How much is a business worth?

[avalanche]

If you were looking to buy a small business how would you calculate the value?

Would you if its a steady business with say 6 years track record value it at annual profit multiplier + asset value ?

If thats the way to do it what would be the multiplier ? x3?

 

[john1989]

Depends on the industry but ultimately it's only worth what someone is prepared to pay.

 

[DD-Matthew]

There is no single formula that can be used to precisely value a business. The seller will want to drive the price up, and potential buyers will want the opposite.

There are a number of factors that can affect the value of your business:

• Finance - historical and project profit, cash flow and costs
  
• State of the economy
  
• Competitors - how much are your competitors (of a similar size) worth?
  
• Any patents or intellectual property that you own
  
• Strength of relationships with customers
  
• Value of assets and debt
  
• How many regular purchases / orders you have
  
• People - how loyal are your staff? Is the business dependent upon your personal skills?
  
• Reputation and brand name
  
• Marketing activity

- Matthew

 

[Clinton]

Excellent post, Matthew.

I often speak with business owners who are looking to sell and their first question is invariably about valuation (followed by how long it will take to sell). Give the business owner the standard line John1989 provided - "a business is worth only what someone is willing to pay for it" - and it doesn't soothe their itch. They still want a figure.

So business brokers give them a figure. Typically, brokers who handle small businesses give the owner a flattering figure and the impression that the business will be very easy to sell. Owner goes away happy, and often ends up hiring that broker to sell his business completely unaware of the major dangers of using these brokers.

And you, as a buyer, are going to be dealing with brokers like these - awful fate for you! - unless you've already identified a target business and are speaking directly with the owner.

In addition to the really useful list Matthew provided, I'm going to add that the figure you pay will and should be influenced, in a big way by:
- how well prepared the business is for buyers' inspection i.e. accounts, employee contracts, transferability of the business (lease assignment) etc. etc.
- whether you're buying assets or shares (major tax and liability implications for you)
- how dispensible the owner is to the business ... I appreciate Matthew has mentioned this, but it's worth mentioning again
- whether there are one or two customers who account for an unhealthy share of the turnover (20% or more)
- whether customers are one-off or are on a subscription model
- how well the seller has sourced "non-obvious" or "strategic" buyers i.e. those likely to derive large synergistic benefits from the acquition
- how well the seller gets those other buyers to compete with you to push the bidding up (if they're foolish or naive enough to not have other buyers competing with you, you'll end up getting a very good deal! It could be even 50% or less than you'd otherwise pay)

A business being sold for £100K by one seller could possibly achieve £500K if being sold by someone else. A lot depends on who the seller is and what his expectations are.

I put together an article for sellers titled "Whatever your business is worth, I'll pay double". Maybe that'll give you an idea that you shouldn't be negotiating (or seeking) a single "valuation figure".

 

[avalanche]

Ok thats all the variables so lets define them to get a figure (this is all imaginary)
The business is a local business owned by a chap I know, its a scaffolding business with a yard and office and all the equipment valued at £300k and there is £100k in the bank and outstanding invoices
there is a staff of 10, 7 of which have been there for years 3 get replaced regularly
the turnover is £1.5m and the profit is £190,000 and has grown by 10% pa
There are many regular customers 70% they have systems in place to efficiently run the office
The business could be grown or kept as it is

How much is it worth?

 

[Bob]

How do you define "profit"

 

[john1989]

what about liabilities?
What are you prepared to offer for the £100k cash? I would say £85k approx.
Profit and or before taxation?
What is he owners remuneration?

 

[Clinton]

How much is it worth?

About double the length of a piece of string.

 

[avalanche]

This forum is full of politicians

 

[john1989]

It's also full of people that want answers to unrealistic questions.

