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Business Valuations Sydney – Melbourne – Brisbane – Canberra – Adelaide – Perth – New Castle : Services provided by Xcllusive Business Agency

Business Valuations Sydney – Melbourne – Brisbane – Canberra – Adelaide – Perth – Newcastle
: Services provided by Xcllusive Business Agency

Business Valuations

Sydney – Melbourne – Brisbane – Canberra – Adelaide – Perth – Newcastle

: Services provided by Xcllusive Business Agency

    • Business Valuation Services
    • Business Valuers Experience & Qualifications
    • Business Valuation Process
    • Business Valuations Contact Us

Valuations need more than numbers

They need experience and understanding. Different businesses will demand different valuation methods

What follows are some brief descriptions of the Valuation methods that are most commonly used for valuing small to medium sized private businesses. One or more of these methods are used depending on the nature and size of your business. As you may have read on other pages of this site, Valuation is just as much an art form as it is a science, and experience more than anything tends to make our decisions for us.

Method 1: Asset Based
Method 2: Capitalised Future Earnings
Method 3: Market Based

Method 1: Asset Based

This method focuses on the assets net of the liabilities. It does not take into account the profitability of the business and is the most appropriate method for under performing businesses, new businesses or any business where the sale of the assets outweigh the sale of the business as a going concern.

Method 2: Capitalized Future Earnings

The value of the business is determined by the future profits that the busienss will generate to its owners. For most private businesses, Capitalised Future Earnings is the valuation method of choice and takes into account the Adjusted Profits and Return On Investment.

 

Before looking at this method, we should clarify the basis for which a Return Of Investment is calculated. The Return on Investment (ROI) relies on the level of internal and external risks associated with a business, and assumes that the lower the risk, the lower the ROI, and resultantly the greater the value of the business. As investments go, businesses are generally considered riskier than government bonds, property investment, shares etc, and as a result the lowest ROI achievable is approximately 20%. Beyond that figure an ROI of between 20% and 100% is calculated based on the several risk factors that may be associated with the business.

 

For example, Paul both owns and manages his manufacturing business. If he were to sell, any buyer would see the business as being heavily reliant on Paul. They would be asking questions like “if Paul leaves, will the business be dramatically affected”. This situation represents a high risk and as such the ROI will be considerably higher than if somebody else was managing the business.

 

Now that we understand the concept of how the ROI is established, the following equation should make more sense. Essentially, by dividing the businesses adjusted profits by the ROI we come to the price of the business.

Adjusted Profit / Return of Investment (%) = Business Price

Example

Paul wants to sell his manufacturing business. He currently manages, but the assumption is that a new manager will be installed when the business is sold. The following table serves to calculate his Adjusted Profits.

 201520162017
Sales$1,100,000$1,400,000$1,500,000
Cost Of Goods$800,000$1,000,000$1,100,000
Gross Profit=$300,000=$400,000=$400,000
Expenses$220,000$300,000$300,000
Other Expenses$7,000$4,000$2,000
Net Profit=$73,000=$96,000=$98,000
Adbacks
   
Sales Manager Wage Adjustment  $70,000
Owners Wage and Benefits  $160,000
New Managers Wage  -$100,000
Total Adbacks  $130,000

Total Adjusted Profits

  

=$228,000

$228,000     /33%=$690,909.09

Adjusted Profit       ROI        Business Price

Method 3: Market Based

This method relies very heavily on the recent sales of similar businesses. For example, lets say that Ryan wants to sell his food distribution business. Within his city, two similar businesses have sold for 3.2 times and 2.8 times their adjusted profits within the last year. Based on this information the valuer will closesly analyse the characteristics of both businesses and compare them to Ryans business in order to determine the profit multiplier to be used.

 

It is commonly accepted that this method if done properly is the most persuasive and accurate. The downfall of this method is that market based information, due to the confidential nature of business sales, are sometimes hard to obtain.

 

Whichever Valuation method used, market sales history is usually taken into account. Comparable sales is the most trustworthy element of a good valuation. Remember; the market is the market.

 

When it comes down it, chances are, the Valuation you receive will involve elements of all of the above methods resulting in the truest opinion as to the value of your business.

Enquire Now About An Expert Business Valuation - Call Us Today on: 1800 825 831

or...

Fill In The Form Below and One Of Our Experienced Team Members Will Contact You:

    VALUATION

    xcllusive-business-sales-logo-ret-1c-optimized
    Xcllusive Awards 2022
    aibb-logo

    WHAT OTHERS ARE SAYING ABOUT US…

    ***The most honest and intuitive organisation***

    “I can honestly say, as a person who has now sold three businesses in the past 8 years, Xcllusive is far and away the most honest and intuitive organisation that I have had the pleasure of dealing with.”

