Small business valuation cost

[c1223]

I'm looking at getting a counter-valuation for a small business that has been running for 4 years. It'll be based on the previous 3-years of accounts. The valuation provided by the business is based on assets + profit x PE value.

How much should I expect to be paying an accountancy firm for a valuation?

TIA

 

[Mr D]

How much work you requiring the firm to do? That's how much you should pay.

You can get a figure from the guy down the pub, from some websites and from your own head that can be just as helpful. Less official but as relevant.
Ultimately what is the buyer willing to pay?

 

[Clinton]

Contrary to popular opinion, accountants aren't generally qualified to value businesses.

You can appoint a qualified valuer, and I can recommend one or two, but I would not advise it for a "small business". Just pick a number out of thin air and you're good to go. Why do you need a valuation anyway, is it to buy the business?

The valuation provided by the business is based on assets + profit x PE value.

I've no idea what that's about but it sounds like someone's making it up as they go along. While it may have accounting terms in it, that's a bunch of gobbledegook!

What are these "assets" you mention? Is that book value or market value or fire sale value? And why are we talking assets rather than net assets (ie what about the liabilities)? And are they tangible assets or fluffy nonsense like goodwill?

What is this "profit" you mention? Is it EBIT, EBITDA? Is it after paying the owner a salary for the time spent running the business? Who audited the accounts to verify these "profits"?

And what do you mean by PE value? PE values based on what - listed companies in this sector? If not listed companies where did you get your comparative valuation P/E data from? And who told you that you multiply profits + assets by whatever multiple you're using.

 

[c1223]

I'm looking to buy a 40% share in the business. The owner has provided me with their valuation, so I just want to get it checked over.

What are these "assets" you mention? Is that book value or market value or fire sale value? And why are we talking assets rather than net assets (ie what about the liabilities)? And are they tangible assets or fluffy nonsense like goodwill?

To be clear, as I wasn't in my first post, their valuation is based on: Net assets + (pre-tax profit * PE value). So it's book value of the assets. They are tangible.

Who audited the accounts to verify these "profits"?

The figures are based on the unaudited accounts submitted to companies house. I've worked closely with the business since the start, so I am confident the profits are accurate.

And what do you mean by PE value? PE values based on what - listed companies in this sector? If not listed companies where did you get your comparative valuation P/E data from?

The PE value is one suggested to them by their accountant. I think this mostly what I need to get advice on. I need some comparative figures to help me.

 

[Clinton]

I would advise you to not bother with comparative figures. First, data on these private transactions are not publicly held anywhere and there is no way in hell to get an idea of PEs. The closest you'll get is perda.net but I would ignore external, self-selected and self-reported data.

Seriously, just pick what looks like a reasonable number out of thin air and you've got as accurate an idea of the valuation of the business as any detailed accountant's calculation. (What's this multiple the accountant provided you anyway?)

The important thing you need to note, and I always struggle to get small business owners to understand this, there is no one value to a business!

If he thinks it's £100K and you think it's £40K, then the value is £100K (to him) and £40K (to you). Both are correct valuations. Seeking an external valuation is simply a looking for a crutch to justify paying a certain amount. My advice is to not bother with it. Pick a number you're comfortable with, offer that to him and refuse to share any calculation you used to arrive at that figure. If you need to justify it, then hire someone to put together justification for whatever price you're offering ... not the other way around!

Oh, and if you do go ahead, do get a solicitor involved and get a proper share agreement drawn up.

 

[KAC]

As @Clinton has said, if you will only have 40% of the shares it is essential that you agree and sign a shareholder's agreement before parting with your money. Have a look here

40% gives you virtually no say in running the business without an agreement

 

[Clinton]

As @Clinton has said, if you will only have 40% of the shares...

The size of the shareholding is also a good pretext on which to negotiate price down. If 51% of the business is worth £51, 40% isn't worth £40, it's worth a lot less.

I'd argue for something like £20 or £25 given that I need to factor in a discount for lack of controlling interest. (I bet his accountant didn't tell you that )

 

[S2K]

Will your 40% attract 40% of the voting rights? How's the other 60% split? Will you be entitled to dividends? Forget about the P&L for a moment, what does the balance sheet looks like? What are your exit plans? Any lease commitments? What are the risks that the business is facing and how confortable are you with those?