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  1. #11
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,604

    Default

    Hi Neongreen,

    A couple of points

    1) If you start to have a pattern of buying and selling businesses, then the gains become taxable.

    2) Simple example of valuing a business

    Profit before tax and owners remuneration - say $200k
    Less fair market salary to owner (vendor always says they do no work etc etc, but in reality do lots) - say $100k
    Profit remaining $100k which is the business real profit.

    To value a business we look at future maintainable earnings, but as the future is hard to predict you normally go on last fews years average trading, putting more of a weighting on the last year.

    Then you need to figure out the return on investment required for the business. Bad business might be 100%, ie you need to make the same profit in a year as the purchase price. 50% return, is still a bad business, and might be relient on the owner. As the businesses get better, bigger, franchises and less relient on the owner, then the return required decreases. Ie a subway might be able to pretty much run itself, has franchise systems, so the buyer might require a lower return on investment. 30 -40% is probably the norm, with a really good business getting down to 25%.

    If you invert the %, you get the multiplier. ie 33% = 3 times the profit. 25% = 4 times the profit. The multiplier is just an easy way of looking at it, but it is really based on the return on investment % required.

    Some industries have their own return on investment, based on the industry. For example, motels might be extremely sort after, so require a lower return on investment, or effectively they are worth more.

    Say the business is pretty good, and the industry is good, the return required might be 33%. So if profit after owner is $100k, then it is worth $300k. This includes all plant, vehicles etc and is the total price.

    It is hard to work out the return on investment required, and often a business broker has statistics on these, and can provide them.

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  2. #12
    Join Date
    Nov 2011
    Posts
    445

    Default

    You need to consult with a lawyer, accountant and other professionals. Before you buy a business you must make sure the business makes money and is a good investment.


 

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