Buying a business
Buying a business can be a big step forward - but can also turn out to be a big disaster even for large corporations. The main pitfalls to acquiring a business are the same no matter what the size of the business that is being bought.
In this section we aim to cover the aspects of approaching a target business, completion of due diligence, negotiating the purchase and settlement once the deal is complete.
Approaching A Business
Due Diligence
Professional Advisors
Initial Offer, Risks and Submitting Offer
Heads of Agreement
Detailed Due Diligence
Historical information
Check on the major balance sheet items
Completing Due Diligence
Getting to the final terms
Following Completion
Approaching a business with view to Acquisition
The primary aim is to convince the vendor that he really wants to sell his business to you. With this in mind the purchaser needs to establish that he is a credible purchaser.
The buyer should initially register their interest in purchasing the business. The target will usually have instructed professional advisor's to sell the business therefore it is the advisor's that should be approached initially not the management.
The advisor's will require the purchaser to explain what their current business is (or the background of the purchaser if they do not currently have a business), why they are interested in that business, how they intend to purchase the business and if funds are currently available or how they will be obtained.
Integrity and future plans will often be extremely important to any vendor particularly if they have built their business up with the current workforce.
During discussions with the vendor and his advisors, the purchaser should attempt to evaluate whether the vendor needs to sell the business and if so what are the required timescales. Is money the prime motivation for selling and will the existing management and workforce remain involved in the business? These factors will have a bearing on the possible offer price.
Read more here:
http://www.alphalimited.co.uk/business-briefs/business-valuations-buying-a-business.htm
Showing posts with label business valuations. Show all posts
Showing posts with label business valuations. Show all posts
Tuesday 10 November 2009
****How much is your Business worth and how can you increase its value?
Valuing a business
How much is your Business worth and how can you increase its value? These are the two questions which should be foremost in the business owners mind.
The worth of a business really depends upon how much money a purchaser can make from it compared to the risks involved in taking it on. Past profitability and asset values tend to be just the starting point and it is often the more intangible factors such as key business relationships, key personnel etc. which provide the most value.
Why Do We Value The Business?
What Affects Valuations?
Valuation Methods
Intangible Issues
Why Do We Value The Business?
There are four main reasons for obtaining a business valuation
1) To help buy or sell a business
By understanding the valuation process it can enable a business owner to
•Take steps to improve the real or perceived value of the business
•Decide the best time to buy or sell a business
•Negotiate better terms
•Complete a purchase more quickly
There is a better chance of a sale being completed if both the buyer and seller enter the process with realistic expectations
2) To assist in getting others to invest in the business particularly through equity
•A valuation of the business can help in agreeing a share price for new shares being issued
3) To create an internal market for shares
•A valuation can help buying or selling shares in a business at a fair price particularly when for example, a director is retiring and wishes to sell his shares
4) As a vehicle in helping to provide motivation for management
Regular valuations of the company is a good discipline which can:
•Provide a measurement yardstick for management performance when they see how they are increasing the net worth of the company
•Enables management to focus on important issues
•Help to expose areas of the business which need changing
All companies that are listed on a stock exchange have the quoted share price as a constant indicator of how well a company is doing. Unlisted companies need to do this in a slightly different way
What Affects Valuations?
There are three basic criteria which can affect the valuation of a business
1) The circumstances of a valuation
•An ongoing business can be valued in a number of ways (see later)
•A ‘forced sale’ will down value a company eg should an owner manager need to retire through ill health he may have to take the first offer that comes along. This is known as a fire sale.
•If the business is being wound up the break up value will be the net of the realisable value of the assets less liabilities outstanding
2) What is the value of the tangible assets of the business?
•A business which owns property or machinery for example will have substantial tangible assets
•Often businesses have no tangible assets beyond the value of its office equipment. This is particularly true of many service companies such as accountants and insurers.
3) What is the age of the business?
•A fairly new business may well have a negative net asset value but have an extremely high valuation in terms of future profitability especially where there are substantial long term contracts in place
Valuation Methods
Whatever the business is valued at with any techniques it must be remembered that this is a guide only. The true value of a business is what the purchaser is willing to pay for it . To arrive at this figure buyers will use various valuation methods and often a combination of methods. The main valuation methods are based upon:
1) Assets
This method would be appropriate if the business in question has significant tangible assets eg. a property company.
Basically the value of all the assets (both fixed and current) are added together and then the total of the business liabilities are subtracted from these to produce an asset valuation. The starting point for an asset valuation is to take the assets that are stated in the latest accounts (This is known as the ‘net book value’). This is refined to reflect the economic reality, for example, property prices may have increased substantially but their increase may not be reflected in the accounts, stock held may be old and have to be sold at a substantial discount or debts within the business may be ‘bad’ and therefore not likely to be paid.
2) Price/Earnings ratio
It would be common to use this method where a business is making sustainable profits which it has demonstrated over a number of years.
The price/earnings ratio (Known as the P/E ratio) is calculated as the value of a business divided by its profits after tax. Once the appropriate P/E ratio has been decided upon it is multiplied by the businesses most recent profits, its average profits over x number of years or on the calculated future profits(where contracts are in place and higher future profits can be justified).
P/E ratios are normally used to value businesses with an established history.
It should be noted that quoted companies will have a higher P/E ratio than unquoted. This is because their shares are much easier to buy and sell as there is a ready made market place and this therefore makes them much more attractive to potential investors.
P/E ratios are often adjusted by commercial circumstances, for example a higher forecast profit growth will result in a higher P/E ratio as will businesses which have constantly earned profits
3) Discounted future cash flows
This calculation is appropriate for businesses which are forecasting a steady or increasing cashflow in future years possibly as a result of an heavy investment programme. This method is the most technical way of valuing a business and relies heavily on assumptions regarding long term business conditions.
The main uses of this method are for cash generating businesses which are stable and mature, eg a publishing company with a substantial catalogue of best selling titles.
Where a business can inspire confidence in its long term prospects this method will underline the businesses solid credentials.
4) Costs of Entry
This method values the business with reference to the probable costs involved to start up a similar business from scratch. Costs included in the valuation would include purchasing similar assets on the open market, developing its products and processes, recruiting and training employees and building up the customer base. The business would also benefit from any cost savings that could be made by for example, using better technology or locating the business in a lower cost area with a cheaper labour pool. Once this is evaluated the business is then able to make a comparative assessment which can be based on a more realistic scenario of the cheaper alternatives.
Intangible Issues
As stated at the beginning, a key source of value to the business can often be things which cannot be measured.
•Key relationships
A key example cited was strong relationships with key customers or suppliers eg where an extremely good relationship has been developed with a key supplier by paying on time, supplying key forecast information to enable stocks in the supply chain to be kept to a minimum or providing technical expertise to develop jointly key components.
•Management Stability
This may be a critical decision in the potential value of a business - particularly in owner managed businesses - where key information about the business resides with the owner. Should he leave then the business would be worth far less eg the profitability of a design agency may plummet if the key creative person leaves or if key sales people leave and take their accounts with them.
•Restrictive Covenants
These terms in employees contracts could add value to a business by ensuring that key personnel are restricted from moving elsewhere or conversely could reduce the value to a potential buyer if they intend to bring their own management team in.
•Risks
The more potential risks that there are from the purchasers point of view, the lower the valuation will be.
Specific actions can be taken to build a more valuable business
•Setting up good systems eg good accurate management accounts. Good systems make nasty surprises unlikely.
•Ensure that sales are spread across a wide customer base. Where there are few large customers the potential for disaster from the loss of just one is increased substantially.
•Ensure that key customers and suppliers are tied in with contracts and mutual dependence.
•Exposure to other external factors such as interest or exchange rates should be minimised.
http://www.alphalimited.co.uk/business-briefs/business-valuations-valuing-a-business.htm
How much is your Business worth and how can you increase its value? These are the two questions which should be foremost in the business owners mind.
The worth of a business really depends upon how much money a purchaser can make from it compared to the risks involved in taking it on. Past profitability and asset values tend to be just the starting point and it is often the more intangible factors such as key business relationships, key personnel etc. which provide the most value.
Why Do We Value The Business?
What Affects Valuations?
Valuation Methods
Intangible Issues
Why Do We Value The Business?
There are four main reasons for obtaining a business valuation
1) To help buy or sell a business
By understanding the valuation process it can enable a business owner to
•Take steps to improve the real or perceived value of the business
•Decide the best time to buy or sell a business
•Negotiate better terms
•Complete a purchase more quickly
There is a better chance of a sale being completed if both the buyer and seller enter the process with realistic expectations
2) To assist in getting others to invest in the business particularly through equity
•A valuation of the business can help in agreeing a share price for new shares being issued
3) To create an internal market for shares
•A valuation can help buying or selling shares in a business at a fair price particularly when for example, a director is retiring and wishes to sell his shares
4) As a vehicle in helping to provide motivation for management
Regular valuations of the company is a good discipline which can:
•Provide a measurement yardstick for management performance when they see how they are increasing the net worth of the company
•Enables management to focus on important issues
•Help to expose areas of the business which need changing
All companies that are listed on a stock exchange have the quoted share price as a constant indicator of how well a company is doing. Unlisted companies need to do this in a slightly different way
What Affects Valuations?
There are three basic criteria which can affect the valuation of a business
1) The circumstances of a valuation
•An ongoing business can be valued in a number of ways (see later)
•A ‘forced sale’ will down value a company eg should an owner manager need to retire through ill health he may have to take the first offer that comes along. This is known as a fire sale.
