How do you value a business?

[claret_n_Blue]

Hi all,

I am selling my freehold shop. Downstairs is a convenience store and upstairs is a small flat.

I have a buyer interested, a guy who knows my shop well. We have been talking for a while and he has seen a few months worth of till reports. His suggestion to buy my shop is as such: We agree a price for the business. Then that's it. Then a surveyor will come in and check the building value and we take that as given, that is the final price for the shop. His reasoning being he doesn't want to pay a fixed asking fee incase he ends up overpaying for the business or the building.

This is fair enough and probably the most professional way to go about the sale.

So in order to make the most money, I need to make sure my business value is very high.

I have read a few ways and one common way seems to be that you take the weekly turnover and then multiply it by 10. This is the value of the business. How does this work? Why 10? Why not 12 for 12 months of the year or something?

An idea I had was that we calculate the gross profit for the year. I.e profit just from sales, not including any deductions of wages etc. I then multiply this by 1.5. What this is saying is, in one year, I make X amount. If you pay 1.5 times that amount, I am saying that you will earn the money back for the shop in 1 and a half years. That's a good amount of time to make back a large sum of money.

If I do it this way, it nearly doubles by value, compared to just doing weekly turnover x 10.

So how do you normally go about valuing shops? What are ways I should look out for that might drop my business value or that might increase my value?

 

[Chris Ashdown]

Please do a search on the forum for "selling a business" as this question comes up every day and has plenty of first class answers from experts in the field

 

[Clinton]

I have read a few ways and one common way seems to be that you take the weekly turnover and then multiply it by 10.

Common way? Which idiot told you that that was a common way to value businesses?

An idea I had was that we calculate the gross profit for the year. I.e profit just from sales, not including any deductions of wages etc. I then multiply this by 1.5.

Wow, you didn't like the numbers so you invented your own method?!

I suggest you start your valuation journey by reading my article on valuation myths.

 

[SALESSALESSALESSALES]

There is no forumula, at the end of the day, you can look at turnover, liquidity, capital, staff turnover, added value, opportunity, competition etc etc etc and the number you get will be individual to you and not based on any formula that someone else put together.

Recently, i have been involved in a negotiation which is based on a complex forumula that we came up with between ourselves, it involved a lot of back and forth and haggling over methods (This is an option for a significantly larger business to buy out a fixed % during a fixed window in the future).

I would say in general, people in small companies massively over estimate their businesses value, often there is a single driver (They seller) once they leave what is left?

What did you buy your business for?
Have other businesses nearby sold? If so they would probably serve as your best guide (Ignore FOR SALE as you can put any daft value on it,find out what similar have sold for) ask yourself what would you yourself pay?

 

[Paul Norman]

"I have read a few ways and one common way seems to be that you take the weekly turnover and then multiply it by 10. This is the value of the business. How does this work? Why 10? Why not 12 for 12 months of the year or something?"

This is urban myth.

 

[Paul Norman]

There is no objective way of 'valuing a business'. It is a negotiation. Which hopefully ends with an outcome that is acceptable to both parties.

And various people will have various approaches.

But for a business like a shop, I will want the property valued by a surveyor, and I will want to agree on a formula for valuing the stock at the point of business transfer. I would want three years accounts, and I would want to be able to research the detail behind those numbers extensively.

Certainly, I would not be paying any amount based on turnover. I would consider looking at profit, provided that profit was reasonable verifiable and without excess risk.

But if I could not gain access to the detail I would expect to pay asset value only.

 

[Clinton]

There is no objective way of 'valuing a business'. It is a negotiation. Which hopefully ends with an outcome that is acceptable to both parties...Certainly, I would not be paying any amount based on turnover. I would consider looking at profit, provided that profit was reasonable verifiable and without excess risk.

Spot on, Paul.

The problem is there are many businesses out there which are making no profit. Some just cover the cost of the owner's time. Others don't even make that (i.e. the owner is working for less than minimum wage).

So when the time comes to talk price, these businesses deperately look for a different number on which to base their valuation - anything other than profit.

Unfortunately, there are a lot of people out there willing to tell them what they want to hear, willing to tell them that yes, they can use other numbers and yes, there is a common formula of 10 times weekly earnings or 1.5x gross profit or 6x the product of your age, your house number and your car registration plate.

Sometimes these people are just being morally supportive or whatever, but oft times they are business transfer agents or other players who have a vested interest in the misdirection. I would still be interested in the OP getting back to say where he was told about these "common" valuations methods.

 

[Clinton]

If we were talking about a website business, seo value of the site, traffic etc.

No, it's not.

Where did you find that nonsense?

 

[Paul Norman]

If we were talking about a website business, seo value of the site, traffic etc.

Why do people put this kind of comment on sites where real people are asking for real business advice? It is just blatantly not the case.

 

[Zoe Williams]

Consider working with an experienced outside advisor who can help you prepare your business for sale.Look for ways to increase operational efficiency, cut costs and control inventory without letting it affecting your operations. As soon as you stop investing in new equipment, maintenance and process improvements the value of your company starts reducing.