Valuing a business is very subjective and at the end of the day what you sell your business for is what someone is willing to pay for it.
You should always consult with a business accountant or business broker preferably one that has experience in selling businesses in your sector.
At the end of this article I have given some indication of some of the multiples that are used in the industry but the following include a number factors that have a bearing in determining a valuation:
* Timing – Sectors become hot when one or more players are looking to increase their market share and this leads to a business being sold for a multiple of what they would normally get. Recent examples include Radio Stations, Security and Pharmaceuticals Companies.
* Proximity of competitors * Concentration of competitors in the overall marketplace * Foot fall of premises * Population of area surrounding the business * Economic demographic of the area if a retail/service based business.
* Depreciation of transport fleet if appropriate * Capital based assets * Stock levels * Size of premises and whether it is leased or owned by the business * Growth trend of revenue over a specified period of time * Renewal business booked and/or order book level * Staff- are the staff that are going with the business knowledgeable enough to run it and understand all the processes involved? Do they have the essential connections to retain customers, or are the management / key staff leaving the business when sold?
* If the business is a web-based concern, then the brand awareness is a critical factor. This includes the number of back links to the domain and SEO (Search Engine Optimisation).
* Exclusivity contracts; is the business located in a shopping centre where it has exclusive rights. For example, if you set-up as a newsagent in a shopping centre and no other newsagent can open in that shopping centre. These contracts up the price of a business significantly.
* Whether you make or sell niche products, these can often command a higher premium if these products are at the high end or there are only a few in the market place nationally.
* If the business has patents or exclusive licencing rights.
* If reselling an existing franchise territory, costs of fees to master franchise if any.
* If the company is a manufacturing concern with a strong product line or innovative future product pipeline.
* Pending litigations * Excessive debt ratio * Pensions, if there is a pension shortfall that will need to be filled- this will decrease the attractiveness of the business.
The following is an indication of the valuations used for certain sectors but can very greatly based on the above:
* Manufacturing sector tend to go for between 5 and 6 times their net profit * Retail based businesses tend to be valued at a price factor of 20 weeks turnover * Pubs: are valued on the last previous 12 months turnover * Professional based services are valued on the last previous 12 months turnover paid over a defined period of time.
For more information on valuations contact: johnryan@thebusinessshop.ie // johnahern@thebusinessshop.ie
Top Tips for Factors Affecting The Valuation of Your Business - To learn more about this author, visit John Ryan's Website.
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I got a great question the other day which highlights the tension that can emerge in an early stage company between VCs and entrepreneurs.
