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Small Business Valuations

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  • Small Business Valuations

    Howdy all,
    Another newbie onboard.
    Been spending the last few months reading the books and perusing this great site (getting totally lost and distracted!).
    Just a couple of questions to begin with....
    Can anyone shed some light on mentoring? your experience, is it worth while, referrals?? etc....
    Can anyone recommend a small business valuer in the AK area, my wife runs a wedding florist business and we would like to get it valued to help us with our financial net worth.
    All input much appreciated.

  • #2
    Businesses are typically valued as a factor of profit.
    The higher the income and profit after expenses the higher the value.

    Business brokers normally multiply the profit by a set rate depending on the type of business.

    Although this can be very subjective.
    Is turnover similar to a florist shop?
    Is so maybe it might value somewhere close to what they go for?
    However if it has no physical premises or foot traffic goodwill then this figure will be lower too.


    • #3
      Hi Benster,

      Generally a business valuation is really subjective, and the only real way to know what your business is worth is to sell it, and obviously the price a buyer will pay. Also banks will normally NOT take into account your business value for lending purposes.

      If one of my clients was looking at buying your business I would

      1) start with the net profit before interest and before the owners remuneration
      2) Check that the above seemed realistic and the figures not doctored
      3) Work out a fair market value for the owner. So full time maybe $60,000. If only worked 10 hours per week, then maybe $20,000. Note this is a major area that any buyer would look at, as every vendor says they only work 30 hours per week when they really work 60. Just think of phone calls, the books, or anything else done at night!
      4) Take off the fair market value from the net profit in 1) above.
      5) Work out the return on investment required. A really good franchise business that has been operating for 5 years +, might require a low return of say 25% as it is reasonable safe. A normal business might be around 30% to 35%.
      6) Net profit divided by % return = total business value. ie including assets, stock etc

      So for your business if net profit is say $100,000, and fair market salary for part timer is $30,000, then real business profit is $70,000. As the business seems quite small and reliant on your wife, I would use a high return on investment of say 35% (if new business, then 40% or higher).

      So $70,000 divided by 35% = $200,000.

      This would be the normal valuation method for a reasonable business. If your business is really just a job, ie fair market salary is the profit, then the business would be valued assets plus a goodwill. This is really hard to put a figure on the goodwill as it depends on what a buyer will pay. I would advise a client buyer to pay a very very small goodwill in this situation, as they are really just buying a job, and the business itself has a very small value in my opinion, unless it is making a good business profit.

      Send me an email to [email protected] if you want to discuss further, or ring me on Wednesday or later in the week if you want a quite chat for free. I'm away on holiday, so don't expect an instant response.

      Book a free chat here
      Ross Barnett - Property Accountant


      • #4
        Thanks for the information,

        Ross - we will apply the formula you have given to our numbers when we get them back from our accountant, this should give us some idea where we are. Thanks


        • #5
          Hey Benster Ross' point that business appraisal is purely subjective is spot on and having sold two of my own businesses in the past three weeks (with plenty more to sell) i will also add negotiations can be brutal

          further i'll add that Ross is bang on - to a degree - everything below is based on my personal experiences

          what i'd like to add is the fact that you're in retail - or so i assume - and retail sometimes follows different rules

          for example one infamous propertytalker sold several of his retail businesses for 14 x weekly sales (some of which didnt have much in the way of profit, if any at all)- this week i also sold one of my so called "non profitable" business for 40% of annual sales plus assetts - some people will buy income not profit or ROI

          i know youre asking the question from the point of view of establishing nett worth and heres a suggestion for you - ask two or three business brokers to appraise your business for you as my experience tells me that appraisals based on profit as Ross suggested often dont work out for sme's so as entrepreneurs we have to get a little more creative - talking to brokers is broadening your market research - just dont sign anything lol

          as for your other question - mentoring - in some minor cases i'd say over rated - hows that coming from someone who personally mentors a select group of business clients in addition to running my other businesses - in order to get benefit from mentoring you have to want to learn, find someone you trust and in my view you should also be a little scared of this person as there will be times they need to use a bit of fear to motivate you (people move away from pain faster than moving toward pleasure)

          In short - mentoring can have a major and rewarding effect on your future - so go for it

          Good luck


          • #6
            Thanks Matt
            What metohds have your found worthwhile to advertise selling businesses currently?

            I did not realise RHF has sold his retail businesses.

            Did the business have a actual premises or assets?
            I have had many in the same catagory.
            The resell market had ground to a halt in this market catagory and they are not moving for much value at present.
            Last edited by whitt; 01-08-2009, 01:08 PM.


            • #7
              Hi Whitt
              The other propertytalker in my example has franchised and sold some of their retail stores while retaining rights and royalties - smart and rewarding although not easy and it takes a special type of person to see this strategy through to success

              Personally I'm finding trademe to be the best piece of advertising real estate at present under businesses for sale however another friend is trialing job vacancies with his business for sale listings and is getting a lot of hits – there is a high number of job seekers in the current market who are often attracted to the idea of owning a business – smart move to market direct to job seekers in my opinion

              I also advertise in the daily paper on Wednesdays only (Saturdays are also very effective but I don’t like taking calls in the weekend if I can help it) I don’t use brokers to sell businesses but they are handy for research purposes as is the internet and mystery shopping

              I beg to differ on your comment that resale grinding to a halt and not moving for much value

              Our business has a policy of "researching like no other" this is keeping us ahead of the pack sales wise and the profit for us is as always based on acquisition cost verses sale price - needless to say you must buy low to make money in this game

              Benster - I hope my comments have been of value to you