As a starter:
£300k equipment
£85k cash
£190k for one years profit
Less any liabilities

 

[Bob]

But @john1989 , we still don't know how "profit" has been calculated As it's a scaffolding business, the liabilities may also include undeclared VAT

 

[john1989]

Vague questions will be met by vague answers

As its a scaffolding business, you would hope the figures stack up

 

[Bob]

Surprising the discounts some scaffolding firms for cash payments

 

[john1989]

If I ask a scaffolder for the cash price, do I need to report myself under MLR, or do you spend the saving in the pub?

 

[Clinton]

One of the key takeaways is this:

The business could be grown or kept as it is

Anyone else putting a value to this should really take into account that there are multiple options here! <sigh>

avalanche, again, there is no one figure. You arrive at a deal by negotiating, not calculating.

 

[DD-Matthew]

How much is it worth?

We've all told you that we cant just give you a figure without digging deep into the business itself, if you want a figure then I suggest you hire someone to do just that.

- Matthew

 

[Carl Mintern]

We've all told you that we cant just give you a figure without digging deep into the business itself, if you want a figure then I suggest you hire someone to do just that.

- Matthew

How much would THAT cost? For the above example

 

[avalanche]

As I said its not a real business and I thought we would assume hey are not fiddling the vat

Never mind I snapped it up for £200k while you lot were still dithering

 

[tony84]

Ok thats all the variables so lets define them to get a figure (this is all imaginary)
The business is a local business owned by a chap I know, its a scaffolding business with a yard and office and all the equipment valued at £300k and there is £100k in the bank and outstanding invoices
there is a staff of 10, 7 of which have been there for years 3 get replaced regularly
the turnover is £1.5m and the profit is £190,000 and has grown by 10% pa
There are many regular customers 70% they have systems in place to efficiently run the office
The business could be grown or kept as it is

How much is it worth?

If you were selling it, how much would you want for it?

 

[avalanche]

Lets say I was retiring and wanted to sell the business,
I would probably open negotiations at £1.2m

 

[john1989]

You'd be laughed at.

 

[tony84]

Lets say I was retiring and wanted to sell the business,
I would probably open negotiations at £1.2m

I did not really want an answer.

The point was, what people want to buy for is usually less than what they would sell the same business for. So when looking at buying you would need to think what you would sell it for and presumably anything less than that is a bonus.

 

[avalanche]

You'd be laughed at.

Unlike you who could not even give a figure

I did not really want an answer.

The point was, what people want to buy for is usually less than what they would sell the same business for. So when looking at buying you would need to think what you would sell it for and presumably anything less than that is a bonus.

There is a formula to work out a value but no one can come up with it like its some sort of mystical witch craft

I'm not buying or selling, I have no connection to any scaffold business just interested in how to come up with a ball park figure for a business and you are all making it over complicated

Can you based on the hypothetical business give a value and how you came to that value,

 

[Clinton]

There is a formula to work out a value..

When you find it please do share.

 

[tony84]

Im not in the business of buying or selling business. I would not have a clue how to come up with a figure.

There is no one calculation. You cant just bang some figures in excel and it calculate it for you. What I would purchase something for could be more or less than the next person.

To give an example, I would sell my business tomorrow for something that would give me 2-3 years wages. But I know nobody would pay that for it as it stands, as its heavily reliant on me being here. 2016 will see me make a lot of changes and that might make it more attractive to someone as they could in theory run it and make a profit with me there or not, but at that point I would want more than 2-3 years wages for it...so would someone then pay what I wanted? Who knows.

The flip side to that is, would I go and buy a company that would take me 10 years to get my money back? The answer is no.
You may find someone who is prepared to do that because they have a side business that would bolt on very nicely and give them an existing customer base to market to, meaning they could make their money back in say 2-3 years.

It is complicated and you can not get the answer you want because there isnt one. And ultimately it is worth what someone will pay.

There are probably exceptions such as a local newsagents which has been there for 30 years with similar levels of income, no expected changes to the local demographics etc. But not being in that field I would not have a clue.

