Finding my Business value - pre sale?

[dafcjim]

Hi.

What is the best way to calculate the worth of a business?. Is this based on its current sales, assets, profile margin etc?

Also freehold? Or leasehold?

Thanks
Jay

 

[Clinton]

If it's a micro business (under a few million in turnover), there is no way to calculate the "worth of a business"!

Or rather, there are a million different ways ...which means it's actually worse than having no way.

Focus, instead, on how you can add value to the business to make it more attractive to buyers and on then using those attributes to drive negotiations to ensure you get the most that the market is willing to pay.

I've had many years of frustration with small business owners wanting to know the value of their business. I've told them all that this is an absolutely stupid place to start anything.

If you're running a (proper) sale process, bear in mind it's expensive in both time and money. So do it only when you're sure you're want to sell!

Run the sale process properly, with the right expertise on board, and take whatever you can get the market to pay you.

Wanting to start with a valuation is what leaves small business owners vulnerable to the numerous con artist business brokers out there dishing out lottery jackpot numbers in every valuation they do.

 

[Avilon]

What is the best way to calculate the worth of a business?

(Next 5 years total profit forecast + cash and receivables + value of fixed assets) and no major debt to any banks or moneylenders.

 

[Socio South West]

There are no firm ways to calculate the net worth..... but thousands of ways to estimate it....

At the end of the day a business is only worth what someone else will pay you for it.

I have bought and sold a few small sole proprietor businesses. To get to a price, I try to work out what it would cost me or the buyer to get to the same trading position as the business is currently in, and then factor in the forward prospects for the business.
No sales or profit in the computation at all. What this sort of business makes is totally down to the business acumen of the business owner, and there is very little guarantee of customer loyalty - although adding a commission based deal in years one and two has worked well in a couple of cases.

 

[fisicx]

(Next 5 years total profit forecast + cash and receivables + value of fixed assets) and no major debt to any banks or moneylenders.

Then divide by the number of days in the month and move the decimal point one place to the left.

 

[The Byre]

Wot @Clinton said + my 30 cents worth - a micro business is worth its assets and seldom is it worth a penny more.

Assets start with a freehold building and then you can add such things as patents, know-how, contracts, designs and other IP. You might be able to add something for truly valuable existing business contacts. Things like profits start to play a role in valuations when there is a substantial 7-figure turnover and market share plays a role when a company has a significant share to sell - what that is, depends on the market.

The one thing most people forget is that it costs money to own a company. They remember that it costs money above and beyond the purchase price to buy the thing, lawyers, accountants, advisors, due diligence - it all costs. But it costs money to own it.

Once a month or once a week, someone has to check the books and generally monitor what is going on. Plus, if it depended on one person, someone must be employed to replace him or her. If it is a medium-sized company, a whole team has to go in for a while and check how things are going.

It is because of all those additional costs that small businesses are worth a great deal less than their owners imagine.

 

[Chris Ashdown]

Pubs are a good indicator, Punters take out massive loans and sign silly contracts to get one and then a couple of years later walk away with massive debt

Other small businesses depend on the skill of the seller to impart some ability for the new owners to make a living and maybe future growth.

 

[bodgitt&scarperLTD]

Pubs are a good indicator, Punters take out massive loans and sign silly contracts to get one and then a couple of years later walk away with massive debt

Other small businesses depend on the skill of the seller to impart some ability for the new owners to make a living and maybe future growth.

Pubs are a strange one. Usually they manage to find another starry eyed young couple to buy the assets off them. By assets, I mean the lease. Which of course, is no asset but instead a liability. But like I said, starry eyed young couples...

 

[Mark T Jones]

Pubs are a good indicator, Punters take out massive loans and sign silly contracts to get one and then a couple of years later walk away with massive debt

Other small businesses depend on the skill of the seller to impart some ability for the new owners to make a living and maybe future growth.

Pubs and restaurants are a great indicator of how deluded buyers can be. It's a phenomenon mostly reserved for hospitality, but an astute vendor can apply it to other business types

 

[m4hmo]

3-4x net profit. plus or including true asset value

 

[Mark T Jones]

3-4x net profit. plus or including true asset value

Plus or minus the sum of 3 carrots less the square root of your birthday

 

[HFE Signs]

Anything from 2-8 times ebitda based upon last 3-5yrs growth and growth potential. Also considering reputation, stock and assets.

Essentially you have to have a case for it’s value and it has to match what someone is willing to pay.

 

[NickGrogan]

I was offered a business in the energy sector.

Past turnover in the low tens of thousands. Never made a profit.

Just lost the main client, so the current year turnover is in the very low thousands.

Valuation: £2.5M

No idea how they came to that figure.

 

[Avilon]

I consider grain farming as the lowest profit margin busines, which corresponds to about 10%. So expecting any properly managed business other than grain farming to yield more than 10% (relative to its assets and inventory) and I always get this at average 20%. Even a company is not making any profits it has an average 20% potential, for me. In this case a company that makes no profit and is asked for £2.5M must have assets between at least £1M-£2.5M.

 

[fisicx]

I consider grain farming as the lowest profit margin busines, which corresponds to about 10%

Setting tat online often has a far lower profit margin.

And high value items (like a house) may only have a fraction of a percent profit margin.

 

[japancool]

Seed farming is quite profitable.

Coca plants, for example.