•If the business is being wound up the break up value will be the net of the realisable value of the assets less liabilities outstanding
2) What is the value of the tangible assets of the business?
•A business which owns property or machinery for example will have substantial tangible assets
•Often businesses have no tangible assets beyond the value of its office equipment. This is particularly true of many service companies such as accountants and insurers.
3) What is the age of the business?
•A fairly new business may well have a negative net asset value but have an extremely high valuation in terms of future profitability especially where there are substantial long term contracts in place
Valuation Methods
Whatever the business is valued at with any techniques it must be remembered that this is a guide only. The true value of a business is what the purchaser is willing to pay for it . To arrive at this figure buyers will use various valuation methods and often a combination of methods. The main valuation methods are based upon:
1) Assets
This method would be appropriate if the business in question has significant tangible assets eg. a property company.
Basically the value of all the assets (both fixed and current) are added together and then the total of the business liabilities are subtracted from these to produce an asset valuation. The starting point for an asset valuation is to take the assets that are stated in the latest accounts (This is known as the ‘net book value’). This is refined to reflect the economic reality, for example, property prices may have increased substantially but their increase may not be reflected in the accounts, stock held may be old and have to be sold at a substantial discount or debts within the business may be ‘bad’ and therefore not likely to be paid.
2) Price/Earnings ratio
It would be common to use this method where a business is making sustainable profits which it has demonstrated over a number of years.
The price/earnings ratio (Known as the P/E ratio) is calculated as the value of a business divided by its profits after tax. Once the appropriate P/E ratio has been decided upon it is multiplied by the businesses most recent profits, its average profits over x number of years or on the calculated future profits(where contracts are in place and higher future profits can be justified).
P/E ratios are normally used to value businesses with an established history.
It should be noted that quoted companies will have a higher P/E ratio than unquoted. This is because their shares are much easier to buy and sell as there is a ready made market place and this therefore makes them much more attractive to potential investors.
P/E ratios are often adjusted by commercial circumstances, for example a higher forecast profit growth will result in a higher P/E ratio as will businesses which have constantly earned profits
3) Discounted future cash flows
This calculation is appropriate for businesses which are forecasting a steady or increasing cashflow in future years possibly as a result of an heavy investment programme. This method is the most technical way of valuing a business and relies heavily on assumptions regarding long term business conditions.
The main uses of this method are for cash generating businesses which are stable and mature, eg a publishing company with a substantial catalogue of best selling titles.
Where a business can inspire confidence in its long term prospects this method will underline the businesses solid credentials.
4) Costs of Entry
This method values the business with reference to the probable costs involved to start up a similar business from scratch. Costs included in the valuation would include purchasing similar assets on the open market, developing its products and processes, recruiting and training employees and building up the customer base. The business would also benefit from any cost savings that could be made by for example, using better technology or locating the business in a lower cost area with a cheaper labour pool. Once this is evaluated the business is then able to make a comparative assessment which can be based on a more realistic scenario of the cheaper alternatives.
Intangible Issues
As stated at the beginning, a key source of value to the business can often be things which cannot be measured.
•Key relationships
A key example cited was strong relationships with key customers or suppliers eg where an extremely good relationship has been developed with a key supplier by paying on time, supplying key forecast information to enable stocks in the supply chain to be kept to a minimum or providing technical expertise to develop jointly key components.
•Management Stability
This may be a critical decision in the potential value of a business - particularly in owner managed businesses - where key information about the business resides with the owner. Should he leave then the business would be worth far less eg the profitability of a design agency may plummet if the key creative person leaves or if key sales people leave and take their accounts with them.
•Restrictive Covenants
These terms in employees contracts could add value to a business by ensuring that key personnel are restricted from moving elsewhere or conversely could reduce the value to a potential buyer if they intend to bring their own management team in.
•Risks
The more potential risks that there are from the purchasers point of view, the lower the valuation will be.
Specific actions can be taken to build a more valuable business
•Setting up good systems eg good accurate management accounts. Good systems make nasty surprises unlikely.
•Ensure that sales are spread across a wide customer base. Where there are few large customers the potential for disaster from the loss of just one is increased substantially.
•Ensure that key customers and suppliers are tied in with contracts and mutual dependence.
•Exposure to other external factors such as interest or exchange rates should be minimised.
http://www.alphalimited.co.uk/business-briefs/business-valuations-valuing-a-business.htm
How and Where to Find a Business for Sale
How and Where to Find a Business for Sale
by BizHelp24
October 19, 2005
Chapter 2: Searching For a Business
The first thing to do before you search for a business is to make a criteria list for the ideal business you are looking for. Don't be too specific or your list will eliminate practically every business out there. Instead, just write down a few requirements from the list below:
•The type of business (service/product, industry, etc)
•The location of the business
•The size of the business (customers, suppliers, administration, number of employees etc)
•The performance (minimum level of profit/turnover you expect)
•The expected salary you hope to achieve
•Level of commitment (hours you are willing to put in)
•Required Assets (machinery, equipment, vehicles, etc)
•Premises (leased or owned, office or home, factory or lock-up)
The list can go on, so feel free to add anything that you feel essential.
2a) Franchises
If you would prefer to buy a business that has already proved successful, you may want to buy a franchise. You can find franchises the same way you would any other business that is for sale (see below). To read more about Franchising, visit the Franchising chapter of this article
2b) Finding That Business
This is the part that can take some time. You may already know which business you want but it is still a good idea to short list a few just in case the deal doesn't go through. Below are some of the main places that you can find businesses for sale:
(i) Newspapers/Magazines:
Advertisements are found in media mainly concerned with business or finance issues: for example; Exchange and Mart, Loot, local papers on specific days, quality weekend newspapers. Although the adverts may not give as much detail as you wanted, there will be contacts specified to make any queries. If you want to find a business locally, it is always best to look in your local and regional media.
(ii) Internet:
There are many web sites on the Internet that list businesses for sale. Your best approach would be to go through a search engine to find the relevant sites. We have managed to get hold of a few web sites to get you started.
•Biz Trader
•Forum Commercial
•Loot
•Turner & Co
•UK Business Base
(iii) Finance Services:
These will include Banks and accountants and they too will have details of businesses wanting to sell. The added advantage of consulting these services is that they will able to provide you with financial reports of the business (very useful).
(iv) Business Brokers and Estate Agents:
There are also a number of business brokers and business estate agents. These organizations have details of businesses for sale but you have to take into account that they may also be employed by the business to help sell it. Such agents can be found listed in telephone directories. Business brokers will be detailed further on the following page.
(v) Self-Advertising:
In addition to those said above, why not let the right business come to you? Advertise what you are looking for in a newspaper/magazine: this way you can be more specific about your requirements. Use word-of-mouth to widen your search - you never know what's out there until you ask!
http://www.bizhelp24.com/business-start-up/how-and-where-to-find-a-business-for-sale.html
by BizHelp24
October 19, 2005
Chapter 2: Searching For a Business
The first thing to do before you search for a business is to make a criteria list for the ideal business you are looking for. Don't be too specific or your list will eliminate practically every business out there. Instead, just write down a few requirements from the list below:
•The type of business (service/product, industry, etc)
•The location of the business
•The size of the business (customers, suppliers, administration, number of employees etc)
•The performance (minimum level of profit/turnover you expect)
•The expected salary you hope to achieve
•Level of commitment (hours you are willing to put in)
•Required Assets (machinery, equipment, vehicles, etc)
•Premises (leased or owned, office or home, factory or lock-up)
The list can go on, so feel free to add anything that you feel essential.
2a) Franchises
If you would prefer to buy a business that has already proved successful, you may want to buy a franchise. You can find franchises the same way you would any other business that is for sale (see below). To read more about Franchising, visit the Franchising chapter of this article
2b) Finding That Business
This is the part that can take some time. You may already know which business you want but it is still a good idea to short list a few just in case the deal doesn't go through. Below are some of the main places that you can find businesses for sale:
(i) Newspapers/Magazines:
Advertisements are found in media mainly concerned with business or finance issues: for example; Exchange and Mart, Loot, local papers on specific days, quality weekend newspapers. Although the adverts may not give as much detail as you wanted, there will be contacts specified to make any queries. If you want to find a business locally, it is always best to look in your local and regional media.
(ii) Internet:
There are many web sites on the Internet that list businesses for sale. Your best approach would be to go through a search engine to find the relevant sites. We have managed to get hold of a few web sites to get you started.
•Biz Trader
•Forum Commercial
•Loot
•Turner & Co
•UK Business Base
(iii) Finance Services:
These will include Banks and accountants and they too will have details of businesses wanting to sell. The added advantage of consulting these services is that they will able to provide you with financial reports of the business (very useful).
(iv) Business Brokers and Estate Agents:
There are also a number of business brokers and business estate agents. These organizations have details of businesses for sale but you have to take into account that they may also be employed by the business to help sell it. Such agents can be found listed in telephone directories. Business brokers will be detailed further on the following page.
(v) Self-Advertising:
In addition to those said above, why not let the right business come to you? Advertise what you are looking for in a newspaper/magazine: this way you can be more specific about your requirements. Use word-of-mouth to widen your search - you never know what's out there until you ask!
http://www.bizhelp24.com/business-start-up/how-and-where-to-find-a-business-for-sale.html
Valuation is what a business is worth
Business Valuation
by Tim Berry
Valuation is what a business is worth, as in “this company’s valuation is $10 million.” This would mean that a company is valued at $10 million, or worth $10 million. The term is used most often for discussions of sale or purchase of a company; it’s valuation is the price of a share times the number of shares outstanding, and the price of a share is the total valuation divided by the number of shares outstanding.
