It's common for a business owner to think their business is worth far more than it really is worth. This is understandable because they often start the business from scratch, earning little money initially, working long hours, and making several sacrifices along the way, until it's established and profitable. I know I've done exactly that. It's also common for a business owner to "need" a certain sale price. The owner, for example, may want to retire or pay off debt with a particular sale price in mind or need a certain sale price to be able to afford to purchase their next business. Instead of speculating, it's a good idea to find out the real value of your business. This will allow you to make an educated decision if you put the business up for sale or possibly keep it for a little longer to try and increase its value further. Generally, a business is valued on it's profit, plant and equipment, and stock. The first step is to determine the true profit of the business. I mentioned earlier about add backs, and this can have a dramatic effect on the net profit. Once we know all the add backs, we then know the business' true net profit and its potential value. There are two main ways to work out the value of a business: comparing the business to other similar businesses or finding the business' "return on investment," known as its ROI. What many people don't realize is that the percent of ROI varies between business types, because some businesses are easier to run and less volatile than others. For example, a fast food restaurant's ROI is usually around 35 to 55 percent, while a consultancy business' ROI is usually around 60 to 80 percent. Determining the value of the business based on ROI will include plant and equipment, stock, goodwill, legal costs, and stamp duty. So, if you have a high value of stock, this will actually affect your sale price. Our advice is to reduce stock where possible, which will make the business more attractive to a buyer. The value of plant and equipment is an area that often confuses people. As mentioned earlier, ROI includes plant and equipment. What buyers will pay for your P&E will be of second-hand value. To give you a gauge think about what your P&E would sell for second hand on eBay. The formula to work out the ROI percent is Profit ($p.a.) x 100 / Purchase Price After you have worked out the ROI, if you believe your business would sell for more, you can always market it at a slightly high price. Then, you can monitor buyer feedback and make an adjustment accordingly. Overall, be realistic with your sale price and invest your time to work out a sensible value. Ideally, you should get help by asking for an evaluation from an experienced business broker. Asset Agents offers a free, no obligation business evaluation service. To find out what your business is really worth, contact us at assetagents@gmail.com or phone 07 3103 5616.
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