To price a business you must be able to calculate its value. Business value is largely based on expected earnings. However, businesses cannot be valued purely by mathematical formulae applied sitting at a desk. Business values change with time and market conditions.
The following points have no bearing on the current value of the business
- What the seller paid for the business
- What the seller needs out of the sale of the business
- What similar businesses are advertised for
The price achieved will vary according to the relative need to buy and sell, and the negotiating skills of the parties. The Business Broker has an obligation to render skilled and professional service before giving an opinion of the value of the business.
The value of a business is made up of three parts
- Tangible Assets – eg: Plant and equipment, fixtures and fittings
- Intangible Assets – eg Goodwill
Tangible Assets have a book value in the balance sheet of the business. This figure, in many instances, represents the market value for sale purposes. If not, the seller has to establish their value or obtain an independent valuation. As a rule of thumb, most plant can be valued as replacement less depreciation depending on age and condition.
This is the value of the continuing income stream. It depends largely on the net profit of each business.
The business will also have a stock value in the balance sheet. However, this will not be relevant as the balance sheet figure was at the end of last financial year. An estimated value is used for sale purposes with a plus or minus percentage allowance. An independent valuation is done on changeover date.
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September 30 2009 09:01 am | The Professional Business Broker