Some of the different valuation methods consider:
Rate of return
Timing and form of return
Amount of control desired
Acceptable level of risk
Perception of risk
Standard new venture valuation methods may include:
Asset-based valuation: the business is worth the sum of its assets. Not a popular valuation method for new businesses, because their future should be worth a lot more than their assets.
Book value: the book value of a company is the calculation of assets less liabilities.
Adjusted book value: this variation adjusts the assets – liabilities calculation for real value of assets, distinguished from the accounting value.
Liquidation value: what a business would yield in real money if its assets were liquidated.
Replacement value: what it would cost to replace the business if the replacement started from scratch.
Earnings Based Valuations: this is by far the most popular method for new businesses; they are valued based on future earnings.
Valuation is also important for tax reporting. Some tax-related events such as sale, purchase or gifting of shares of a company will be taxed depending on valuation.
The term is used less in discussions of major publicly traded companies, but it is essentially the same as market cap or market capitalization.
Used as a verb, valuation is the process of determining what the business’ valuation. In this context, a valuation is like an audit, and a valuation expert is a CPA or analyst who does valuations. Some CPAs are certified as valuation experts, which means the IRS is more likely to accept their valuation as part of a transaction related to taxes.
References:
Valuation formulas
Valuation before investment.
Business start-up valuation.
http://articles.bplans.com/buying-a-business/business-valuation/212
by Tim Berry
Valuation is what a business is worth, as in “this company’s valuation is $10 million.” This would mean that a company is valued at $10 million, or worth $10 million. The term is used most often for discussions of sale or purchase of a company; it’s valuation is the price of a share times the number of shares outstanding, and the price of a share is the total valuation divided by the number of shares outstanding.
Some of the different valuation methods consider:
Rate of return
Timing and form of return
Amount of control desired
Acceptable level of risk
Perception of risk
Standard new venture valuation methods may include:
Asset-based valuation: the business is worth the sum of its assets. Not a popular valuation method for new businesses, because their future should be worth a lot more than their assets.
Book value: the book value of a company is the calculation of assets less liabilities.
Adjusted book value: this variation adjusts the assets – liabilities calculation for real value of assets, distinguished from the accounting value.
Liquidation value: what a business would yield in real money if its assets were liquidated.
Replacement value: what it would cost to replace the business if the replacement started from scratch.
Earnings Based Valuations: this is by far the most popular method for new businesses; they are valued based on future earnings.
Valuation is also important for tax reporting. Some tax-related events such as sale, purchase or gifting of shares of a company will be taxed depending on valuation.
The term is used less in discussions of major publicly traded companies, but it is essentially the same as market cap or market capitalization.
Used as a verb, valuation is the process of determining what the business’ valuation. In this context, a valuation is like an audit, and a valuation expert is a CPA or analyst who does valuations. Some CPAs are certified as valuation experts, which means the IRS is more likely to accept their valuation as part of a transaction related to taxes.
References:
Valuation formulas
Valuation before investment.
Business start-up valuation.
http://articles.bplans.com/buying-a-business/business-valuation/212
What’s That Business Worth?
by Milton Zlotnick
- the balance sheet and
- the statement of income and expense.
Valuing a Business
Valuing a Business
by BizHelp24
October 19, 2005
Chapter 6: Valuing a Business
Arguably, a business is worth what-ever someone is willing to pay and therefore will vary from person to person.
Today, there are over twenty different ways of valuing a business and this is why many people cumulate different prices. The price that the seller asks for is almost never what they will receive and is usually reduced in value through negotiations between themselves and you- the buyer.
It is important that you value the business yourself (with the help of assistance) so that you can be sure that you are not over paying for a business.
By paying too much, you will encounter further financial problems if the business doesn't turn out to be successful. On the other hand, those businesses that do prove successful will serve justice to the amount you paid.
In most cases, a business should be valued against the ability it has of generating a good cash-flow. In other words, the price will be dependent on the level of consistency the business has at making profits. All businesses are unique and therefore it is important that you use the most appropriate valuation method to determine a realistic value.
6a) Be Aware!
There are many people out there who use the wrong valuation methods to price a business and consequently pay too much. To give you an idea, look at a couple of them - the first of these is the Comparison Approach:
Say a small business has a Net Profit figure of £5,000 a month and was sold for £200,000 and the business that you want to buy also has the same Profit figure. You would be wrong to think that because they have the same Profits, they should both have the same value. The business that was sold for £200,000 may have only been operating for a few months and therefore, chance is that the profits are likely to increase. The business you have interest in may have been running for a number of years and profits may have stabilized. Also, that business may have a shorter operating period, say, five days a week, compared to your potential business' operating period of six days a week. The moral is that you should never compare prices to businesses with similar profits.
Quite often, many people have confidence that the seller has provided a realistic value and therefore they try to make a bargain by reducing this price by say, 10%. The trap that you may have fallen into here is that the seller may have inflated the price anyway in an attempt to make a bit more money out of the deal. So in theory, you haven't made anything from using this approach and consequently will have paid the price that the business is worth or maybe even more.
http://www.bizhelp24.com/business-start-up/valuing-a-business.html
Valuing a Business: The Asset Value and Payback Value
6b) The Right Approach
Different methods are also used depending on the size of the business and so we have stuck to the main ones that are generally used to valuing Small Medium Enterprises - 'SME'. During this time, you should consult your accountant to determine the best approach and also allow them to make the necessary calculations: despite the simplicity they may show, the figures involved may take time to reach through previous calculations taken from the accounts. Further, most of the figures and values you need should have been obtained during your due-diligence period.
6c) Asset Value
Using assets to value a business is more commonly used when it is considered as asset-intensive i.e. the assets heavily contribute to the level of profit that is generated. The Net asset value can therefore be obtained from the sum of the following:
•An accumulated value of all the fixed assets including plant, land and machinery.
•The value of any leasehold improvements: this includes any refurbishments or modifications the owner may have made such as new office space and/or equipment. You should note that the leaser can make the owner return the leasehold to the original state should these changes not be beneficial to you. Any improvements would therefore not be included in the overall value.
•The value of the inventory which can include raw materials, stock and anything that may be considered as work-in-progress.
•The value of intangible assets which not only includes goodwill but also logos, trademarks, and any patents.
6d) Payback Value
This is where you will set a price determined by the period that you expect to get a return for your initial investment. For example, a newsagent has a Net Profit of £30,000 and you expect to start making money after the third year. In which case, you would multiply this period by the Net profit i.e. £30,000 x 3 years = £90,000. This method strongly validates the fact: a business is only worth what someone is willing to pay.
http://www.bizhelp24.com/business-start-up/valuing-a-business-the-asset-value-and-payback-value.html
Valuing a Business: Return on Investment, Income Value & Owner Benefit Value
6e) Return on Investment/Capital
For a return on investment value, we are assuming that no fixed price has been given for the business and therefore you will use the net profit and your proposed return on investment percentage to determine a price. For example, a business makes a net profit of £20,000 and you expect an investment return of 10%. In which case, £20,000 divided by 10% gives a value of £200,000.
A return on capital approach would assume that a fixed price has been given for the business in which you can use to determine whether it is a wise investment. It may be that your money is worth investing elsewhere such as a bank that offers an average return of around 5%. Using basic terms, let's say the business is for sale at £100,000 and the net profit is £10,000. To find the return rate, you would divide the net profit by the business price and then work it out as a percentage: (see below)
£10,000 divide by £100,000 = 0.1
0.1 x 100% = 10% Return on Capital Employed
With a 10% Return on Capital Employed, It would therefore be a good investment as the rate is higher than that of the bank.
Should the rate be unacceptable, you would use the return on investment method to determine a more suitable price in order to give you your desired return.
6f) Capitalization of Income Value
This method is used more commonly for services and therefore considers the intangible value of the business. Such businesses are usually contract orientated and consequently you can fall into high risk situations. It would further be wise to use an accountant to determine that the business would have a favourable outcome should it suffer from a change of ownership.
This method involves using factors to determine an average figure called the "capitalization rate", say, between 1 (low) and 5 (high) to multiply against the owner's discretionary income (profits, owner's salary, non essential expenses etc) the following list has a low score potential of 11, and a high of 55. Such factors will include:
•Profitability (concentrate on future, not past, profitability)
•Competition (present and future)
•Customer base, particularly those under contract
•Full risk analysis
•Your suitability (your standard of experience and knowledge in the industry)
•Future potential for the industry
•Why the present owner is selling
•How long the business has traded
•How many past owners
•Location of business to customers
•Where growth lies within the business
If after rating the above as, say, 20 and the discretionary income is £20,000, the sum would be:
20 x 20,000 = £200,000 purchase price
As these factors are very subjective, it could be difficult to agree an exact "capitalization rate" and therefore an alternative valuation method should be adopted if you are too far from the sellers rate.
