Business Valuation Guide

7/24/2019 Business Valuation Guide

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BUSINESS

VALUATIONS

B L A I R M A C D O N A L D

A GUIDETOBUSINESSVALUATIONS

business

valuatio

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PERTHBUSINESsVALUATIONS


2/13 B l a i r M a c d o n a l d - B u s i n e s s V a l u a t i o n G u i d e

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CONTENTS

Intdn 3

Vn Methds 4

Oveve f Retn n Investent Methd 5

H s the R.O.I% ted? 6

Wht s Adjsted Net Pt? 7

Wht e Add-Bks? 8

Add-Bks Expned 9

H s Gd ted? 10

At the Ath 11

Dse / Bsness Se Chekst 12

Cntt Dets 13




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INTRODUCTION

The vn f s sness (ess thn 100 epyees) s n t f psed y vety f pfessns, th deng

eves f sess. Lke the vn f e estte, thee e estshed pedes nd ethds f the vn f sness

hh f fed, pde est f sts.

As ppety ve th ve 10 yes expeene, I ndestnd tht the ss f vn ethds tey e k

t det psn eteen the sjet ppety nd the ppees f vyng pty. Y y e png

pveents, ns, se pes, esng tes, znng et., t tey se st f psn need t e de,

hh gey detene the Mket Ve f sjet ppety.

Informed comparisons can only be made within aframework of adequate and informed knowledge

Unftntey, n espet t sness ses, t s dt f st stkehdes t nd the spe f nfn neessy t

ke nfed psns eteen snesses. Infn s ghty hed y kes, ntnts, nd ndsty spests,

nd sseqenty st sness vns e de n se-v f ted nfn.

Despte ths, t s neessy f snesses t e ved, nd vn pfessns ke the est se f the ted nfn

t hnd t ke vn desns. Ths dent hs een peped t gve n ndestndng f the pess nvved th

vng sness, nd ths ene pfessns t spek n ngge hen efeng t sness vng. It

s t ke the vn pess e tnspent, nd deysfy the Bsness Bkes pespeve n h they ve

snesses.

It s y hpe tht y nd ths dent sef. Pese ntt e dety t dsss ny spet f ths Gde.

B Mdnd

We Recognise Value

A.I.B.B. Ceed Png Bsness Bke

Lensed Ppety Ve #44019

Bhe f Bsness (Unvesty f Qeensnd)

TEL: 0433 149 144

E: @pethsnessvns..

W: .pethsnessvns..



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VALUATION METHODS

Cent vn they sggests tht thee e thee s eves f ve ppe t sness sness nteest. The

eves f ve e espevey:

Cntng nteest: the ve f the entepse s he.

As f feey tde nty nteest: the ve f nty nteest, kng nt, t

enjyng the enet f ket qdty.

Nn-kete nty nteest: the ve f nty nteest, kng th nt

nd ket qdty.

Mst sness vns e nteested n detenng the ve f the tt sness enty, nd s

sh e ndetken n ntng Inteest ss.

Detenng the f ket ve f pny s ny heved sng ne e epted

vn ethds. These ethds nde t e nt ted t:

. The net pesent ve f the pjeted sh s (Dsnted Csh F Methd);

. The ptsn f fte ntne enngs (Retn n Investent Methd);

. Net sset kng sed n dey esn f the ssets;

v. Indsty ket ethd.

The Discounted Cash Flow Methods ny nsdeed spe tehn pph ese t s f tns n

fte pefne t e egnsed. It s ves the sness n the ss f the fte fee sh s geneted. Heve,

t se ths ethdgy eqes ee ng te sh fests. The nte f the sness des nt end tsef t

the devepent f sh fests nd gven the vty n sness pefne, t y e n npppte ethd t ey

pn. On ths ss e hve deded nt t ppy ths ethdgy.

The Return on Investment Method s ee ethdgy t epy f te pte snesses. Ths ethd

ptses pe tx enngs (EBITDA) nd estshes ve f the entepse. Ths ethd eqed the detenn f

the fte ntne enngs f the sness, ssessent f n pppte ptsn te nd vn f ny ssets

sps t the e sness. Ths ethd s ny sed n the vn f snesses nd s pppte hee theehs een sent tdng hsty t estsh sness nnty nd hee t s esne t expet tht the ve f the

sness s key t exeed the ndeyng ve f the net ssets.