 

[SillyBill]

I don't think I could ever buy a micro business given my past, and very limited, forays into it revealed the most bizarre delusions of so-called business people on price. I'd consider most of them to be not much more than an act of charity to help the owner(s) pack up with no costs (that they'd otherwise have) and perhaps a small final pay cheque to send them off with. Anyone looking for more beyond that is going to be disappointed, in for a long wait (most appear to be listed for years), or incredibly lucky to find the biggest of mugs. Agree generally for me that price would typically start with a number around the net asset value minus slow moving/redundant stock value (which needs to be determined otherwise you are buying someones crap).

Small (but still greater than £1M T/O) to medium sized businesses is where the price consideration more reflects other items such as whether it is a bolt-on (customer acquisition) that means it doesn't increase your business complexity, doesn't increase your combined costs (staffing or otherwise) that greatly and yet may increase the bottom line appreciably. This is where the right buyer and the right seller can achieve a good price as suits both parties. I'd have 2 companies in the UK which I'd be interested in buying, one is far too big for me to buy so out of my league and the other is a potential. So shows how limited this market can be, dependent on sector. Generally requires a retirement or other significant event to trigger it. And the approach can often be seller to buyer in past experience.

 

[KeithGreen]

Sorry, I'm a bit late to this thread. I'm guessing that you are looking for some practical advice, and hopefully I can assist you in making a start to resolving your query.

As part of my service to small and micro-business owners I offer a free, no obligation valuation service. Obviously this represents my opinion, but it is based on 25 years plus experience of successfully selling small businesses on behalf of clients.

Please PM or look me up and get in touch.

 

[KeithGreen]

Wanting to start with a valuation is what leaves small business owners vulnerable to the numerous con artist business brokers out there dishing out lottery jackpot numbers in every valuation they do.

Sadly this is true. Many broker firms make their money from over-valuing, so they can charge an upfront fee to secure the instruction, rather than working to obtain a sale commission. I will always attempt to give an honest valuation and happy to show my workings to any prospective client.

But, human nature being what it is, many (most) would-be sellers will want an opinion of value. This should be given with sound advice and pragmatic assistance towards a sale (or preparation towards a sale).

 

[SmartClinic]

Some very contrasting advice here. I don't agree with those who say it's worth assets and not a penny more. If that were the case I would be acquiring a lot more businesses!

What hasn't been discussed in much detail and is worth considering are a) the sector you are in and b) the trend in turnover and net profit.

The sector is all about future potential - if you have a business in lithium batteries for example, it is probably more investable than the equivalent sized business mining coal.

The trends in T/O and profit are all about demonstrating the growth of your business and the success of the business model. For example if you've grown consistently at 30% year on year, the valuation may be higher than if the numbers had been consistent for the past 5 years because it shows you're growing and scalable.

Balance sheet plus five years profit is a decent starting point, but there are so many variables that I wouldn't take it too seriously. One of our competitors recently sold at approximately 30x their net profit, so what do I know!

 

[Clinton]

Some very contrasting advice here. I don't agree with those who say it's worth assets and not a penny more.

Most small businesses are not worth even the assets!

I had someone who once contacted me six months after opening a new, trendy bar in London. He had spent £70K on refurbishing the place using some fancy designer firm. But he found it impossible to make a profit from the place and he wanted out. His expectation was that he'd get at least £70K. He was surprised when nobody was willing to pay even £10K. Assets? Pah!

The sector is all about future potential - if you have a business in lithium batteries for example, it is probably more investable than the equivalent sized business mining coal.

Five minutes ago the businesses with "potential" were ****** businesses.

It's nothing to do with sector (or "potential" which you seem to confuse with sector). It's to do with the attributes of the business. The basics are always the same - steady, proven profits (even after a market wage for the owners), a good management team with little to no reliance on shareholders/directors, no customer concentration etc etc. Bonuses are strong growth, recurring income, high barrier to entry.

It's not whether it's in lithium batteries or coal or sewage treatment.

Balance sheet plus five years profit is a decent starting point....

Micro businesses, when they sell (because they usually DON'T sell - in over 90% of cases!) tend to attract 1x to 2.5x net profit, not "balance sheet plus five years profit".

 

[SmartClinic]

Maybe. Lots based on your opinion. It’s all meaningless until you get that offer anyway as we all know and we are all just trying to offer our experiences to help out the original thread poster.

Of course five minutes ago when ****** were the businesses with “potential” there were some acquisitions going on at very inflated prices, so that kind of proves the point.

 

[Clinton]

Of course five minutes ago when ****** were the businesses with “potential” there were some acquisitions going on at very inflated prices, so that kind of proves the point.

I'll believe it when I see some examples of micro businesses - not mid market or bulge bracket - that were sold at these, how do you say, "very inflated prices".

What happens in the upper market is irrelevant to the mum 'n pop shop. This is a truth that many small business owners need to get into their heads! What happens in even the lower mid market in which I operate (£5m to £50m in turnover) is irrelevant to the micro businesses.

We're all helping the OP with our experience. From my experience, people who claim "balance sheet plus five years profit is a decent starting point" are making it up as they go along.

 

[bodgitt&scarperLTD]

I'll believe it when I see some examples of micro businesses - not mid market or bulge bracket - that were sold at these, how do you say, "very inflated prices".

What happens in the upper market is irrelevant to the mum 'n pop shop. This is a truth that many small business owners need to get into their heads! What happens in even the lower mid market in which I operate (£5m to £50m in turnover) is irrelevant to the micro businesses.

We're all helping the OP with our experience. From my experience, people who claim "balance sheet plus five years profit is a decent starting point" are making it up as they go along.

The only examples I can think of, and I know I keep referencing this, are pub leases. This is because there is seemingly no shortage of idiots willing to pay £70k plus for a maintenance lease heavily in favour of the pubco, because they’ve always fancied running a pub and just know they can turn it around where five others have failed before them!