6g) Owner Benefit Valuation
This method uses a figure between 2 and 3 (depending on what you think is appropriate) and multiplied by the owner's discretionary cash-flow. Discretionary annual cash-flow can be referred to as the money that is not used in the operations of the business - profits, owner's salary, non essential expenses etc. Using this approach gives a value that reflects the business' ability to generating cash-flow and profits. If you want, say, 2.5 times the owners total benefits and the discretionary income is £20,000, the sum would be:
2.5 x 20,000 = £50,000 purchase price
http://www.bizhelp24.com/business-start-up/valuing-a-business-return-on-investment-income-value-owner-benefit-value.html
Valuing a Business: The Multiplier Valuation
6h) Multiplier Valuation
This area is very subjective and there will be a variation in people's attitudes and opinions for the figures involved. The figures that we have given are USA based and should be used for guidance purposes only to give you an idea of the differences between industries. The value of the business is derived from the multiplication of a figure (or percentage) and a financial value of the business.
Below are multiplication figures that have been supplied by the Business Brokerage Press, located in the USA, from their publication 'The 2001 Business Reference Guide'.
Type of Business "Rule of Thumb" valuation
Accounting Firms 100% - 125% of annual revenues
Auto Dealers 2-3 years net income + tangible assets
Book Stores 15% of annual sales + inventory
Coffee Shops 40% - 45% of annual sales + inventory
Courier Services 70% of annual sales
Day Care Centres 2-3 times annual cash flow
Dental Practices 60% - 70% of annual revenues
Dry Cleaners 70% - 100% of annual sales
Employment & Personnel Agencies 50% - 100% of annual revenues
Engineering practices 40% of annual revenues
Florists 34% of annual sales + inventory
Food/Gourmet Shops 20% of annual sales + inventory
Furniture & Appliance Stores 15% - 25% of annual sales + inventory
Gas Stations 15% - 25% of annual sales + equip/inventory
Gift & Card Shops 32% - 40% of annual sales + inventory
Grocery Stores 11% - 18% of annual sales + inventory
Insurance Agencies 100% - 125% of annual commissions
Janitorial & Landscape Contractors 40% - 50% of annual sales
Law Practices 40% - 100% of annual fees
Liquor Stores 5% of annual sales + inventory
Property Management Companies 50% - 100% of annual revenues
Restaurants (non-franchised) 30% - 45% of annual sales
Sporting Goods stores 30% of annual sales + inventory
Taverns 55% of annual sales
Travel Agencies 40% - 60% of annual commissions
Veterinary Practices 60% - 125% of annual revenues
http://www.bizhelp24.com/business-start-up/valuing-a-business-the-multiplier-valuation.html
by BizHelp24
October 19, 2005
Chapter 6: Valuing a Business
Arguably, a business is worth what-ever someone is willing to pay and therefore will vary from person to person.
Today, there are over twenty different ways of valuing a business and this is why many people cumulate different prices. The price that the seller asks for is almost never what they will receive and is usually reduced in value through negotiations between themselves and you- the buyer.
It is important that you value the business yourself (with the help of assistance) so that you can be sure that you are not over paying for a business.
By paying too much, you will encounter further financial problems if the business doesn't turn out to be successful. On the other hand, those businesses that do prove successful will serve justice to the amount you paid.
In most cases, a business should be valued against the ability it has of generating a good cash-flow. In other words, the price will be dependent on the level of consistency the business has at making profits. All businesses are unique and therefore it is important that you use the most appropriate valuation method to determine a realistic value.
6a) Be Aware!
There are many people out there who use the wrong valuation methods to price a business and consequently pay too much. To give you an idea, look at a couple of them - the first of these is the Comparison Approach:
Say a small business has a Net Profit figure of £5,000 a month and was sold for £200,000 and the business that you want to buy also has the same Profit figure. You would be wrong to think that because they have the same Profits, they should both have the same value. The business that was sold for £200,000 may have only been operating for a few months and therefore, chance is that the profits are likely to increase. The business you have interest in may have been running for a number of years and profits may have stabilized. Also, that business may have a shorter operating period, say, five days a week, compared to your potential business' operating period of six days a week. The moral is that you should never compare prices to businesses with similar profits.
Quite often, many people have confidence that the seller has provided a realistic value and therefore they try to make a bargain by reducing this price by say, 10%. The trap that you may have fallen into here is that the seller may have inflated the price anyway in an attempt to make a bit more money out of the deal. So in theory, you haven't made anything from using this approach and consequently will have paid the price that the business is worth or maybe even more.
http://www.bizhelp24.com/business-start-up/valuing-a-business.html
Valuing a Business: The Asset Value and Payback Value
6b) The Right Approach
Different methods are also used depending on the size of the business and so we have stuck to the main ones that are generally used to valuing Small Medium Enterprises - 'SME'. During this time, you should consult your accountant to determine the best approach and also allow them to make the necessary calculations: despite the simplicity they may show, the figures involved may take time to reach through previous calculations taken from the accounts. Further, most of the figures and values you need should have been obtained during your due-diligence period.
6c) Asset Value
Using assets to value a business is more commonly used when it is considered as asset-intensive i.e. the assets heavily contribute to the level of profit that is generated. The Net asset value can therefore be obtained from the sum of the following:
•An accumulated value of all the fixed assets including plant, land and machinery.
•The value of any leasehold improvements: this includes any refurbishments or modifications the owner may have made such as new office space and/or equipment. You should note that the leaser can make the owner return the leasehold to the original state should these changes not be beneficial to you. Any improvements would therefore not be included in the overall value.
•The value of the inventory which can include raw materials, stock and anything that may be considered as work-in-progress.
•The value of intangible assets which not only includes goodwill but also logos, trademarks, and any patents.
6d) Payback Value
This is where you will set a price determined by the period that you expect to get a return for your initial investment. For example, a newsagent has a Net Profit of £30,000 and you expect to start making money after the third year. In which case, you would multiply this period by the Net profit i.e. £30,000 x 3 years = £90,000. This method strongly validates the fact: a business is only worth what someone is willing to pay.
http://www.bizhelp24.com/business-start-up/valuing-a-business-the-asset-value-and-payback-value.html
Valuing a Business: Return on Investment, Income Value & Owner Benefit Value
6e) Return on Investment/Capital
For a return on investment value, we are assuming that no fixed price has been given for the business and therefore you will use the net profit and your proposed return on investment percentage to determine a price. For example, a business makes a net profit of £20,000 and you expect an investment return of 10%. In which case, £20,000 divided by 10% gives a value of £200,000.
A return on capital approach would assume that a fixed price has been given for the business in which you can use to determine whether it is a wise investment. It may be that your money is worth investing elsewhere such as a bank that offers an average return of around 5%. Using basic terms, let's say the business is for sale at £100,000 and the net profit is £10,000. To find the return rate, you would divide the net profit by the business price and then work it out as a percentage: (see below)
£10,000 divide by £100,000 = 0.1
0.1 x 100% = 10% Return on Capital Employed
With a 10% Return on Capital Employed, It would therefore be a good investment as the rate is higher than that of the bank.
Should the rate be unacceptable, you would use the return on investment method to determine a more suitable price in order to give you your desired return.
6f) Capitalization of Income Value
This method is used more commonly for services and therefore considers the intangible value of the business. Such businesses are usually contract orientated and consequently you can fall into high risk situations. It would further be wise to use an accountant to determine that the business would have a favourable outcome should it suffer from a change of ownership.
This method involves using factors to determine an average figure called the "capitalization rate", say, between 1 (low) and 5 (high) to multiply against the owner's discretionary income (profits, owner's salary, non essential expenses etc) the following list has a low score potential of 11, and a high of 55. Such factors will include:
•Profitability (concentrate on future, not past, profitability)
•Competition (present and future)
•Customer base, particularly those under contract
•Full risk analysis
•Your suitability (your standard of experience and knowledge in the industry)
•Future potential for the industry
•Why the present owner is selling
•How long the business has traded
•How many past owners
•Location of business to customers
•Where growth lies within the business
If after rating the above as, say, 20 and the discretionary income is £20,000, the sum would be:
20 x 20,000 = £200,000 purchase price
As these factors are very subjective, it could be difficult to agree an exact "capitalization rate" and therefore an alternative valuation method should be adopted if you are too far from the sellers rate.
6g) Owner Benefit Valuation
This method uses a figure between 2 and 3 (depending on what you think is appropriate) and multiplied by the owner's discretionary cash-flow. Discretionary annual cash-flow can be referred to as the money that is not used in the operations of the business - profits, owner's salary, non essential expenses etc. Using this approach gives a value that reflects the business' ability to generating cash-flow and profits. If you want, say, 2.5 times the owners total benefits and the discretionary income is £20,000, the sum would be:
2.5 x 20,000 = £50,000 purchase price
http://www.bizhelp24.com/business-start-up/valuing-a-business-return-on-investment-income-value-owner-benefit-value.html
Valuing a Business: The Multiplier Valuation
6h) Multiplier Valuation
This area is very subjective and there will be a variation in people's attitudes and opinions for the figures involved. The figures that we have given are USA based and should be used for guidance purposes only to give you an idea of the differences between industries. The value of the business is derived from the multiplication of a figure (or percentage) and a financial value of the business.
Below are multiplication figures that have been supplied by the Business Brokerage Press, located in the USA, from their publication 'The 2001 Business Reference Guide'.