The Net Assets Backing Method, hst ve s psn t, s geney nsdeed t e npppte f vng

sness nde gng nen nept. Ths ethd sses tht the ve f the sness ests n ts ndeyng ssets nd

tht the ve f thse ssets s eded n the nn stteents f the pny s esne een f ent ve.

The Industry Market Methody e sed n ndsty sets hee thee s evey ge ne f ppnts, se f

these snesses n feqent ss nd hee the se pe s knn t the de p. In these sets ent

ket pes n e estshed f s snesses nd hh f psn th ny fetes nqe t the sness

nde nsden. Ths n pvde ss f fng esne ket pnn. A ket f ths type des nt exst f

ths sness.




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OVERVIEW OF RETURN ON INVESTMENT METHOD

Thee e ne f vn ethds nd es-f-th hh hve deveped ve e f the vn f snesses,

nd p sness ndstes y even hve the n spe ethds f vn. Ths n e vey nfsng,

py f y e png snesses f deent ndstes.

T t thgh ths nfsn, single consistent valuaon

method hs een deveped ng snesses t e

ved n the se nsstent ss. Ths ethd f vng

s knn s the Return On Investment (R.O.I.) Method of

Valuaon.

TheR.O.I. Method of Valuaonnyses the ne ste

f sness, nd then ssesses the Risk f ths ne

ste nnng n nt the fte. Ths sk s expessed s

peentge (%) nd s knn s the R.O.I% . The hghe the peentge, the hghe the peeved sk f the ngng ne

ste (See Pge 8).

A pdent ye sk Is the ent ne f the sness sstne nd n-gng? The R.O.I% sed n ng

the ve f the sness s een f ths sk. It s ptnt t nte tht the R.O.I% s detened y sppy nd dend.

If sness s n sght e ndsty then phse y e peped t py e f sness, ths eng the R.O.I%.

The R.O.I% hnges ve e s sness yes e nd . It s, theefe, ptnt nt t ey n es f th henvng snesses.

The dvntges f sng ne snge ethd t ve snesses s tht t s f deent snesses ss vs ndstes

t e ped t eh the n the se ss. A hese sness n e ped th nftng sness, even

thgh the ndstes e petey deent.

HOW IS THE BUSINESS VALUE CALCULATED?

Lets nsde n expe. Jenny hs sessf hese/et sness hh hs n Adjsted Net Pt f $200,000 pe

nn. An R.O.I% f 40% s deeed t e pppte n ths nstne. Wth these t pees f nfn the pten se

pe f the sness n e ted sng the f shn e:

EXAMPLE SALE PRICE = Adjsted Net Pt

Retn n Investent (R.O.I.)%

SALE PRICE = $200,000

40%

SALE PRICE = $500,000

Note: a full explanaon of Adjusted Net Prot and Return on Investment (R.O.I.)% appears on the following pages.



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HOW IS THE R.O.I % CALCULATED?

The R.O.I% s deved y dvdng the Se Pe f sness y the Adjsted Net Pt f the sness (Pese see f

e). F expe, f Jenny ses he sness f $500,000 t Ret, nd t the e f se the sness s pdng n

Adjsted Net Pt f $200,000 pe nn, then the R.O.I% f tht sness e ted s:

EXAMPLE Retn n Investent (R.O.I)% = Adjsted Net Pt X 100

Se Pe

Retn n Investent (R.O.I)% = $200,000 X 100

$500,000

Retn n Investent (R.O.I)% = 40%

Note that this is a reversal of the formula show on page 5.

