There are four traps buyers and sellers fall into in assembling the value of a business. As a result, they end up paying more than they should, or expecting too much if they are selling. The "comparison game" is first. This assumes that because someone paid a certain price for a particular type of business, that all similar businesses with the same profits will fetch that price.

If a hardware store with net profits of R10 000 a month was sold for R250 000, every other similar venture with that sort of profitability should sell for R250 000. Nonsense. Appreciate that each business operates within its own economic environment and although profit levels might be the same, that could be all that is. The first may have been going for five years, the other five months. One works long hours, 7 days a week, the other a 5 day week.

Another variable is the turnover multiplier, particularly pertinent in food businesses, like supermarkets or tea rooms. The myth is that price is calculated at three or four times monthly turnover. So a store doing R100 000 sales would have a price tag of R300 000 or R400 000 plus stock. Service stations also go wrong here. Value here is often put at monthly literage multiplied by R1,50 or R2. That would mean a station pumping 200 000 litres a month would go for between R300 000 and R600 000 plus stock. The flaw is that the concentration is on the wrong end. Just because the sales volumes of two supermarkets or garages are the same, does not mean their profits are identical. One could have a much higher rental than the other or a large amount to pay off on leases or instalment purchase agreements.

Hours and wages bills may vary substantially and hence bottom line. Another myth is that you've got a good buy if you knock the seller down 10% or 15%. But, most sellers inflate their price anyway hoping to catch a sucker. So, you end up paying what it's worth anyway.

The time to knock the price down, is once the seller has been forced to bring it back to earth because the business won't sell. One important myth is the "tangible asset" myth, which says if you pay the asset value for a going concern you've done well. Remember, a business needs profits before assets represent any value.

You could sell off the machinery, you argue. Bear in mind in a forced sale, you never get your price for equipment and surely the reason for buying a business is to make a profit every month, not just a one off sale profit.

Mike Hindle of Aldes Business Brokers, www.aldes.co.za

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