that their business is worth 8 times profits.

A business transfer agent is at the sharp end of the market and they know how much similar businesses are sold for. Your accountant on the other hand has probably never sold a business in his life.

Some business transfer agents offer a valuation service, if your business is worth a fair figure, then a Pinders Report is the authority.

Thats some rather sweeping generalisations about accountants. I think we'll have to agree to disagree on that;)

[Tom McClelland]

In fact your accountant may be the worst person to advise you on your businesses probable selling price. Accountants sometimes have very strange ideas sometimes about valuing a business. I have heard of accountants telling small business owner clients that their business is worth 8 times profits.

A business transfer agent is at the sharp end of the market and they know how much similar businesses are sold for. Your accountant on the other hand has probably never sold a business in his life.

Some business transfer agents offer a valuation service, if your business is worth a fair figure, then a Pinders Report is the authority.

As someone who sold a small business for about 7.5x pretax profits a few years ago I'm not sure why the assertion that 8x profits is achievable for the right business would necessarily be laughable. If the buyer is a listed company then such a multiple is likely to be earnings-enhancing to them even before administrative economies.

Professional agents sometimes seem to think that it is their duty to talk the value of the business down.

[Rhodes100]

I did use words such as "may be" and "sometimes".

The best thing to do is for the owner to ask their accountant to be honest about their experience in valuing businesses.

I am sure that they would not want any legal action taken against them for undervaluing a business leading to a large loss by their client.

[MyAccountantOnline]

I did use words such as "may be" and "sometimes".

The best thing to do is for the owner to ask their accountant to be honest about their experience in valuing businesses.

I am sure that they would not want any legal action taken against them for undervaluing a business leading to a large loss by their client.

I think you'll find accountants are well aware of their capabilities and also very well aware of the risk of negligence/PI claims;)

[Rhodes100]

As someone who sold a small business for about 7.5x pretax profits a few years ago I'm not sure why the assertion that 8x profits is achievable for the right business would necessarily be laughable. If the buyer is a listed company then such a multiple is likely to be earnings-enhancing to them even before administrative economies.

Professional agents sometimes seem to think that it is their duty to talk the value of the business down.

But a small retail business does not sell for 8 times!

A business will sell for what someone is willing to pay for it, if an agent is on 5% commission why would they want to talk the value down?

In my opinion a private seller is the one who under sells his business.

[Tom McClelland]

But a small retail business does not sell for 8 times!You didn't specify "small retail" in your original post. You just implied that 8x was ridiculous. It might be in some situations, but in others it might be absurdly low

A business will sell for what someone is willing to pay for it, if an agent is on 5% commission why would they want to talk the value down?To make the deal more certain to go through. Not necessarily a bad thing, but vendors should be aware that their interests aren't always exactly aligned with their agent, despite the agent's percentage.


In my opinion a private seller is the one who under sells his business.

Now I'm sure that can be true. :D

[MyAccountantOnline]

But a small retail business does not sell for 8 times!



I must have missed the OP saying he was selling a small retail business:)

[Rhodes100]

We are agents and take instructions from our clients, we cannot make them sell their business for a lower price.

We can make recommendations, however business owner will not sell their business for less than they think it is worth.

We have an legal obligation to act in our clients best interests and not under sell a business in order to get easy money.

[Williams lester]

The best thing to do is for the owner to ask their accountant to be honest about their experience in valuing businesses.



They may also want to ask their business transfer agents the same question! You may be great at what you do, but others in the same field may not...

[solopreneur]

I posted some valuation methods in another post http://www.ukbusinessforums.co.uk/forums/showthread.php?t=166979&highlight=solopreneur

hopefully they may be useful to you.

[mr. mischief]

If an agent is on 5% commission why would they want to talk the value down?

Read "Freakonomics" !! I can't remember all the details, but in essence a US real estate agent selling his or her own house keeps the property on the market for about 2 weeks extra on average and sells it for an extra 5% or so.

Let's say this business could make £150k in the current market, £7.5k commission. If the agent does a poor job and sells for £130k that's £1k less but he or she may easily have spent 30 or 40 hours less marketing the business.

So the difference in commission is no big deal, whereas the £19k net less for the poster probably is a big deal.

[oldeagleeye]

It all boils down to the quality of the business and the market sector doesn't it.

That is why you will see in the equities market some companies have a P/E ratio of 6 while others might have 16.

As far as the OP is concerned he is in a nice niche market and even a cursory look tells me it has huge potential. At the moment for example he appears to only be targeting or maybe just servicing what I would call the rural commercial market farms etc and even there I was surpised by the extremely low prices.