Type of Business "Rule of Thumb" valuation
Accounting Firms 100% - 125% of annual revenues
Auto Dealers 2-3 years net income + tangible assets
Book Stores 15% of annual sales + inventory
Coffee Shops 40% - 45% of annual sales + inventory
Courier Services 70% of annual sales
Day Care Centres 2-3 times annual cash flow
Dental Practices 60% - 70% of annual revenues
Dry Cleaners 70% - 100% of annual sales
Employment & Personnel Agencies 50% - 100% of annual revenues
Engineering practices 40% of annual revenues
Florists 34% of annual sales + inventory
Food/Gourmet Shops 20% of annual sales + inventory
Furniture & Appliance Stores 15% - 25% of annual sales + inventory
Gas Stations 15% - 25% of annual sales + equip/inventory
Gift & Card Shops 32% - 40% of annual sales + inventory
Grocery Stores 11% - 18% of annual sales + inventory
Insurance Agencies 100% - 125% of annual commissions
Janitorial & Landscape Contractors 40% - 50% of annual sales
Law Practices 40% - 100% of annual fees
Liquor Stores 5% of annual sales + inventory
Property Management Companies 50% - 100% of annual revenues
Restaurants (non-franchised) 30% - 45% of annual sales
Sporting Goods stores 30% of annual sales + inventory
Taverns 55% of annual sales
Travel Agencies 40% - 60% of annual commissions
Veterinary Practices 60% - 125% of annual revenues
http://www.bizhelp24.com/business-start-up/valuing-a-business-the-multiplier-valuation.html
Valuing a business & Buy It Without Fear
"How to Value a Business & Buy It Without Fear"
http://www.howtovaluebusiness.com/
http://www.pnesbitt.com/business_transactions/valuing_a_business.pdf
http://www.howtovaluebusiness.com/
http://www.pnesbitt.com/business_transactions/valuing_a_business.pdf
4 Tips to Valuing a Business For Purchases
4 Tips to Valuing a Business For Purchases
By Ted E. Sanders Ted E. Sanders
Level: Basic PLUS
Mr. Sanders is a self described “serial entrepreneur,” and teacher. Mr. Sanders has purchased 4 businesses and started too many businesses to remember. Mr. Sanders ... Article Word Count: 646 [View Summary] Comments (0)
You've made the decision to buy a business. Good choice! Buying a business can be the best way to increase your personal wealth. You've found this wonderful illustrious business that has incredible potential and you know you are absolutely going to love working there for the rest of your life, or at least until you make your first million ;) Now the seller is asking a price that sounds right, but how did they come to that price? Valuing a business is more than often an ambiguous process that comes down to more opinion than fact. Market value for your business is the price that a reasonable buyer would pay and reasonable seller would pay for in a normal market of business sales. If you're reading this article - you're not normal. I say this in a good way. You're actually above normal. Most people who ATTEMPT to buy a business do very little studying and research into the process. Consequently they either don't buy the business due to insecurities or inadequate funding or they buy the business and fail due to poor preparation. So how much is that business worth? Here are 4 tips to assist you in valuing the business.
1. If the business is making a profit, how much of a profit does it REALLY make? I've seen business brokers, and listing agents come up with all sorts of amazing projections on what the business should be making and then trying to sell it based on that number. If the business broker or seller can predict the future then they shouldn't be in entrepreneurship - they should be in the stock market! If the price is based on earnings, and the earnings are based on "pro-forma" or projected income (not actual) then forget any price they put to the business. You're buying income not income potential. If you want some great income potential I have some swamp land for sale for you in Florida that is definitely going to go up in value - some day.
2. If the business is losing money, it's worth the assets current resale value minus the debt that you're assuming in the business. This means if the business has 1 widget that they bought for $100,000, business debt of $20,000 - you don't know the value of the business! If you can sell the widget for $40,000 and the business debt is $20,000 the business is worth $20,000.
3. What is the business worth to you? Most of the buyers I coach are individuals who are more interested in buying a business/job instead of investing millions of dollars into a business that can be made into a public offering. Consequently buying a business means replacing a full-time income for twice the work as your previous job. However people seek self employment for a variety of reasons, income, pride, the freedom of spending more time with family etc. List 10 reasons why you want to be self employed. Now put a price tag to every item you've listed. If any of those price tags are "infinite" self employment is for you.
4. The four P's - Pick your Price based on Past Performance or what was Put in the Previous owners Pocket? - Pay for past performance - never pay for what the business could or should be. Remember that you are the buyer and you should try to pick your price based on how much money the business has put in the previous owners pocket. All formal and informal business valuations are established on "net present value." Please remember that off book money absolutely can not account for the price! Off book money is money not reported to the IRS. If the seller didn't declare it as income or benefits then it does not count for the income to determine the price.
Do you want to learn more about how to buy a business? I have just completed a brand new guide in buying a business "The Corporate Raider's Guide to Creatively Financing Your First Business." Download it free here: http://www.corporateraidersguide.com/
Article Source: http://EzineArticles.com/?expert=Ted_E._Sanders
http://ezinearticles.com/?4-Tips-to-Valuing-a-Business-For-Purchases&id=2695770
By Ted E. Sanders Ted E. Sanders
Level: Basic PLUS
Mr. Sanders is a self described “serial entrepreneur,” and teacher. Mr. Sanders has purchased 4 businesses and started too many businesses to remember. Mr. Sanders ... Article Word Count: 646 [View Summary] Comments (0)
You've made the decision to buy a business. Good choice! Buying a business can be the best way to increase your personal wealth. You've found this wonderful illustrious business that has incredible potential and you know you are absolutely going to love working there for the rest of your life, or at least until you make your first million ;) Now the seller is asking a price that sounds right, but how did they come to that price? Valuing a business is more than often an ambiguous process that comes down to more opinion than fact. Market value for your business is the price that a reasonable buyer would pay and reasonable seller would pay for in a normal market of business sales. If you're reading this article - you're not normal. I say this in a good way. You're actually above normal. Most people who ATTEMPT to buy a business do very little studying and research into the process. Consequently they either don't buy the business due to insecurities or inadequate funding or they buy the business and fail due to poor preparation. So how much is that business worth? Here are 4 tips to assist you in valuing the business.
1. If the business is making a profit, how much of a profit does it REALLY make? I've seen business brokers, and listing agents come up with all sorts of amazing projections on what the business should be making and then trying to sell it based on that number. If the business broker or seller can predict the future then they shouldn't be in entrepreneurship - they should be in the stock market! If the price is based on earnings, and the earnings are based on "pro-forma" or projected income (not actual) then forget any price they put to the business. You're buying income not income potential. If you want some great income potential I have some swamp land for sale for you in Florida that is definitely going to go up in value - some day.
2. If the business is losing money, it's worth the assets current resale value minus the debt that you're assuming in the business. This means if the business has 1 widget that they bought for $100,000, business debt of $20,000 - you don't know the value of the business! If you can sell the widget for $40,000 and the business debt is $20,000 the business is worth $20,000.
3. What is the business worth to you? Most of the buyers I coach are individuals who are more interested in buying a business/job instead of investing millions of dollars into a business that can be made into a public offering. Consequently buying a business means replacing a full-time income for twice the work as your previous job. However people seek self employment for a variety of reasons, income, pride, the freedom of spending more time with family etc. List 10 reasons why you want to be self employed. Now put a price tag to every item you've listed. If any of those price tags are "infinite" self employment is for you.
4. The four P's - Pick your Price based on Past Performance or what was Put in the Previous owners Pocket? - Pay for past performance - never pay for what the business could or should be. Remember that you are the buyer and you should try to pick your price based on how much money the business has put in the previous owners pocket. All formal and informal business valuations are established on "net present value." Please remember that off book money absolutely can not account for the price! Off book money is money not reported to the IRS. If the seller didn't declare it as income or benefits then it does not count for the income to determine the price.
Do you want to learn more about how to buy a business? I have just completed a brand new guide in buying a business "The Corporate Raider's Guide to Creatively Financing Your First Business." Download it free here: http://www.corporateraidersguide.com/
Article Source: http://EzineArticles.com/?expert=Ted_E._Sanders
http://ezinearticles.com/?4-Tips-to-Valuing-a-Business-For-Purchases&id=2695770
Valuing a Business (Power Point Presentation)
Earnings Multiple (Value-to-Earnings) Ratio:
A ratio is determined by dividing the firm’s value by its earnings that can be compared to representative ratios of recently-sold similar firms.
Normalized Earnings: Earnings that have been adjusted for unusual items, such as fire damage, and all relevant expenses, such as a fair salary for the owner’s time
Type of Firm ####Earnings Multiple
Small, well-established firms, vulnerable to recession ####7
Small firms requiring average executive ability but operating in a highly competitive environment ####4
Firms that depend on the special, often unusual, skill of one individual or a small group of managers#### 2
Risk and Growth in Determining a Firm’s Value:
Risk and Growth are Key Factors Affecting the Earnings Multiple and Firm Value
The more (less) risky the business, the lower (higher) the appropriate earnings multiple and, as a consequence, the lower (higher) the firm’s value.
The higher (lower) the projected growth rate in future earnings, the higher (lower) the appropriate earnings multiple and, therefore, the higher (lower) the firm’s value.
Cash Flow-Based Valuation
Determination of the value of a business by estimating the amount and timing of its future cash flows
Step 1. Project the firm’s expected future cash flows.
Step 2. Estimate the investors’ and owners’ required rate of return on their investment in the business.
Step 3. Using the required rate of return as the discount rate, calculate the present value of the firm’s expected future cash flows, which equals the value of the firm.
http://www.andrews.edu/~schwab/sbm-appb.ppt#8
A ratio is determined by dividing the firm’s value by its earnings that can be compared to representative ratios of recently-sold similar firms.
