NotoriousREV

This is just a generic question, but how do you value a business? Is it a multiplier of turnover or profit or what?

e.g. If I had a company that turned over £100k a year and made a profit of £50k, what would the business roughly be worth (I know it's not a straightforward as this but I'm just looking to get an idea)

paulwrxboro

my guess is 150k...just a guess tho

j4ckos mate

do they have any assets?

Gav

It's only worth what someones willing to pay for it. My dads company turns over 700k gross a year but his business is only valued at 170k because thats all someone will pay for it

stilover

I think it's several things

Assets
Turnover
Profitability
Bank balance

NotoriousREV

Ah yes, forgot about assets.

DCI Gene Hunt

Lest we forget about a company's "name/market image" or even "location".

These are all factors in assessing a companys value, for instance a company can have a well known worldwide image/brand albeit with a poor to moderate turnover but still be worth far in excess of its assets and orders.

It's not what a companys 'worth'.... it's what that company's 'worth' to YOU. Another consideration is breaking into overseas markets, a strategic purchase of a US company can see you ease your way into new markets by pushing your UK goods through your US company.

So strictly speaking there's no actual way of telling what a companys worth, but there is a way of telling what that companys worth to you

Suresh

In Finance there are a number of methods that can be used. Take a look here for an overview -

Business valuation - Wikipedia, the free encyclopedia

Any method you choose relies on the fact that the information you have is correct. In the end if the seller knows something you don't (why they are really selling for example) then information asymmetry will flummox any method you choose as the valuation they do using their information will be different to the value using your information.

From a strategic standpoint if a business can make a 50% profit in year 1 (per your example), are there any barriers to entry that mean everyone will be doing it and there will be no more super profits in year 2? If there are no barriers then the expect cashflows and profit margins will be a lot smaller. SWOTS and PESTLE frameworks help with such analyses.

Caveat emptor

David Lock

Don't forget Goodwill. If most profit is because of an individual, say a famous chef, then he might take half his customers with him. There might even be clauses in a sales contract that he can't just set up shop in the vicinity for a defined period. But this wouldn't apply for a car wash so much depends on business type. dl

paulwrxboro

i did this with my hotel, just aswell as the cheeky ****** tryed to buy one over the road a couple of months after

Puff The Magic Wagon!

iTrader: (2)

A typical London courier company goes for roughly 1/3 turnover based on a buy out over a period of time. This is due to the fact that they have no tangible assets other than goodwill.

If they were to have a premises then maybe some more depending how saleable but other assets are negligible - who wants knackered old vans?

Now should that same company have a guaranteed contract for a period of time generating it's income, then the value will increase - but not by too much, maybe the value of that contract over a proportion of the time.

Thing about courier companys is that they are more or less the same - low net profit.

Ours on the other hand is worth multiples of it's turnover because it has 2 things going for it - 1) much lower operational costs leading to a much increased net profit & 2) what makes 1) possible is saleable to other companies in the same & other markets.

Assets, order book & potential

Odds on

Assets are important and obviously command a price

Client base is important, if they can be potentially held..

The good will, if it can carry through, is worth loads.

TBH, if my company made 50k for every 100k turned over, I'd not sell it unless large amounts are offered.

MikeCardiff

iTrader: (2)

Turnover is meaningless - lots of companies have large turnovers, but make very little percentage profits - think Tesco for example - this is fine in a huge company that has a very high turnover, but as it gets scaled down to smaller companies the actual profit made is less and less.

Profit is the main way of valuing a business, after all, how would you know how much to pay for it unless you know how much money it is making, and how long your initial investment is going to take to pay back ?

Assets are also included ( but these vary depending on the type of business, for example a small engineering company that has say £100K worth of machinery compared to a retail shop that has a till and some racking ), as is SAV ( stock held ) and goodwill.

You also need to look at the track record - is the business well established, has a secure place in the market ( lots of people try and do the same thing, thinking that just copying someone elses business model will make them money, and most fail ! ) has it been making consistent profits over the past few years.

And... why is it for sale ? Is it because the owners are retiring, or is it because a huge competitor is going to be opening up oin 6 months.

With the OP's example, without knowing the other details I would say the company is probably worth between £100 - £150 K ( 3 years profits is a very basic way of valuing ).

Just because it is making 100% profit doesnt mean it necessarily worth more as it could be a business that cant be scaled up easily. Often to make another £100K per year could involve so much extra cost that the profit on that £100K may only be £25K or less.

Hoppy

Looked at another way, what would you pay for it? Do an analysis - you should have all the answers.

harvey

iTrader: (48)

Different types of business are valued differently, however, generally, the profitability of the operation is a major consideration. A multiple of 5 - 10 times net profit might be reasonable for an engineering concern, however, asset value, finance and borrowings will all influence this valuation. What changes will take place in the management of the business if the vendors are the current day to day managers. Who will replace them and at what cost?
This is a very complex subject, for instance, are you buying a limited company or acquiring an ongoing trading situation from a sole trader or partnership.
Unless you have existing experience in this area you will benefit from those that have specialist knowledge which could be anyone from accountants dealing with acquisitions to local enterprise agencies or business ventures offering advice and guidance.
Be careful as there are so many pitfalls for the unwarry.

shamrock

When I model business acquisitions I take the following into account when valuing a business:

NPV
Asset Value
EBITDAP * industry beta

These produce a range of these values. The risk and strategic fit of the business will determine our offer from the range of values we have for the business.

Hope this helps.

NotoriousREV

Thanks for the answers guys, it's helped me a lot. I'm doing an academic exercise but it's important for a business case I'm writing to have an understanding

rossyboy

iTrader: (8)

In theory, businesses are valued on estimated future earnings, discounted at a rate that represents their risk profiles . This is what share prices are based on.

Previous profits are unreliable. Just look at banks. Huuuuge profits prior to the credit crunch, with high share prices as their future earnings growth rates were assumed to continue as they were. Then the credit crunch hit, profits fell and share prices are down, due to uncertainty over future earnings.

TopBanana

Depends very much on the business sector

Fantom

The most basic way to value a company is the bottom line on the balance sheet. Then you need to add goodwill and thats where it gets complicated.