Business mentor: Working out just what you're worth

Q: How much is my business worth?

I would like advice regarding a small manufacturing business that I own. As the business is quite small (three employees), I am not sure how much to allocate to a presale valuation of the business or whether this is advisable. I have heard that a valuation can be quite expensive. Are there guidelines or industry-based means by which I could determine the company value?


* Stewart Hobbs, editor for Financial and Business Adviser, specialists in business advice to SMEs, replies:

A: Generally speaking, a professional valuation of your business will incur costs dependent on the brief you supply the valuer. For instance, a detailed valuation of a business worth between $300,000 and $1,000,000 may cost as much as $10,000, depending on the complexity of the business.

You can ask your accountant for a pre-assessment valuation which is not a true valuation but will give you a good indication as to value.

This would cost about $3000 to $4000, dependent on complexity.

Businesses are valued by a number of methods: discounted cashflows (formal business model which is based on long-term forecasts), capitalisation of earnings (dependent on rate of return for particular industry base), capitalisation of dividends (normally applied when valuing small or minority shareholdings in businesses), net asset value (assumes that the company would have to liquidate), industry rules of thumb (such as dairies), comparison with business statistics (compared with database of business sales) and multiple of EBPIDT (sellers' discretionary cash, e.g. a video shop may yield 2.2 x EBPIDT whereas a professional practice may yield 1.1 x EBPIDT).

Valuing a business is an art and a science. One method used by brokers, and sometimes frowned upon by valuers, is the EBIT capitalisation method.

Although it should not be used in isolation, it provides an indication of market value.

You need to calculate the sustainable EBIT (earnings before tax and interest) after all costs, depreciation and monthly interest on debtors less creditors.

The sustainable EBIT is then capitalised, dependent on the industry risk factor, with a value typically ranging between 25 per cent and 30 per cent.

The example in the table (using 25 per cent) demonstrates the process. In the example, the goodwill is worth $230,000. If we had used a capitalisation rate of 30 per cent the goodwill and asset value would be $150,000 and $400,000 respectively. Excessive stock levels or large fixed-asset values can have a bearing.

Generally speaking, the value of goodwill will be 1.0 to 2.0 times EBIT. This means we have ($230,000 $120,000) 1.9 x EBIT.

Contact your accountant and discuss the matter with him.

Also, there are business brokers who would be willing to do the work and charge nothing until your business is sold.

Inquiries can be directed to 09 836-5060 or emailed to queries@businessadvisor

Business Advisor

Assumed Sustainable EBIT = $120,000

Therefore, total assets = $480,000 (calculated as EBIT 0.25)

EBIT$120,000

Value of stock$50,000

Value of fixed assets$80,000

Goodwill ?

Total price of assets$480,000


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