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(/profile/soundadvice) soundadvice (/profile/soundadvice) 14th Mar 2015 10:43
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Valuing a sole trader business for sale Valuing a sole trader business for sale I have a client who is looking to sell his business and is wondering firstly how to estimate a value and what he might do to try and add value in advance of sale. It is a retail business selling postal and packaging services from a rented retail unit. Using approx round figures for ease His turnover for last 3 year has grown steadily 120,000 to 135,000 to 150,000 approx His profits before any personal drawings have been 20,000 then 25,000 then 30,000. The profit is after deducting 5,000 per annum for depreciation of machinery and 7,000 a year motoring costs. (however, although motoring costs in total were 7,000 pa 60% of them ie 4,200 were private motoring If he was to value on the basis of a multiple of profit. Should one adjust for the private element of motoring by taking the private element out and increasing profit accordingly? I assume depreciation is left in the accounts as a deduction for valuation purposes? I also assume any personal drawings are left out of the calculation. I have said he will need to find out what average multiples his type of business achieves on sale; my job as accountant is to make sure we are using the right profit figure to apply the multiple to. Any thoughts would be much appreciated. Are there any good links to guidance on how to calculate profits for use in valuing a business like this
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By richards1 (/profile/richards1) 16th Mar 2015 13:26
Valuing a business Hi I am not an accountant but a business owner that has built and sold a few businesses. First a business is only worth what someone is prepared to pay for it and the value of the business is primarily in the customer base and how "sticky" that customer base is on transfer. In addition how much growth can come from the existing customers new customers and product range growth. How much of the business is based on the personal contact of the owner and what will the effect be of him not being their would be? The Profit margin seems a bit low to me. What costs are you loading in rent,rates, heat light etc. Is this profit and net or gross?
By soundadvice (/profile/soundadvice) 16th Mar 2015 18:31
The profit shown is the net profit. His gross margin on sales is about 58% so not bad. The operating costs include all the usual items, rents (by far the biggest cost), rates, phone, staff etc.. Would you exclude depreciation, amortisation of goodwill and interest, and the cost of private motoring from the calculations so as to identify the actual cash the business is producing? My client believes the average multiple in his line is 3 - 4 times profit before the deduction of depreciation, amortisation and interest. Many thanks for your interest and response
By richards1 (/profile/richards1) 16th Mar 2015 19:33
Business Sale Yes I would exclude those things. Anyone buying this business will be concerned about 1 Actual Cash generation 2 Transferability of the business 3 Affect of the current owner leaving, how much are the customers loyal to him, why is he selling etc R
By johngroganjga (/profile/johngroganjga) 16th Mar 2015 19:47 You missing the notional cost of paying for the proprietor's services on an arm's length basis. Yes 3 to 4 times EBITDA is probably in the right ball park.
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