= Bs/p sness stte

HIGH R.O.I.% (e.g. 120%) = Hgh Rsk f pt dntn

= Le dend f ths type f sness

R.O.I. Range

= Gd sness stte

LOW R.O.I.% (e.g. 28%) = L sk f pt dntn

= Hgh dend f ths type f sness

An expe hs een pvded e n thee deent snesses, th the se Adjsted Net Pt f $100,000. The

hypthe snesses e ped th eh the, nd nte the eet n the ve ve tht the R.O.I.% hs:

Whese/Dstn Met Fn Pesn Tnng

BUSINESSOVERVIEW

Lng estshed;

Hgh qty nds;

L st eqeents;

N shp fnt eqed;

Wen exsve ntts;

5 dys pe eek;

Rn nde se-ngeent;

N p expeene neessy;

L pen

P expeene eqed;

Hgh pnt nd eqpent eves;

Spest st eqed;

Dt t ete;

Hgh ve heds;

L gss pts;

Estshed sness enshps;

ng

L-d eves f pen

N ng-te ntts;

L es t enty;

Hgh pen;

Hghy vted hs

ne;

Lted sness hsty;

6 dys pe eek;

Bsness s sed n nes

pesn enshps

ADJUSTED NET

PROFIT$100,000 $100,000 $100,000

R.O.I. % 27% - 30% 45% - 50% 80% - 90%

VALUE RANGE $330,000 to $370,000 $200,000 to $225,000 $110,000 to $125,000

As y n see, the e the R.O.I.%, the hghe the ve f the sness. Reee tht the R.O.I.% s deved f the

Bsness Ses Mket, t te p-t-dte R.O.I.%s n snesses hh hve eenty sd.




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WHAT IS ADJUSTED NET PROFIT?

In sness vn ns (pg7) e se the sness Adjsted Net Pt t detene ve.

SALE PRICE = Adjsted Net Pt

Retn n Investent (R.O.I.)%

S jst ht s Adjsted Net Pt?

In ts st spe f, Adjsted Net Pt s the te ndeyng

pt f sness e nes hve een de f the nes

pesn stte nd ny n ne expense events. In

nng tes t s knn s E.B.I.T.D.A (Enngs Befe Inteest,

Tx, Depen, nd Ans).

Pepe y stt snesses n de t hve ess t n ne

ste f the seves pdts tht the sness pdes. The

R.O.I. Methd f Vn tes the ve f sness sed n

the ne t pdes.

The ne ste f sness s shn n the Pt nd Lss stteents peped y the sness ntnt. Fnn

stteents f pvtey hed snesses e sy peped t ept ne txes. These nn stteents seve theppse f hh they ee ntended, heve they ey sh the en ety f the snesss enngs ssets.

T detene the pppte Adjsted Net Pt t ve sness, t s s pe t k n the ges f the ent

nn ye, s ths s sy the st p-t-dte pte f h the sness s pefng.

When valuing a business, I use the business nancial statements to determine the ongoing income stream that would be

available on an Under Management basis from the business, and then mulply this income stream by an R.O.I. Percentage

to determine the sale price of the business.

Adjd N Pr djd rmv

h d h wr pr rr

frm h b pr.

Adjusted Net Prot = Business Operang Prot before Tax, Depreciaon, Interest & Add-Backs

We dsss Add-Bks n gete depth n the next pge.



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WHAT ARE ADD-BACKS?

The nn stteents f pvtey ned snesses ey pty the te ssets nd enngs they genete. P-f

djstents, en efeed t s Add-Bks, e sed t djst n hsty epted nn stteent f te pte

f the ndeyng sh- f the sness.

Add-bk hp prry h r

dry h-w f b

Adjusted Net Prot = Business Operang Prot before Tax, PLUSDepreciaon, Interest & Add-Backs

The type f Add-Bks tht e eevnt depend n the stnes nqe t eh ndvd sness. The ndeyng g s

t djst the hsty epted pt t the en ety f the sness y ddng stng nts t ndvd

nn stteent pnents.

Typical Addbacks can include:

Dnns He Phse nd Lesng hges

Bd Dets Lss n se f Fxed Assets

Rent Adjstents Inteest (Bth expense nd ne)

Adjstent f Ones Wges & Spennn Depen

Add-ks e n ptnt t f djsng nn stteents t sh the en ety f the sness, t they e

nt ts tht n te hsty. Add-ks e nt pppte t dept h sness d hve pefed hd the ne

tken deent stteg den pted n pptnty tht s ssed. Add-ks e sed t ppey dept the

enngs nd ssets f the sness s t s ty peted nd nt h the ne shd hve d hve peted the

sness.

