Price & Value Compared

by Mike Hindle of Aldes Business Brokers

 


It is one thing to have practical methods for putting a market related value on a business you want to buy, but will theoretical prices be realised in the market place?

We have looked at three methods of assessing the value of two businesses with the same net profit but different asset bases. Both had net profits of R6 000 a month, but the garden service business achieved it with assets of R60 000, while the gift shop got by with assets worth R140 000.

We put an average price tag on the garden business of R80 466 and on the gift shop one of R138 366. There often is a difference between value and price. It can be based solely on horse trading between parties.

But there are many other factors influencing price, a violent robbery, for example. Unfortunately, over the past few years this had been a real concern with buyers. A seller whose wife passes away may want to get out of the business at virtually any price. He is not overly interested in the value of his business. Partners who are at each others throats and are keen to sell tend to accept any reasonable offer, even less than the valuation. A seller with cash flow problems will be forced to accept a lot less than the value.

A seller who is not prepared to provide any financial information about the business will receive low offers. But there are things which help the seller to get value. Offering good terms to a buyer is one way. Having sound records and provable profits creates buyer confidence, resulting in a better price.

Buyers often find they lose golden opportunities by adhering religiously to third party advice on not paying more than a certain amount. Then they spend months trying to find a similar operation, eating up their capital and berating themselves for not offering a little more the first time.

If the business will pay you a salary and give you a reasonable return on your money and the balance of the price is being financed out of the cashflow of the business, it really doesn't matter what you pay.

The point is you are buying more than plant and equipment, more than a lease to some premises, more than just a profit, you are buying a way of life.

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

Back to www.bizland.co.za