    Leon J. – Import and Wholesaling business

    Valuations need more than numbers

    They need experience and understanding. Different businesses will demand different valuation methods

    What follows are some brief descriptions of the Valuation methods that are most commonly used for valuing small to medium sized private businesses. One or more of these methods are used depending on the nature and size of your business. As you may have read on other pages of this site, Valuation is just as much an art form as it is a science, and experience more than anything tends to make our decisions for us.

    Method 1: Asset Based
    Method 2: Capitalised Future Earnings
    Method 3: Market Based

    Method 1: Asset Based

    This method focuses on the assets net of the liabilities. It does not take into account the profitability of the business and is the most appropriate method for under performing businesses, new businesses or any business where the sale of the assets outweigh the sale of the business as a going concern.

    Method 2: Capitalized Future Earnings

    The value of the business is determined by the future profits that the busienss will generate to its owners. For most private businesses, Capitalised Future Earnings is the valuation method of choice and takes into account the Adjusted Profits and Return On Investment.

     

    Before looking at this method, we should clarify the basis for which a Return Of Investment is calculated. The Return on Investment (ROI) relies on the level of internal and external risks associated with a business, and assumes that the lower the risk, the lower the ROI, and resultantly the greater the value of the business. As investments go, businesses are generally considered riskier than government bonds, property investment, shares etc, and as a result the lowest ROI achievable is approximately 20%. Beyond that figure an ROI of between 20% and 100% is calculated based on the several risk factors that may be associated with the business.

     

    For example, Paul both owns and manages his manufacturing business. If he were to sell, any buyer would see the business as being heavily reliant on Paul. They would be asking questions like “if Paul leaves, will the business be dramatically affected”. This situation represents a high risk and as such the ROI will be considerably higher than if somebody else was managing the business.

     

    Now that we understand the concept of how the ROI is established, the following equation should make more sense. Essentially, by dividing the businesses adjusted profits by the ROI we come to the price of the business.

    Adjusted Profit / Return of Investment (%) = Business Price

    Example

    Paul wants to sell his manufacturing business. He currently manages, but the assumption is that a new manager will be installed when the business is sold. The following table serves to calculate his Adjusted Profits.

     

    2015

    2016

    2017

    Sales

    $1,100,000

    $1,400,000

    $1,500,000

    Cost Of Goods

    $800,000

    $1,000,000

    $1,100,000

    Gross Profit

    =$300,000

    =$400,000

    =$400,000

    Expenses

    $220,000

    $300,000

    $300,000

    Other Expenses

    $7,000

    $4,000

    $2,000

    Net Profit

    =$73,000

    =$96,000

    =$98,000

    Adbacks

       

    Sales Manager Wage Adjustment

      

    $70,000

    Owners Wage and Benefits

      

    $160,000

    New Managers Wage

      

    -$100,000

    Total Adbacks

      

    $130,000

    Total Adjusted Profits

      

    =$228,000

         $228,000         /33%   =    $690,909.09

    Adjusted Profit       ROI        Business Price

    Method 3: Market Based

    This method relies very heavily on the recent sales of similar businesses. For example, lets say that Ryan wants to sell his food distribution business. Within his city, two similar businesses have sold for 3.2 times and 2.8 times their adjusted profits within the last year. Based on this information the valuer will closesly analyse the characteristics of both businesses and compare them to Ryans business in order to determine the profit multiplier to be used.

     

    It is commonly accepted that this method if done properly is the most persuasive and accurate. The downfall of this method is that market based information, due to the confidential nature of business sales, are sometimes hard to obtain.

     

    Whichever Valuation method used, market sales history is usually taken into account. Comparable sales is the most trustworthy element of a good valuation. Remember; the market is the market.

    When it comes down it, chances are, the Valuation you receive will involve elements of all of the above methods resulting in the truest opinion as to the value of your business.

    Enquire Now About An Expert Business Valuation - Call Us Today on: 1800 825 831

    or...

    Fill In The Form Below and One Of Our Experienced Team Members Will Contact You:

      VALUATION

      xcllusive-business-sales-logo-ret-1c-optimized
      Xcllusive Awards 2022
      aibb-logo

      WHAT OTHERS ARE SAYING ABOUT US…

      ***The most honest and intuitive organisation***

      “I can honestly say, as a person who has now sold three businesses in the past 8 years, Xcllusive is far and away the most honest and intuitive organisation that I have had the pleasure of dealing with.”

      Leon J. – Import and Wholesaling business