Business Valuation Appraisal

SCALE OF FEES
VALUATION / APPRAISAL

Form	Details	Fee
Written	Appraisal (1-3 pages)	$1,100 - $1,900	Plus GST
Written	Appraisal (1-3 pages)	$2,000 - $5,000	Plus GST
Extras	Court attendance/ travelling etc	$240/hour + actual costs	Plus GST
Opinion	(Written)	$240/hour (min $480)	Plus GST

Business Valuation Methods

Valuing a business in not a precise science and can vary significantly depending on the type of business and the reason for going to valuation. There are a wide range of factors that go into the process - from the book value, to a host of tangible and intangible elements. In general, the value of the business will rely on an analysis of the company's cash flow, future risks, land opportunities and market demand.

A business ability to generate consistent profits will ultimately determine its worth in the market place.

Business valuations are usually considered to be a starting point for both buyers and sellers. It's rare that buyers and sellers come up with a similar figure, if, for no other reason, that the seller is looking for a higher price. The goal should be to determine a ballpark figure from which the buyer and the seller can negotiate a price that they can both live with. Look carefully at the number, but keep in mind this quote: "Businesses are as unique and complex as people who run them and are not capable of being valued by a simplistic rule of thumb." These are some of the common methods used to determines a business valuation.

Asset valuation
Capitalization of income valuation
Owner benefit valuation
Multiplier or market valuation
Return on Investment method

Asset Valuation

Asset valuation is used when a company is asset-intensive. Retail businesses and manufacturing companies fall into this category. This process takes into account the following figures, the sum of which determines the market value.

Fair Market value of fixed assets and equipment (FMV/FA) - This is the price you would pay on the open market to purchase the assets or equipment. (Note: this is NOT the new replacement value unless the items are new and resalable at new price).

Leasehold improvements (LI) - These are the changes to the physical property that would be considered part of the property if you were to sell it or not renew a lease.
Owner Benefit (OB) - This is the seller's discretionary cash for one year; this can be obtained from the adjustment income statement.
Inventory (I) - Wholesale value of inventory, including raw materials, work-in-progress, and finished goods or products.

Capitalization of income valuation

This method places no value on fixed assets such as equipment, and takes into account a greater number of intangibles. This valuation method is best used for non-asset intensive businesses like service companies.

In his book "The Complete Guide to Buying a Business" (Amacom, 1994), Richard Snowden cites a dozen areas that should be considered when using Capitalization of Income Valuation. He recommends giving each factor a rating of 0-5, with 5 being the most positive score.

The average of these factors will be the "capitalization rate" which is multiplied by the buyer's discretionary cash to determine the market value of the business. These factors are:

Owner's reason for selling
Length of time the company has been in business
Length of time current owner has owned the business
Degree of risk
Profitability
Location
Growth history
Competition
Entry barriers
Future potential for the industry
Customer base
Technology

Again, add up the total ratings, and divide by 12 to come up with an average value to use as the capitalization rate. You next have to come up with a figure for "buyers discretionary cash" which is 75% of owner benefit (seller's discretionary cash for one year as stated on the income statement). You multiply the two figures to determine the market value.

Owner benefit valuation

This formula focuses on the seller's discretionary cash flow and is used most often for valuing businesses whose value comes from their ability to generate cash flow and profit.

It uses a fairly simple formula - you multiply the owner benift times 2.2727 to get the market value. The multiplier takes into account standard figures such as a 10% return on investment, a living wage equal to 30% of owner benefit, and debt service of 25%.

Multiplier or market valuation

This approach finds the value of a business by using an "industry average" sales figure as a multiplier. This industry average number is based on what comparable businesses have sold for recently. As a result, and industry-specific formula is devised, usually based on a multiple of gross sales.

This is where some people have trouble with these formulas, because they often don't focus on bottom line profits and cash flow. Plus, they don't take into account how different two businesses in the same industry can be. Some examples are mentioned in "The Complete Guide to Buying a Business" by Richard Snowden (Amacom, 1994).

To find the right multiplier for your industry, you can try contacting your trade association. Another option is to utilize the services of a specialist business broker or appraiser who specializes in businesses such as yours.

Return on Investment Method

The Return on Investment (ROI) method calculates the % return on the total amount of money that the buyer has to spend to buy the business including stock and physical assets.

Calculation by this method is done by multiplying the Net Profit of the business under management, multiplied by 100 and divided by the total purchase price or investment required to purchaser the business. (ie. The value of the business without the Owner playing a 'day to day' role in running the business).

Most investors and their financial advisers would expect to get minimum of 20% return on investment from a business which must be balanced agaist returns from other types of investment like property and shares.

There are numerous ways of Valuing a business. Some are more subjective than others. Whichever method is used to determine the value of a business at the end of the day market forces rule. Your Business Broker will be aware of these and can assess the likely sale outcome at any given time.

Benchmark Business & Commercial Sales offers fee-based advice on business value and provide business appraisal and valuations. Please contact the Principal for details.

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