Ask 20 experts to value a business and you get 20 different answers over an amazing range. You have the sellers accountant telling him he has a fabulous business with a fortune in goodwill and the value of stock and equipment. On the other hand, is the buyer's accountant. He says it looks like a good business, but virtually non-existent goodwill and asset values which have been over inflated.

Value in a business is nothing more than what you as a buyer or seller perceive it is worth to you. Property traders can use the comparative property analysis, which records actual sale prices. These tend to be roughly similar for similar properties in similar locations.

With businesses, the variable are too great to make this type of comparison reliable. People buy businesses for many different reasons and sell them for as many. There are roughly 27 different ways to reach a value. Over the past 12 years, we have used the following three basic formulas very successfully and they are now the recommended procedure of the Institute of Realtors for small to medium size businesses.

Payback Method

Sometimes referred to as the Magic Multiplier, establishes value by multiplying the net profit by the period a purchaser would expect to recoup his investment.

Return on investment method

This method sets the value by dividing the net profit, after allowing for a owners salary, by an acceptable return on investment percentage.

Extra Earning Potential / Super Profits Method

Sets the value for the business based on the value of the assets, plus a goodwill figure calculated after deducting the owners salary, plus interest from the net profit of the business.
Although the result of each method may differ greatly, the average of the 3 methods is viewed as a realistic market value for the business.

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

Back to www.bizland.co.za