Just £97 quid for a horse paddack in fact is almost unbelievable. There could be bigger margins in this buyout then for a new owner with more dynamic marketing skills and then of course there is the really big money. The military.

Given the huge potential I wouldn't sell that business for anything less than 10 times earnings let alone 8 and I would want a premium on any physical assets like a cheap lease etc too.

Rob

[Rhodes100]

There is so much rubbish spoken on these threads about how much a business is worth.

The fact is that we have absolutely no information on this persons business, trading history, personal circumstances, goals, profits, net asset situation or product development, so one cannot reach a conculsion based on his website. Nor anything about the person who made the offer.

He may be making £100,000 profit a year so this so last post has advised the person that his business is worth just less than a million, adjusting for net assets. However if there is minimal entry costs to the business and I could start a similar business for £200,000 why would I pay a million? The businesses valuation is that case is £200,000.

I see all the time people stating that you should use discounted cash flow techniques, however this values the business based on what it is worth in the current owners hands.

Technically there is always a range of values dependent on how you choose to look at it, sometimes these technical values can difffer enormously if the profit is reasonable

A business is worth what someone will pay for it and that amount differs from person to person.

If the purchasers are reliant on bank finance it is the bank manager who decides how much that business is worth.

However a purchaser may look at a business and decide there are synergies and they can cross sell products to respective customer databases, cutting costs in the meantime, the important criteria in valuing a business is to try to work out how much it is worth to the purchaser, because he will pay anything up to the benefit he will receive by buying the business.

[Clodbuster]

Thank you all.
Perhaps a bit more detail. Only been in the UK for 41/2 years with annual growth inc 32% to date 2010 over 2009. Ave G profit of 30% I have an exclusivity deal with the second largest manufacturer as I've been with them 28 years I get a good deal.
The market ranges from the organic family with 5 chooks in the back garden getting slaughtered by foxes to agricultural enterpises plus some export.

[oldeagleeye]

Well you can really trust a business transfer agent to be unbiased can't you.:eek:

Pubs with stupid price tags. Little haberdashers in little village shops where the takings are so little the profits only just about pay the rent. The business transfer agency is 90% hype dominated by just a few big main players who the little boys feed off. We all know who they are. They all hide under Dalton's Weekly shell. Rhodes your the one talking a load of twaddle.

I quote.

"He may be making £100,000 profit a year so this so last post has advised the person that his business is worth just less than a million, adjusting for net assets. However if there is minimal entry costs to the business and I could start a similar business for £200,000 why would I pay a million? The businesses valuation is that case is £200,000."


The reason you would pay a million is that unlike a newbie you would be buying an established business with a reputation. You would no doubt from the OP's age be advised on the pitfalls when it comes to health & safety and all the other legal regulations surrounding electric fences.

You would pay the money because as a newbie you would be lucky to break even the first year which in this scenario is a £100K of the cost written off immediately. You would then have to build the business up. The bottom line is that 7 -8 years time you just might be making £100K a year and your be that many years older.

All a bit of a false economy don't you think when if you went in straight away with a fresh more dynamic marketing plan you could more than double perhaps treble those profits within a year. A year when again you might just possibly get a £5 million pound contract from the military.

WELL _ WELL _ WELL.

If that don't beat all. There is me telling a dog he is barking up the wrong tree. Then I make a cup of coffee and out of curiosity click on our Rhodes web site ( a bit of a cheap DIY affair it seems to me and the font's terrible ) but the content is interesting. Here is what our Mr Rhodes has to say about buying a business as opposed to a start-up

-------
http://img695.imageshack.us/img695/3013/rhodes.jpg (http://img695.imageshack.us/i/rhodes.jpg/)

Uploaded with ImageShack.us (http://imageshack.us)

Jolly good advice old chap. Take it yourself because there is nothing like shooting yourself in the foot but do get rid of the ROI in 2 years. Few of the businesses that you deal with achieve that.:eek:

BTW. Having been a finance & mortgage broker for nearly 20 years I could value any property or business right down to the pound note.:rolleyes:

[oldeagleeye]

Thanks OP. Definately a quality business which you can spot a mile off and with that sort of growth if profits are in the £100K region well worth a P/E of 10.

Mind you. If you plan relocation abroad again. I would settle for about 6-7 paid net off-shore.

[Clodbuster]

Mind you. If you plan relocation abroad again.

I doubt it - Mugabe won't have me back.

[Rhodes100]

Clodbuster, you will not get a sensible and accurate valuation on here because we dont have enough information and it would be unprofessional of us to ask you to divulge financial details about your business.

I would suggest you pay for professional advice if you believe it is worthwhile you doing so.

