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What Is My Business Worth? and the $64,000,000 Question

David Wells
David Wells
REINZ Accredited Business Broker

The North Shore – what a great place to live AND do business in!

Borrowed from our illustrious leader, Martin Cooper (and added to a little). We are very proud to be part of the Cooper & Co team offering Commercial and Industrial Sales and Leasing services, Commercial Property Management and Business Brokerage.

Back to the $64,000,000 question – What is my business worth? The simple (but somewhat unhelpful) answer is “What someone is prepared to pay for it”. Identifying the value of your business is not easy, in fact, it has been described as an art based upon science.

Getting Your Business Appraised

As Business Brokers, we are required under the Real Estate Agents Act 2008 (REAA 2008) to provide you, the Vendor (or Owner) with a written appraisal before we list your business for sale. This is not quite as straightforward as one would assume due to the many variables and uniqueness of businesses. There are several ways to assess the market value of your business and ideally at least two of the methods used will identify very similar values.

Factors Affecting Value

Most SME (Small to Medium-sized Enterprise*) businesses are comprised of three fundamental parts – namely Stock, Plant and Goodwill. These are known as tangible and intangible assets.

Plant and equipment are tangible assets and goodwill is an intangible asset. Stock and tangible assets are reasonably easy to assess the value of and there are many qualified specialists available to value these.

Intangible assets are more of a challenge to assess the value of as they include reputation, relationships, leases, agencies, intellectual property etc. Intangible assets represent a substantial part of the total value of most businesses sold, however, they can have very different values for different people.

Assessing Your Business’s Market Value

To assess the current market value of an SME business, we employ several different methods to ensure that the assessed value is consistent across at least two of the methods adopted. With many years of combined experience between the NAI Harcourts Business Sales team, we constantly find that the ‘basic’ or ‘traditional’ method of assessing value produces the most consistently accurate result.

Part of the assessment is to ascertain the Seller’s Discretionary Income, more commonly known as the EBPIDT (Earnings Before Proprietors Drawings, Interest, Depreciation and Taxation) and to do this we require 2 to 3 years of accounts from you. Once this is calculated, we then compare your business against similar businesses that have sold and identify which multipliers to use.

To give an example: a similar business to yours may have sold recently for 3 x EBPIDT or the Intangibles average 1.2 x EBPIDT, or it has returned a 24% p.a return to an investor.

Then we ask these questions: Is your 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 risks are there? Are there likely to be motivated buyers and importantly are there likely to be financially capable buyers? The list of questions drill down deeply and all these factors come into play.

As you can see, assessing the market value of a Small to Medium Enterprise is not purely a financial exercise, or an exact measure as there are a lot of variables that are taken into account and each business is unique. The different appraisal methods should identify a price range, however determining the correct market value really is an art based upon science.

If you are thinking of selling your business and would like to have a confidential chat please call us in confidence on 09 486 9250.

*SME – small to medium enterprise that usually employs less than 20 people.

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