Page 10 - SEll Your Business Booklet

STEP 2. Business Value Appraisal continued...

Industry ratios Asset based Earnings based
The value of the business is based on This approach is generally used for Generally used for larger businesses,
its sales record compared with industry businesses with a history of low earnings this approach emphasises earnings
averages. This method is often used for (or losses). Using this method, the value rather than assets and is determined by
small businesses and franchises where of the collective tangible and intangible considering the following:
there is an established track record assets determines the value of the • The level of return on investment
within a specific industry. It may also business. There will be an element of (ROI) in the business, taking particular
use a formula of multiples of weekly goodwill, even where a business is not account of the perceived level of risk
sales or an average derived from sales trading profitably. Although selling the and realistic costs of management.
of similar businesses. assets separately is an option, there’s
often value in selling as a going concern, • The ‘industry average’ multiplier
which may include a customer database, on true earnings. This is market driven
supplier relationships, experienced staff, and varies according to perceived
and reputation. Calculating intangible industry risk factors, perceived
assets requires both judgement and earnings sustainability and historical
Example: A cafe with excellent foot experience, together with objective comparisons. The multiplier is
traffic in a popular suburb is for sale, market comparisons. usually EBIT, but others may be used.
and is likely to sell for 2.75 to 3.25 times It’s critical with multipliers to ‘compare
its annual surplus to one apples with apples’.
working owner. • The fair market value of the unencum-
bered tangible assets of the business
Factors such as location, foot traffic,
parking and so on will determine the Example: A dry-cleaning business is – for example, plant or vehicles where
right multiplier. any loans have been paid off – along
now breaking even and the owners are with its intangible assets.
keen to sell. The company’s current
Selling Price figures are as follows:
Equals Approx.
2.75-3.25x Tangible Assets $135,000

(Total book value)
THE ANNUAL SURPLUS TO Stock $5,000
ONE WORKING OWNER (All saleable)
Bad Debts $0

Creditors all paid

The market appraisal is then broken
down as follows:

Tangible Assets $110,000
(Fair market value)
Intangible Assets / $15,000
Goodwill
Stock $5,000

MARKET APPRAISAL $130,000

8 SELL Y OUR BUSINESS, SMAR TER