Value based on big three

Photo / Thinkstock

Problem

I run a small business and am thinking about selling. How can I decide what the business is worth?

Solution

Business broker Brett Clarkson says the old adage that value is what a prudent buyer will pay a willing seller still applies. But there are some ways to get a steer on how much a business is worth before you get to that stage.

The value of a business generally boils down to stock, usually priced at cost, assets/plant, assessed at market value, and goodwill - the intangible quality that made a business successful.

For bigger firms, there are formulas that can work out value based on return on investment, earnings or cash flow but a lot of small businesses do not have the turnover to make that possible. "Lots of small businesses don't make a lot of money ... so people are basically just buying jobs."

Clarkson said many factors could contribute to value, such as the length of a business' lease, the quality of its machinery, its database of clients and the employment contracts its staff were working under. Other factors could come into play - a small coffee bar that was a well-known franchise would be worth more than an independent operator. Some businesses may also require special skills to run.

Clarkson said you could get a gauge on the value of plant and equipment from an independent valuer, but goodwill was harder to quantify. A rough guide was that goodwill was equal to one year's earnings before interest and tax, but could be up to three times. "The best thing is to see a broker and work through [the details]."

Clarkson said it was important that the business was well-presented for the market, with good documentation showing profit and loss, details of the lease and an accurate list of plant and equipment.

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