Normalized Earnings: Earnings that have been adjusted for unusual items, such as fire damage, and all relevant expenses, such as a fair salary for the owner’s time
Type of Firm ####Earnings Multiple
Small, well-established firms, vulnerable to recession ####7
Small firms requiring average executive ability but operating in a highly competitive environment ####4
Firms that depend on the special, often unusual, skill of one individual or a small group of managers#### 2
Risk and Growth in Determining a Firm’s Value:
Risk and Growth are Key Factors Affecting the Earnings Multiple and Firm Value
The more (less) risky the business, the lower (higher) the appropriate earnings multiple and, as a consequence, the lower (higher) the firm’s value.
The higher (lower) the projected growth rate in future earnings, the higher (lower) the appropriate earnings multiple and, therefore, the higher (lower) the firm’s value.
Cash Flow-Based Valuation
Determination of the value of a business by estimating the amount and timing of its future cash flows
Step 1. Project the firm’s expected future cash flows.
Step 2. Estimate the investors’ and owners’ required rate of return on their investment in the business.
Step 3. Using the required rate of return as the discount rate, calculate the present value of the firm’s expected future cash flows, which equals the value of the firm.
http://www.andrews.edu/~schwab/sbm-appb.ppt#8
Deciding on the right type of business to buy
Ideally any business you buy needs to fit your own skills, lifestyle and aspirations. Before you start looking, think about what you can bring to a business and what you'd like to get back.
List what is important to you. Look at your motivations and what you ultimately want to achieve. It is useful to consider:
•Your abilities - can you achieve what you want to achieve?
•Your capital - how much money do you have to invest?
•Your expectations in terms of earning - what level of profit do you need to be looking for to accommodate your needs?
•Your commitment - are you prepared for all the hard work and money that you will need to put into the business to get it to succeed?
•Your strengths - what kind of business opportunity will give you the chance to put your skills and experience to good use?
•The business sector you're interested in - learn as much as you can about your chosen industry so you can compare different businesses. It's important to take the time to talk to people already in similar businesses but the internet and a large local library will also be good sources of information. Find out how to comply with all the regulations and licences that apply to Your business sector.
•Location - don't restrict your search to your local area. Some businesses can be easily relocated
http://www.adelbb.com/tipsMore.php?id=27
List what is important to you. Look at your motivations and what you ultimately want to achieve. It is useful to consider:
•Your abilities - can you achieve what you want to achieve?
•Your capital - how much money do you have to invest?
•Your expectations in terms of earning - what level of profit do you need to be looking for to accommodate your needs?
•Your commitment - are you prepared for all the hard work and money that you will need to put into the business to get it to succeed?
•Your strengths - what kind of business opportunity will give you the chance to put your skills and experience to good use?
•The business sector you're interested in - learn as much as you can about your chosen industry so you can compare different businesses. It's important to take the time to talk to people already in similar businesses but the internet and a large local library will also be good sources of information. Find out how to comply with all the regulations and licences that apply to Your business sector.
•Location - don't restrict your search to your local area. Some businesses can be easily relocated
http://www.adelbb.com/tipsMore.php?id=27
****Best Businesses to Start or Buy: Recurring Revenue Business Models
Best Businesses to Start or Buy
Recurring Revenue Business Models
Starting a business? Buying a business? If so, there's one question that you absolutely must ask. Does your new venture have a recurring revenue business model? If not, you might want to go back to the drawing board and look at other options.
The best businesses to own are recurring revenue businesses.
(article continues below)
If you are a new entrepreneur or are searching for a business to start or buy, you might overlook this simple fact. If so, you are making a huge mistake.
To make the most money as a business owner, you want a business model that has built-in recurring revenues.
Examples of Recurring Revenue Business Models
Here are a couple of examples of recurring revenue businesses.
One friend of mine sells telecommunications services. In short, his company sells bandwidth to companies. The offerings include T1 lines, T3 lines, OC3 lines, OC12 lines and other internet access and point to point telecom offerings.
His business is a reseller of telecom services from big companies like AT&T and MCI. He doesn't have the massive overhead that those companies have. He just sells their services and offers a small amount of first-call support services.
The business has recurring revenues because whenever he sells, say, a T1 line, my friend gets a commission on every single payment the buyer makes. In other words, it's not a one-time fee. Rather, it's an annuity. As long as the customer keeps that T1, even if it's for 10 years, my friend is making money. He only had to sell the deal once, the customer typically renews every year, and he just watches as MCI and AT&T transfer money into his bank account.
That's the beauty of a recurring revenue business. In essence, you earn money now for work you did in the past.
Here's another one. Another business acquaintance of mine sells health insurance to companies. At any given time, he has maybe 50 companies with an average of 40 employees each. I'm not sure exactly what an average health premium is for his clients but let's guess that it's $500 per month. For having sold the health insurance plan, he gets 4% of every premium payment made to the health insurance company.
So, do the math. He's making 50 X 40 X $500 x 12 X .04 per year. That works out to top line revenues of $480,000. Not bad.
He has one employee on staff…a troubleshooter who handles those situations when an employee of one his clients runs into an issue with a health insurance claim. He also has rent expenses on a small office. All in, I'm guessing he's pulling in $300,000 net before taxes worst case.
If he left the country for a year to take a long vacation, he might lose a few clients. But his able assistant could handle most of the service issues. He'd still be receiving revenues in the form of commission payments. In other words, he'd be benefiting from the recurring revenues related to work he did years ago.
Alternatives to Recurring Revenue Business Models
The mistake that many new entrepreneurs make is that they don't figure out how to build a recurring revenue business.
Instead, they earn only as much money as they deserve based on very recent efforts.
This is the taxi company business model. You get a fare, drive them, and get paid. Now, to make more money, you need to find a new fare.
There are no rewards for what you do long ago. There's no cumulative building up of revenues. It is always "What have you done for me lately?" from customers. No new sale, no new revenues.
Entrepreneurs on this track are on a treadmill. If they get off the treadmill, they stop making money.
Always Look for Recurring Revenues
The key takeaway from this article is that owning a business is not a generic concept. Every business out there has different dynamics to it, which in aggregate amount to a business model.
Some business models are better than others. As an entrepreneur, you need to evaluate the business models that are available to you and choose the most profitable…offering the maximum reward for the minimum effort and risk.
Take our word for it. The best business to buy or start will be one that has recurring revenues built into the business model. Without that, you can do OK but you will always be on the treadmill. In that case, the business owns you instead of visa versa.
Related Articles
Want to learn more about this topic? If so, you will enjoy these articles:
Evaluting Business Models When Buying a Business
http://www.gaebler.com/Recurring-Revenue-Business-Models.htm
Recurring Revenue Business Models
Starting a business? Buying a business? If so, there's one question that you absolutely must ask. Does your new venture have a recurring revenue business model? If not, you might want to go back to the drawing board and look at other options.
The best businesses to own are recurring revenue businesses.
(article continues below)
If you are a new entrepreneur or are searching for a business to start or buy, you might overlook this simple fact. If so, you are making a huge mistake.
To make the most money as a business owner, you want a business model that has built-in recurring revenues.
Examples of Recurring Revenue Business Models
Here are a couple of examples of recurring revenue businesses.
One friend of mine sells telecommunications services. In short, his company sells bandwidth to companies. The offerings include T1 lines, T3 lines, OC3 lines, OC12 lines and other internet access and point to point telecom offerings.
His business is a reseller of telecom services from big companies like AT&T and MCI. He doesn't have the massive overhead that those companies have. He just sells their services and offers a small amount of first-call support services.
The business has recurring revenues because whenever he sells, say, a T1 line, my friend gets a commission on every single payment the buyer makes. In other words, it's not a one-time fee. Rather, it's an annuity. As long as the customer keeps that T1, even if it's for 10 years, my friend is making money. He only had to sell the deal once, the customer typically renews every year, and he just watches as MCI and AT&T transfer money into his bank account.
That's the beauty of a recurring revenue business. In essence, you earn money now for work you did in the past.
Here's another one. Another business acquaintance of mine sells health insurance to companies. At any given time, he has maybe 50 companies with an average of 40 employees each. I'm not sure exactly what an average health premium is for his clients but let's guess that it's $500 per month. For having sold the health insurance plan, he gets 4% of every premium payment made to the health insurance company.
So, do the math. He's making 50 X 40 X $500 x 12 X .04 per year. That works out to top line revenues of $480,000. Not bad.
He has one employee on staff…a troubleshooter who handles those situations when an employee of one his clients runs into an issue with a health insurance claim. He also has rent expenses on a small office. All in, I'm guessing he's pulling in $300,000 net before taxes worst case.
If he left the country for a year to take a long vacation, he might lose a few clients. But his able assistant could handle most of the service issues. He'd still be receiving revenues in the form of commission payments. In other words, he'd be benefiting from the recurring revenues related to work he did years ago.
Alternatives to Recurring Revenue Business Models
The mistake that many new entrepreneurs make is that they don't figure out how to build a recurring revenue business.
Instead, they earn only as much money as they deserve based on very recent efforts.
This is the taxi company business model. You get a fare, drive them, and get paid. Now, to make more money, you need to find a new fare.
There are no rewards for what you do long ago. There's no cumulative building up of revenues. It is always "What have you done for me lately?" from customers. No new sale, no new revenues.
Entrepreneurs on this track are on a treadmill. If they get off the treadmill, they stop making money.
Always Look for Recurring Revenues
The key takeaway from this article is that owning a business is not a generic concept. Every business out there has different dynamics to it, which in aggregate amount to a business model.