The ptne f ppey denfyng Add-Bks shdnt e veked s they dety pt the Bsness Ve hen

sng the R.O.I Methd f vn.




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ADD-BACKS EXPLAINED

WHY DO WE ADJUST FOR MANAGEMENT WAGES?

In st s snesses (ess thn 100 epyees) the sness det(s) k vey n the sness n n pen

pty. Dependng n the sness stte nd txn stte eended y the sness nes nn dvse,

the dets ses y e ve e f ket enen.

The Wge Adjstent s de t ense tht f hge s de f the sts f peng the sness nde f ngeent,

nd hene f hges de f nes ges f e engged n the kng n the sness.

WHY DO WE ADJUST FOR RENT?

Anthe ne stteent djstent en nvves pny st dng ent. Se snesses n the peses they

pete t f, theey nt needng t py F Mket Rent.

An djstent t the hst ent expense f the sness y need t e de t eet the enngs f the sness s f t

hd een pyng F Mket Rent ng, sne n nng ye f the sness hve t n ths expense theseves

n the se f the n sness vty.

WHY DO WE ADJUST FOR DEPRECIATION?

The Retn n Investent Methd f Vn ees n E.B.I.T.D.A (EnngsBefe Inteest, Tx, Depen, nd Ans).

The ne f the sness s ved efe depen hs een tken nt nsden.

In the nts, the depen s detened y txn s. Ths y y nt hve ny eevne t the t ket

ve f the pnt nd eqpent. F expe sy hne s ght f $990 n the 30 Jne. One dy te, n the 1 Jy,

ths te hve n k ve s t hs een petey en f tx ppses. T sy tht ths te hs n e ve t

the sness ne the next dy s g. If tht pesn s seng the sness, he d nt t get e thn $0 f ths

ne pee f eqpent. Mny tes f pnt nd eqpent n e en petey n the ks, t e s sed y

the sness f ny yes theee. Expeene hs shn tht n the vst jty f es, the skng ve f the pnt

nd eqpent exeeds the en dn ve nd n ny ses y ge nts.

EXCEPTIONS

Depen shd nt e dded k f vde stes nd pnes tht he t pnt nd eqpent. Vde tpes hve

100% depen te. Ths the phse f these shd e teted s n expense. Hed t pnt nd eqpent s the

stk f the sness nd shd e nsdeed s n expense.



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HOW IS GOODWILL CALCULATED?

WHAT IS GOODWILL (Intangible Asset)?

Gdw h v f b prhr vr d bv v. It reects the value of intangible

assets such as strength of the on-going income stream, reputaon, brand name, contracts, good customer relaons, high

employee morale and other factors that improve the companys business.

The et ethd f devng Gd s vey spe nd te.

Goodwill = Total Business Value lessNet Asset Value (See example below)

The st step t ng Gd Ve s t detene the Tt Bsness Ve, sng the R.O.I Methd f Vn

tned n the peedng pges. One the Tt Bsness Ve hs een detened t s spe e f dedng the

Net Asset Ve (pnt, eqpent, stk, vehes et.) f the sness f the Tt Bsness Ve, t ve t the Gd

Ve, ntnge sset ve.

Usng expe f Whese / Dstn sness f the Pge 8 (see e), the Tt Bsness Ve s ted t

$370,000, s detened sng the R.O.I ethd f vn.

Example Wholesale / Distribuon Business

BUSINESS OVERVIEW

Lng estshed;

Hgh qty nds; L st eqeents;

N shp fnt eqed;

L pen

Wen exsve ntts;

5 dys pe eek; Rn nde se-ngeent;

N p expeene neessy;

The sness needs the Pnt & Eqpent nd Stk shn e t

sessfy n t ts ent eves:

PLANT & EQUIPMENT VALUE: $50,000

STOCK VALUE: $150,000

ADJUSTED NET PROFIT $100,000

R.O.I. % 27%

TOTAL BUSINESS VALUE $370,000 (calculated by dividing the Adjusted Net Prot by the R.O.I %)

LESSPLANT/EQUIPMENT -$50,000

LESSSTOCK -$150,000

GOODWILL VALUE $170,000

The ve f the Gd s dety detened y the ve ve f the sness, hh n-tn s deved y the R.O.I.

