Potential Value of a Company?

[buzz-promotions]

How would I go about working out the potential value of my company, for say the end of 2006?

I'm not exactly sure how this works? Help! :?

 

[gary brown]

Hi lifecapture,

I buy and sell businesses for clients.

However the way I value a business is on its saleability. This can be totally different from the way an Accountant would value it.

Please tell me why you want to value your business.

One of the things I do for clients is help them to structure their business for sale and to help them build capital value into their business.

Managing a growing business creates its own unique set of challenges.

Ironically I have seen businesses increase their turnover and profits to find their business is less saleable and is worth less.

It is crucuial you structure your growth to help increase the value of your business and make it more saleable.

Perhaps you would like to pm me more details about yourself and your company story.

Gary Brown

 

[buzz-promotions]

PM sent Gary

 

[theMBA]

As said above, there are lots of ways of valuing a business, depending on the purpose of that valuation. If it's for a sale, the value is, ultimately, what a willing buyer and a willing seller are prepared to agree. If more than the assets, the difference is either written off or recorded as "goodwill" by the buyer.

Some examples of more challenging areas for valuation negotiations:

- future earnings forecasts (often used to strike a price in terms of an "earnngs multiple")
- how to value brands

 

[Brin]

Small businesses are very difficult to sell. Often the goodwill in the business lies more in the owner than the business itself. For investors, the purchase of small businesses is very risky: more purchases fail than ae successful. You may find that your business may not be saleable, it may not only have no value, it may be a liability (due to lease commitments, potential employee termination costs, onerous long term customer commitments etc).

Look at it another way: how many ugly babies have you seen over which the parents drool?

 

[gary brown]

I don't find small businesses hard to sell, provided they have the right management structure.

In fact there is a cut off at which point a business grows to a size where it becomes an institutional purchase as it is too big for an individual to write a cheque for it with conventional financing.

With the right advice buying a business shouldn't be as risky as you describe it.

I see lots of businesses remain unsold or not achieve their full price because of the sales process used by the business owner. The trick is knowing when to walk away.

People buy bad second hand cars all the time because they never have a survey, but it doesn't mean all second hand cars are bad.

My advice to any buyer is do your homework and make sure you understand exactly what you are buying and more importantly how you are going to make your money back.

Gary Brown

 

[Steve Roberts]

I buy and sell compoanies all the time - about one a week. As mentioned above, a company is worth what anyone's prepared to pay for it. However, three things will effect what someone is prepared to pay, these are:

1) The level of risk. High risk = low price, low risk = high price.
2) The level of return (profit).
3) Bidder competition. The more bidders the higher the price.

Now of the above three things, two of the (1 & 3) are subjective, and the other (2) is objective. Looking at number '2' (profit) a buyer will want a return on investment, typically, say, 20%. As such, from an objective perspective he may be willing to pay 5 X (real) profit. However, if he's being outbid by another company then it becomes a whole different box of frogs. As such, it brings us into a nice round circle, in that a company is worth what anyone is prepared to pay for it. If you want to maximise the value of your company, you'd do well to make it 'low risk', 'profitable' and have several buyers knocking on your door.

 

[Cornish Steve]

I defer to Gary and to Steve since this is their business; however, to start down the path, there are some established rules of thumb. The following article suggests 3-5x EBIT as a basis for evaluation.

http://www.bizbuysell.com/guide/s_value_1.htm

 

[gary brown]

Sorry this is confusing this is to Steve from the last posting not Steve Roberts

Steve,

Your right this formula is used as a rule of thumb.

The problem is that there is no such thing as a standard business or a standard buyer and as Steve Roberts says it is down to what the buyer will pay.

This is why I try and get a number of motivated buyers around the table and get them to compete against each other. This in my opinion is the only way to achieve the best possible price for the seller.

Every business has its own story and its value or price. I would say ignore standard valuations and look at the business. I sold one a few months back on a 16 times multiple. It also depends on the sector and what the business does.

I can tell you which sectors are hot at the moment if you tell me what your business does. You can pm me for details at no cost.

Gary Brown.

 

[Steve Roberts]

There is a distinct problem in using multiples of profit as a guide to business valuation. The example I use is as follows:

There are two companies both turning over £3m and making an EBIT of £500k. If the multiple formula is adhered to, say 5 X EBIT, then both companies are worth £2.5m. However, company 1 has net assets of £1m and 100 clients. Meanwhile, company 2 has net assets of £50k and one client. Are they still worth the same amount?

To further complicate matters, company 1 has just one bidder while comany 2 has ten bidders biting his arm off.

Now please value the above. Of course you can't because a company is worth what anyone's prepared to pay for it!