Some business models are better than others. As an entrepreneur, you need to evaluate the business models that are available to you and choose the most profitable…offering the maximum reward for the minimum effort and risk.
Take our word for it. The best business to buy or start will be one that has recurring revenues built into the business model. Without that, you can do OK but you will always be on the treadmill. In that case, the business owns you instead of visa versa.
Related Articles
Want to learn more about this topic? If so, you will enjoy these articles:
Evaluting Business Models When Buying a Business
http://www.gaebler.com/Recurring-Revenue-Business-Models.htm
Valuing a Business for Sale in New Zealand
Valuing a Business for Sale in New Zealand
Written by: Richard O'Brien | Posted on 06 November 2009. Tags: business mindset, selling a business
When you are planning to buy or sell a business how can you work out how much it is worth?
There are many different ways of calculating the value of a business. Many of these methods have been devised for large businesses, especially those listed on share markets. Smaller businesses (i.e. those that have less than 20 employees, – and 96% of all New Zealand businesses are in that size range) need a different approach. Sales contracts for small businesses normally define the value as the sum total of the inventory (stock), plus plant & fittings, plus goodwill. (Debtors and creditors are not normally part of the sale contract.)
The value of a business is largely influenced by profit. A person who buys a business is purchasing a future cash flow. The higher the anticipated cash flow, the higher the value of the business.
Past profits may be a good indication of future cashflow, but there is no guarantee that profits will continue at the same rate. In some cases there will be signs that profit is increasing, in others a downward trend may indicate lower expectations. Other factors such as impending rent increases, new competitors or the loss of a major contract may also raise concerns about the level of profits that can be expected in the future. Each party to a sale must form their own ideas about the future cash flow.
Defining Profits for Valuation:
There are many different measures of profit. (e.g. profit before tax or profit after tax etc.) When valuing small businesses the most useful measure of profit is known as EBPIDT – Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables.
Valuation Method:
One method of valuing a business is to use an Earnings Multiplier. For example, a business which has a profit of $60,000 may sell for $90,000. The Earnings Multiplier in this case is 1.5 ($60,000 X 1.5 = $90,000)
Earnings Multiples:
How do you work out what earnings multiple to use? Avoid “Rules of Thumb.” Most of these are likely to be out of date at best, and downright misleading at the worst.
There are several ways of finding an appropriate Earnings Multiplier.
◦Ask acquaintances who have recent sold/bought similar businesses to the one you are interested in.
◦Ask your accountant. They may have had clients who have been involved in sales of similar businesses.
◦Your business broker can share his/her experience.
◦Use a commercial data base which lists sales by business brokers throughout NZ “BizStats”. This will tell you what earnings multiples have been used in recent sales. It will cost you $125 + GST but may provide useful guidelines.
Buying or selling a business is a major investment decision. Careful research and professional advice can help you to get the right value.
http://businessblogs.co.nz/2009/11/06/valuing-a-business-for-sale-in-new-zealand/
Written by: Richard O'Brien | Posted on 06 November 2009. Tags: business mindset, selling a business
When you are planning to buy or sell a business how can you work out how much it is worth?
There are many different ways of calculating the value of a business. Many of these methods have been devised for large businesses, especially those listed on share markets. Smaller businesses (i.e. those that have less than 20 employees, – and 96% of all New Zealand businesses are in that size range) need a different approach. Sales contracts for small businesses normally define the value as the sum total of the inventory (stock), plus plant & fittings, plus goodwill. (Debtors and creditors are not normally part of the sale contract.)
The value of a business is largely influenced by profit. A person who buys a business is purchasing a future cash flow. The higher the anticipated cash flow, the higher the value of the business.
Past profits may be a good indication of future cashflow, but there is no guarantee that profits will continue at the same rate. In some cases there will be signs that profit is increasing, in others a downward trend may indicate lower expectations. Other factors such as impending rent increases, new competitors or the loss of a major contract may also raise concerns about the level of profits that can be expected in the future. Each party to a sale must form their own ideas about the future cash flow.
Defining Profits for Valuation:
There are many different measures of profit. (e.g. profit before tax or profit after tax etc.) When valuing small businesses the most useful measure of profit is known as EBPIDT – Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables.
Valuation Method:
One method of valuing a business is to use an Earnings Multiplier. For example, a business which has a profit of $60,000 may sell for $90,000. The Earnings Multiplier in this case is 1.5 ($60,000 X 1.5 = $90,000)
Earnings Multiples:
How do you work out what earnings multiple to use? Avoid “Rules of Thumb.” Most of these are likely to be out of date at best, and downright misleading at the worst.
There are several ways of finding an appropriate Earnings Multiplier.
◦Ask acquaintances who have recent sold/bought similar businesses to the one you are interested in.
◦Ask your accountant. They may have had clients who have been involved in sales of similar businesses.
◦Your business broker can share his/her experience.
◦Use a commercial data base which lists sales by business brokers throughout NZ “BizStats”. This will tell you what earnings multiples have been used in recent sales. It will cost you $125 + GST but may provide useful guidelines.
Buying or selling a business is a major investment decision. Careful research and professional advice can help you to get the right value.
http://businessblogs.co.nz/2009/11/06/valuing-a-business-for-sale-in-new-zealand/
How to value a business
Valuing a business can be one of the most worrying parts of buying an existing business.
There are several valuation methods you can use. For specific advice on valuation methods see our guide on how to value and market your business. Your accountant may be able to help you value the business, but a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.
A healthy business
To get a general idea of how healthy the business is, look at:
•the history of the business
•its current performance - sales, turnover, profit
•its financial situation - cashflow, debts, expenses, assets
•why the business is being sold
•any outstanding or major litigation the business is involved in
•any regulatory changes which might have an impact on the business
As part of your investigations, talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business. Such research can also be done on the internet or at your local reference library.
For example, if the vendor is being forced to sell due to decreasing profits, your valuation might be lower.
Intangible assets
The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:
•the company's reputation
•the relationship with suppliers
•the value of goodwill
•the value of licences
•patents or intellectual property
You should consider how the value of these assets could be affected if you decide to buy the business.
Other considerations
The list below details other factors that will affect the value:
•stock
•location
•assets
•products
•debtors
•creditors
•suppliers
•employees
•premises
•competition
•benchmarking - what other businesses in the sector have sold for
•who else in the sector is for sale or on the market
Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all.
If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence.
http://www.adelbb.com/tipsMore.php?id=29
There are several valuation methods you can use. For specific advice on valuation methods see our guide on how to value and market your business. Your accountant may be able to help you value the business, but a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.
A healthy business
To get a general idea of how healthy the business is, look at:
•the history of the business
•its current performance - sales, turnover, profit
•its financial situation - cashflow, debts, expenses, assets
•why the business is being sold
•any outstanding or major litigation the business is involved in
•any regulatory changes which might have an impact on the business
As part of your investigations, talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business. Such research can also be done on the internet or at your local reference library.
For example, if the vendor is being forced to sell due to decreasing profits, your valuation might be lower.
Intangible assets
The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:
•the company's reputation
•the relationship with suppliers
•the value of goodwill
•the value of licences
•patents or intellectual property
You should consider how the value of these assets could be affected if you decide to buy the business.
Other considerations
The list below details other factors that will affect the value:
•stock
•location
•assets
•products
•debtors
•creditors
•suppliers
•employees
•premises
•competition
•benchmarking - what other businesses in the sector have sold for
•who else in the sector is for sale or on the market
Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all.
If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence.
http://www.adelbb.com/tipsMore.php?id=29
****Evaluating Business Models When Buying a Business
Buying a business? Of all the things to consider when buying a business, a thorough evaluation of the business model is the most important consideration.
(article continues below)
- How does the company I am about to buy currently make money?
- Can I continue to make money after I buy this business using the existing business model?
- Is there something I can do to change the business model to greatly improve the potential of this business?
How Does the Business Model Make Money?
How does a local drycleaning business make money? They take in clothes, dry clean them, and get paid to do that. Duh.
How does a PR firm make money? They get clients to pay them money to get media placements. Duh.
How does a website development firm make money? They build websites and get paid to do so? Duh.
How does a lawn mowing service make money? They mow lawns and get paid to do so. Duh.
How does a telecomm value-added reseller make money? They sell businesses T1 lines and other telecomm services and get paid to do so. Duh.
To evaluate the business model, you have to ask probing questions that take the discussion up a notch. Here are a few sample questions to ask when evaluating a business to buy and that company's business model:
Is their repeat business and a recurring revenue stream? A lawn mowing service can sign up clients for an entire summer, and have repeat revenues from customers every week. In contrast, a website development company might only be earning money while working on a specific project. In that respect, the website company is like a taxi driver. No fare, no income. A telecomm value-added reseller locks into a growing recurring revenue stream because they are typically compensated by the provider (e.g. MCI, Sprint, etc.) as long as their client keeps the service. Hence, in the fifth year of business, they are still earning revenues from companies they signed up five years ago, four years ago, etc.
Is the value proposition unique and can a competitor steal the business away? A dry cleaner could lose a lot of business if a comparable business opened up across the street and offered the same services at half the price. The key to a strong business model is some sort of unique positioning that cannot be easily replicated by competitors.
Can I Continue to Make Money With the Current Business Model?
