Muffleman

Hi all,

Looking at the possibility of buying a business, and my next step is to have it professionally valued. I know there is a rough guide of 3/4 times GP, but does anyone know what is involved in a proper valuation ? Is there a formula ? etc

Any help gratefully received !

I'm very excited yet sh*tting meself at the same time !!!

Cheers



Matt

Reffro

Freehold or leasehold.

Rough rule of thumb I used to use and it was reasonably accurate was as follows:-

Freehold - cost of the property plus 1.5 to 2 times average annual profit based on last 3 yrs accounts.

Lease hold - Max 2 times average annual profit, with AT LEAST three years accounts to prove turnover+profit.

ProperCharlie

afaik different sectors have different factors for calculating the value of a business. floated companies are usually valued at way more that 3 or 4 times earnings. what sort of business is it? you can have mine if you like - offers in excess of £5M welcome.

ProperCharlie

Reffro - so you would expect to get 100% of your investment back within 2 years? can't imagine many people with strong businesses being interested in those terms.

Muffleman

The business is leasehold.

I'm looking for a more accurate measure than a multiple of GP. There must be some consideration given for value of equipment etc.

Anyone know ?

Cheers


Matt

Reffro

What sector is the business, what I said was fairly general.

And the reason why leaseholds have a low value is your only buying the goodwill, if that goes, you are left owning the sum total of bugger all....

Pete The Biker

GP (Gross Profit) doesnt usually come into it when you are valuing a business. What is important is the ability of the business to generate net profit, which is usually adjusted from the Net Profit figure quoted in the Audited Accounts.

The value of the business is usually a multiple of the Adjusted Net Profit (known as EBITDA (earnings before interest, tax, depreciation and amortisation):-
* Net Profit
* Add back interest costs
* Add back depreciation costs
* add back things which were particular to the current owner e.g. Directors remuneration over and above his actual value to the business

The actual multiple which would apply to the EBITDA in order to calculate the value of the business would depend on:-
* the type of business
* the risks in the product line / sector
* the size of the business (a small business may well be riskier than a bigger more established business)
* the stability of the workforce
* whether the vendor was the key man in the business, meaning that you are buying an 'empty shell'
* etc etc etc

Some businesses like newsagents and pharmacies trade on a multiple of T/O.........

What you need to assess is the return you get on your investment (as a percentage: equals EBITDA divided by the price you pay), and compare that with the return you could get elsewhere for similar risks, bearing in mind that you also need to make a living out of the business!

If the business has other assets (e.g. a freehold property) which are not integral to the value of the business itself (which could trade from any location e.g. rented) then you would have to pay extra for those assets.

I hope this is food for thought. What you really need is professional advice from an accountant who is well versed in buying/selling businesses of the size and sector you are looking at. He should be able to help advise you what price is appropriate, and you would also need him to go through the books (due diligence) to make sure that the audited accounts and any management information show the whole picture with no "black holes", or liabilities like back-tax etc etc

Can you give us a clue what sort of business it is, and how big?

Good luck!


Pete The Biker