 

[john1989]

Unlike you who could not even give a figure

You will find I gave some earlier on in the thread.

 

[Bob]

There is a formula to work out a value but no one can come up with it like its some sort of mystical witch craft

It is some sort of witchcraft and there isn't one formula, there are loads. This is quite an interesting article. Although aimed primarily at accounting practices, it does also comment on non professional businesses. Most people look at Return On Capital Employed but you will get people who will pay over the top for lifestyle businesses and similarly businesses that are unsaleable at any price

 

[avalanche]

I would have thought if you were buying a small business/Lifestyle business you are doing it to make a wage while being your own boss so any calculation of a price to pay needs to bring a return within 3-4 years or where is the point.
Yes you own an asset but you also need to make a living

 

[Bob]

You get people who have received a redundancy payment/inheritance etc who have always wanted to run a pub/post office/wool shop/model shop etc and they seem quite happy to spend the lot on a business that only makes a wage. Tend not to take advice before so doing

 

[Chris Ashdown]

Often the stock figure is often valued at what it was brought for, this can be miles out as unused and brand new it will have had depreciated in real terms (say its got a lifespan of 3 years for the wood then after that its firewood) so you need to appraise the replacement value and life available to come to a replacement value

Money in bank would never be sold so not relevant or cancelled out, invoice values outstanding would be worth their value less any ones to dodgy payers

Profit can be Gross or Net, net is the one you want

Staff on books for over two years could be under Tupe rules

Contracts are ok if ongoing say a builder building a new estate, contracts to say repair a roof are a one off occurrence and worth little or nothing

How long would it take you to get your money back is to me what counts

 

[avalanche]

I agree Chris and I think most would, as I said you own an asset but a business can change from an asset to a liability in a relatively short time frame

 

[roydmoorian]

As with any sale - If both the Seller and the Buyer are mildly dissatisfied then the price is about right.

 

[Andrew Chambers]

The usual starting point for the value of a business is 3x annual net profit, providing they have been trading for at least three years.

 

[boring-friday]

Ok thats all the variables so lets define them to get a figure (this is all imaginary)
The business is a local business owned by a chap I know, its a scaffolding business with a yard and office and all the equipment valued at £300k and there is £100k in the bank and outstanding invoices
there is a staff of 10, 7 of which have been there for years 3 get replaced regularly
the turnover is £1.5m and the profit is £190,000 and has grown by 10% pa
There are many regular customers 70% they have systems in place to efficiently run the office
The business could be grown or kept as it is

How much is it worth?

I've been buying a lot of websites for 10-30x their monthly profit, I'd say offline businesses are safer. With the profit growing by 10% pa I'd say its worth a minimum of 3x its profit+assets so around a mil. Probably more than 3x the yearly profit with it growing and having long term customers aslong as its a fairly safe industry etc etc

 

[Bob]

The usual starting point for the value of a business is 3x annual net profit, providing they have been trading for at least three years.

No it isn't. If only it were that easy All businesses are different

 

[Andrew Chambers]

No it isn't. If only it ere that easy

Starting point for negotiations. It is the given.

As you say, you are not a lawyer or accountant.

 

[Andrew Chambers]

I've been buying a lot of websites for 10-30x their monthly profit

So about 3x annual net profit?

 

[boring-friday]

So about 3x annual net profit?

Well its less than 2x on average but yeah I agree with your assessment of 3x for offline businesses

 

[Bob]

Starting point for negotiations. It is the given.

As you say, you are not a lawyer or accountant.

Do you have data to back up your assertion. There are far more variables to take into account then just the net profit and we could argue for hours over what is meant by "net profit". We clearly will have to differ on this,
And just for the sake of accuracy, it does not say that I am not an accountant. It says that I am no longer in practice

 

[Andrew Chambers]

Well its less than 2x on average but yeah I agree with your assessment of 3x for offline businesses

Starting point is the key, and was in response to the op. I think we kinda agree.