Tool Box
Issue No. 51 - February/March 2010
How to measure a business worth
For many SME owners, their business is their largest asset and for many, one that is expected to help fund their retirement. What is your business is really worth, and what sets a high-value business apart? For every business that sells for an attractive price, there are many that struggle to sell, let alone fetch an attractive price. With the average age of business owners increasing and fewer new entrants looking to buy existing businesses, the sale price of many businesses is likely to come under pressure. When you come to sell a business the first question is: what are you selling? In most cases, this is fixtures and fittings, plant and equipment, stock on hand, and the goodwill of the business. Generally, a buyer won’t want to purchase your liabilities or your business structure, nor will they want to collect your outstanding debtors. Most business sales become a sale of business assets. The value of plant and equipment, and trading stock, can generally be agreed relatively easily. The tension is usually around the value of the goodwill. This is because goodwill is made up of many intangible assets – things you can’t readily quantify. Goodwill can include the value of: the business name; the customer list; the income stream generated by the business; your location and lease on premises; your brand value; franchise or distribution rights; your operating systems; advertising; and supply agreements. The list goes on. We can all agree there is value in these assets but the question is, how much? Goodwill is basically the value of the future free cashflow of the business. Based on how your business is structured, it is the value of the profits the business can generate in the future. This is what a buyer is prepared to pay for. If a buyer has a reasonable certainty of profits and free cash flow in the future, then this is worth something. By comparison, a start up business will have a higher level of risk and no certainty that profits can be generated. In f...
