The simple but unhelpful answer is, “what someone is prepared to pay for it.” NAI Harcourts business broker, David Wells, along with three other industry professionals have got together to run a free business buyers’ seminar to be held in Ponsonby on 9 July at the Studio One Meeting Room 5 on Ponsonby Road.
Most SME* businesses are comprised of three fundamental parts – namely stock, plant and goodwill. For several reasons I won’t delve into at the moment, plant and equipment are called tangible assets and goodwill has become intangible assets. Stock and tangible assets are relatively easy to value, and there are many qualified specialists available to achieve this. Intangible assets are more of a challenge.
Again, space doesn’t permit an in-depth analysis of intangible assets, but they include nebulous things like reputation, relationships, leases, agencies, intellectual property, etc. These assets will have different values for different people, and yet they represent a very substantial part of the total value of most businesses sold.
To assess the CMV** of an SME* business, we usually employ three of four different methods, and hope that they will produce similar answers or at least an indicative range. Over many years of business broking, I have found that the ‘basic’ or traditional method still produces the most consistently accurate result. We require two or three years of accounts from the vendor to establish the EBPIDT*** figure (also known as ‘seller’s discretionary income’).
From our database of similar business-type sales we can assess which multiples to use for the subject business. For instance, the average similar business may have sold for three times EBPIDT*** or intangibles average 1.2 times EBPIDT***, or has returned a 24% pa return to an investor. Is the subject business better or worse than the average (in our opinion)?
Which way is it trending? What are the barriers to entry? Are specialist skills required? What is the competition like? How long is the lease? What are the risks? Are there likely motivated and financially capable buyers, etc.
Assessing the market value of an SME* is not strictly a financial exercise or an exact measure. The different appraisal methods should indicate a price range but determining the correct market value can be as much an art as it is a science.
*SME. Small to medium-sized enterprise, usually employing less than 20 people. **CMV. Current market value. ***EBPIDT. Earnings before proprietor’s drawings, interest, depreciation and taxation.
FREE BUSINESS BUYERS SEMINAR
Tickets available from www.eventbrite.co.nz
or email: david.wells@naiharcourts.co.nz
t: 09 486 9279 m: 0274 361 465
Places are limited so please reserve your seat today.
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