Methd f vn s tned ee n the ept.




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ABOUT THE AUTHOR

Blair Macdonald

My enty nt the d f Bsness Vng se t f y pssn f sness.

P t enng y sness vng ee n 2006, I peted s ensed

e nd esden ppety ve thght Ast. I nd ths vn

expese nve hen vng snesses.

I spese n the ve f snesses ngng f $100,000 t $10,000,000 n ve, nd

I f th sness ndsty types.

How Can You Benet From My Services?

I t dd ve f y ents thgh the fng seves:

B Brk - I enjy hepng pepe sessfy tnsn nt, nd t f, qty snesses. I dedted t

pvdng the hghest qty seve, dentn, nd keng f y ents n egds t sness tnsns.

B V / B Hh Chk -As ensed ve I e-qed t ndetke sness vns, nd

hve sd hsty n pvdng sness vns f nge f stnes.

Byr Rprv & Nr- I sessfy pph pnes, nt enty f se, n ehf f yes h e

keen t qe tht p sness. Atenvey e n nvss spe ndsty sets n ehf f yes h e

kng t qe sness thn etn ndsty.

S Tr Dm- I pepe egy ndng nd enfee ses tnsn dents f yes nd sees

h y hve edy geed n se pe.

B Mdnd

WE RECOGNISE VALUE

TEL: 0433 149 144

E: @pethsnessvns..

W: .pethsnessvns..

C m fr prf,

r, d d

v yr b



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DISCLAIMER

Document Terms of Use Agreement between Blair Macdonald and The reader of this

Document (You/Your)

Y se f ths dent s sjet t these egy ndng tes nd ndns.

Intellectual Property

Repdn f pt f the ntents n ny f f ths dent s phted

the thn f ndvd se ny, nd the ntents f ths Dent y nt e

ped these shed th ny thd pes.

Wtht tn, Y gee tht Y nt pnt, dstte, dspy, se, p-

sh, dst, te, dssente ey expt, n ny f y ny

ethd htseve, pt f the ntents f ths Dent, npte the

Dent te, ny pt f t, n ny k pn, hethe n hd py,

eetn, ny the f.

Uness these nted, tes n ths Dent s pteted s the pyght,

tde dess, tdeks nd/ the nteet ppees ned y B Mdn-

d y the pes tht hve ensed the te t B Mdnd.

All rights not expressly granted are reserved.

T the x extent peed y , B Mdnd des nt gve ny -

nty n en t the ntent, y, ny the spet f ny te n the

Dent;

T the x extent peed y , B Mdnd exdes ty f ss

dge seed y Y, (ndng t nt ted t det, ndet, ndent,

spe, nseqen exepy dges, ss f pts evene, fe t

ese npted svngs enets sness pptnes) tht Y y se

s est f the se ene n ny nfn n the Dent;

B Mdnds exsn f ty ppes hethe the s n ntt, tt

(ndng tht tn, neggene) eqty nd even f B Mdnd hs

een ned f the pssty f sh ss dge.

Y gee tht B Mdnds ty t Y t e eded y the extent,

f ny, t hh Y ntted t the ss.

Governing law

These tes nd ndns e gvened y nd nsted n dne th the

s f the stte f Westen Ast.

Denions

Dent ens Bsness Vns - A Gde t Bsness Vns;

Y ens the se f the Dent (nd Y hs the espndng enng).

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Contact Details

BLAIR MACDONALD

A.I.B.B. Ceed Png Bsness Bke

Lensed Ppety Ve #44019

Bhe f Bsness (Unvesty f Qeensnd)

TEL:0433 149 144

EMAIL:

blairPERTHBUSINESSVALUATIONS.com.au

WEB:www.PERTHBUSINESSVALUATIONS.com.au

ADDRESS:

PO BOX 103, SOUTH PERTH, WA 6951

OTHER BUSINESS GUIDES:

BUSINESS BUYERS GUIDE

GUIDE TO BUSINESS SALES

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Business Valuation Guide

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