Certainly you should not be listening to valuations provided anonymously on here where there is no indemnity recourse due to bad advice.

Perhaps your accountant might be the right person, and they, as it has been mentioned, no doubt would only be willing to provide a written valuation if they felt they were qualified to do so.

You also have the option of business transfer agents or a Pinder Report depending on the size of business.

If the offer is substantial £500k to £1m in my opinion the best agents are BCMS Corporate, however their fees are substantial in themselves, something like £10,000 in up front payments. It would not however be worthwhile contacting BSMS if the offer is in the region of £100,000.

You are right to listen to offers as you state you are close to retirement and your business could take a year or so to sell in any event.

BSMS themselves spend 6/9 months grooming your business and identifying possible buyers, with a small business the average time it takes to find a buyer is 6 months, provided that the marketing price is right.

[Clodbuster]

That is true and I certainly wasn't expecting a valuation - just some pointers to enable me to speak to my accountant with a bit of background understanding.

Thanks everyone.

[jonsay]

:-! tha what? I thought I might get some useful info for myself but all I see is people slagging each other off.

Clodbuster, seek professional advice, and if that is just your accountant so be it. If YOU think he suggests a fair price it is. If not suggest your own. Whatever you tell the potential buyer they'll try to beat down your price anyway. As long as you walk away with what you want its a good deal.

[Cathy Duncan]

oldeagleeye: Well, the post is quite informative, but don’t you think that strategies may vary from business to business? There are giants sitting around who keep eyes on various businesses and when they think the business is likely to go up, they apply relevant strategy to earn more than we expect!

[oldeagleeye]

Your quite right Cathy. We can only talk in general terms but even on the limited info we know the OP,s biz has huge potential. He is in a niche market but one which has huge potential given just a few contacts. Every military base in the world for example has electrified fencing and I know the MOD here well they would expect to pay 10 times the OP,s pricing.

He has sole distribution rights in Britain for the 2nd largest manufcturer of this type of kit in the world. That alone is worth a heavy premium. To say the that 8 times earning is a wildly over optimistic view is IMO nonsense. I would say extremely conservative.

Rob

[sirearl]

Always puzzled why the amount of hours of work that are needed to run a business never seem to come up in the valuation.?

How much per hour,minute,second is important to me and how much work it entails.?

Earl

[Rhodes100]

Always puzzled why the amount of hours of work that are needed to run a business never seem to come up in the valuation.?

How much per hour,minute,second is important to me and how much work it entails.?

Earl

The fact is that it does come up in the valuation along with so many other issues.

A business where the owner is working 7am - 11pm is not worth the same amount as a business where the owner is working 11am - 3pm for the same profit.

[WACCvalue]

Valuation theory
There are two fundamental ways to view the valuation, either the company and consequently the valuation is based on the assumption of going concern or in a liquidation scenario. These two approaches can be assessed using four types of valuation methods:


Net Present Value - based valuation methods
Relative - based valuation methods
Liquidation - based valuation methods
Option - based valuation methods


In the following - a brief explenation of the most commonly applied methods in business valuation.

Trading multiples
The Trading multiples methodology is a comparison to the stock market pricing of comparable listed companies (“peers”) with similar characteristics (from an investor’s perspective).

The debt free price (EV) of each listed peer is compared to that peer’s earnings level (e.g. EBIT) in a given year (expected or realised), hence the “multiple” or ratio. Having determined a relevant multiple, such multiple can be multiplied by the relevant target object’s expected earnings to arrive at an indication of the EV of the target.

Transaction multiples
The Transaction multiples methodology is a comparison to prices paid in historical acquisitions of companies with similar characteristics (from an investor’s perspective).

The debt free price (EV) paid is compared to the latest reported earnings (e.g. EBIT) of such acquired companies, hence the “multiple” or ratio. The methodology is based on historical and near term profitability and does not account for future changes in profitability.

Discounted Cash Flow (DCF)
DCF valuation reflects the present value of the expected future free cash flows to the firm given certain assumptions regarding discount rate (WACC), state of the company in the terminal period etc.

Economic Value Added (EVA)
EVA is a measure of by how much a company's returns exceed the cost of capital. It therefore tells one how much wealth the company has created for providers of capital. Even though the methods are different the resulting valuation is identical to the DCF.

Leveraged Buyout (LBO)
LBO valuation reflects the EV based on what a financial sponsor/private equity buyer is willing to pay for the company given certain assumptions regarding financial leverage, exit value, holding period and IRR requirements etc.

Conclusion
The above applied valuation methods would indicate the most likely valuation range of any given company.