Recurring Revenue Business Models
How to Buy a Business: Valuation Process
Written by Bobby Jan for Gaebler Ventures
(article continues below)
- facts that are directly related to the business and
- facts that are indirectly related to the business.
http://www.gaebler.com/Valuation-Process.htm
http://www.gaebler.com/Articles-on-Buying-a-Business.htm
http://www.gaebler.com/Business-Valuation-Trends.htm
Key Factors to Consider When Buying a Business
Buying a Business
Key Factors to Consider When Buying a Business
Written by Anna Lempereur for Gaebler Ventures
It is essential to consider key factors before buying a business to be sure that it is right for you. Here are some tips that will help you make the right decision, and prevent you from heading in the wrong direction.
When buying a business, it is important to know what to look for, and to not rush into anything.
(article continues below)
It takes a lot of time and thought to buying a business, and failure to consider these factors may result in harming the business overall. Here are some basic factors to consider when buying a business…
Buying the Right Business for You
Many people make the mistake of buying the wrong business. It is vital to buy a business that suits your interests, personality, skills and knowledge.
Try looking for one that has some sort of relevance to work you have done in the past, or classes you have taken. If you are buying a business just for the sake of buying, that business may not be right for you.
You will know if the business is right for you because you are interested in it, and are confident enough that you can offer what is necessary to make it successful.
Research the Business's History
After you have chosen a business that you feel suits you best, do a little research on its history and finances.
Be sure to carefully review copies of the business's certified financial records, including cash flow statements, balance sheets, accounts payable and receivable, employee files, including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information.
This research will give you a thorough background on how the company works, as well as alert you to any problems that may be faced in the future. It is important to have a full understanding on the way the business runs before making any decisions.
Hope for the Best But Plan for the Worst
What if your projected sales for the business are off by 25% in the first year? Will you survive?
It's important to evaluate various worst case scenarios to see if and how you will survive them.
We know one entrepreneur who bought a drycleaning business and then watched the business revenues plummet by 50% when the economy dipped into a recession. He survived but said it was an extremely painful business lesson.
Develop a Plan for Promoting the Business
Although the business is already established, it is necessary to have some sort of advertising and marketing plan that will maintain the momentum of the business after you take over.
No matter how many customers the business already has, promoting the business is still a priority. Don't think that the work is already done for you, because you indeed have plenty of work to do. Be sure to have plans made for promoting the business, because it is very possible for the company to head for a downfall if you are not prepared.
Negotiate for a Good Price
Never forget that the seller's asking price is just a starting point for negotiation.
According to industry data from business brokers, businesses typically sell for between 15 percent and 25 percent below the business seller's initial asking price.
If you pay the asking price, there's a strong chance you are overpaying for the business.
The key is to figure out what you are willing to pay and keep your emotions out of it. If you can't get your price, just walk away and don't look back.
Anna Lempereur is a freelance writer interested in writing about small business. She is currently a Journalism major at the University of Albany in New York.
http://www.gaebler.com/Factors-to-Consider-When-Buying-a-Business.htm
Key Factors to Consider When Buying a Business
Written by Anna Lempereur for Gaebler Ventures
It is essential to consider key factors before buying a business to be sure that it is right for you. Here are some tips that will help you make the right decision, and prevent you from heading in the wrong direction.
When buying a business, it is important to know what to look for, and to not rush into anything.
(article continues below)
It takes a lot of time and thought to buying a business, and failure to consider these factors may result in harming the business overall. Here are some basic factors to consider when buying a business…
Buying the Right Business for You
Many people make the mistake of buying the wrong business. It is vital to buy a business that suits your interests, personality, skills and knowledge.
Try looking for one that has some sort of relevance to work you have done in the past, or classes you have taken. If you are buying a business just for the sake of buying, that business may not be right for you.
You will know if the business is right for you because you are interested in it, and are confident enough that you can offer what is necessary to make it successful.
Research the Business's History
After you have chosen a business that you feel suits you best, do a little research on its history and finances.
Be sure to carefully review copies of the business's certified financial records, including cash flow statements, balance sheets, accounts payable and receivable, employee files, including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information.
This research will give you a thorough background on how the company works, as well as alert you to any problems that may be faced in the future. It is important to have a full understanding on the way the business runs before making any decisions.
Hope for the Best But Plan for the Worst
What if your projected sales for the business are off by 25% in the first year? Will you survive?
It's important to evaluate various worst case scenarios to see if and how you will survive them.
We know one entrepreneur who bought a drycleaning business and then watched the business revenues plummet by 50% when the economy dipped into a recession. He survived but said it was an extremely painful business lesson.
Develop a Plan for Promoting the Business
Although the business is already established, it is necessary to have some sort of advertising and marketing plan that will maintain the momentum of the business after you take over.
No matter how many customers the business already has, promoting the business is still a priority. Don't think that the work is already done for you, because you indeed have plenty of work to do. Be sure to have plans made for promoting the business, because it is very possible for the company to head for a downfall if you are not prepared.
Negotiate for a Good Price
Never forget that the seller's asking price is just a starting point for negotiation.
According to industry data from business brokers, businesses typically sell for between 15 percent and 25 percent below the business seller's initial asking price.
If you pay the asking price, there's a strong chance you are overpaying for the business.
The key is to figure out what you are willing to pay and keep your emotions out of it. If you can't get your price, just walk away and don't look back.
Anna Lempereur is a freelance writer interested in writing about small business. She is currently a Journalism major at the University of Albany in New York.
http://www.gaebler.com/Factors-to-Consider-When-Buying-a-Business.htm
Three Principles of Business Valuation
Buying a Business
Three Principles of Business Valuation
Written by Bobby Jan for Gaebler Ventures
Valuing a business is an art form as much as it is a science. This article introduces three basic but important principles of business valuations to help you get started.
Are you an entrepreneur and looking for a business to buy?
(article continues below)
If you are, it is very important to understand how to value a business correctly. This article introduces three basic but important principles of business valuations to help you get started.
The Principle of Alternatives
The Principle of Alternatives states that each party always has an alternative to consummating a transaction. This seems like a no brainer but this is one of the fundamental principles of business valuation.
This principle is profound in many ways. For example, as you negotiate to buy another business, never get into the mentality that you just have to buy that business. Many companies and individuals grossly overpay as they get tunnel vision.
The Principle of Substitution
The Principle of Substitution tells us that the value of something tend to be the price paid for an equally desirable substitution. As a profit maximizing agents, we all try to minimize cost, all else equal. The value of a business, therefore, is the smallest price paid for substituting the business with something equally desirable.
Example 1: If a business could be replicated for X amount of dollars (by purchasing and operating the exact assets that a business has), then the Principle of Substitution tells us that it is the business is worth at most X amount of dollars.
Example 2: In this example, you want to determine the value of business A. Business A costs $5 million to replicate exactly. However, another equally desirable but different business could be acquired for only $2 million. The Principle of Substitution tells us that business A is worth at most $2 million dollars.
The Principle of Future Benefits
Unless you are buying a company only to liquidate instantly, you care a lot about the future benefits of owning that business. The Principle of Future Benefits tells us the economic value of a business reflects (anticipated) future benefits.
Although you shouldn't buy a business solely based on the past, the past could sometimes be an indicator of what is to come. The Principle of Future Benefits is why a fast growing company sells for much more than a slow growing one. The principle also explains why an industry might experience a surge in business valuations when a favorable has been passed.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm
Three Principles of Business Valuation
Written by Bobby Jan for Gaebler Ventures
Valuing a business is an art form as much as it is a science. This article introduces three basic but important principles of business valuations to help you get started.
Are you an entrepreneur and looking for a business to buy?
(article continues below)
If you are, it is very important to understand how to value a business correctly. This article introduces three basic but important principles of business valuations to help you get started.
The Principle of Alternatives
The Principle of Alternatives states that each party always has an alternative to consummating a transaction. This seems like a no brainer but this is one of the fundamental principles of business valuation.
This principle is profound in many ways. For example, as you negotiate to buy another business, never get into the mentality that you just have to buy that business. Many companies and individuals grossly overpay as they get tunnel vision.
The Principle of Substitution
The Principle of Substitution tells us that the value of something tend to be the price paid for an equally desirable substitution. As a profit maximizing agents, we all try to minimize cost, all else equal. The value of a business, therefore, is the smallest price paid for substituting the business with something equally desirable.
Example 1: If a business could be replicated for X amount of dollars (by purchasing and operating the exact assets that a business has), then the Principle of Substitution tells us that it is the business is worth at most X amount of dollars.
Example 2: In this example, you want to determine the value of business A. Business A costs $5 million to replicate exactly. However, another equally desirable but different business could be acquired for only $2 million. The Principle of Substitution tells us that business A is worth at most $2 million dollars.
The Principle of Future Benefits
Unless you are buying a company only to liquidate instantly, you care a lot about the future benefits of owning that business. The Principle of Future Benefits tells us the economic value of a business reflects (anticipated) future benefits.
Although you shouldn't buy a business solely based on the past, the past could sometimes be an indicator of what is to come. The Principle of Future Benefits is why a fast growing company sells for much more than a slow growing one. The principle also explains why an industry might experience a surge in business valuations when a favorable has been passed.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm
How to define the economic value of a business
Economic Value
Written by Bobby Jan for Gaebler Ventures
If you are looking to buy a business, it is important to understand how to define the economic value of a business. By looking at how much the business is worth through various business valuation lenses, you can determine what price you might be willing to offer.
If you are looking to business, it is important to determine the value of the business.
(article continues below)
Value comes in many different forms.
Some people buy certain businesses to increase their social standing while other run businesses as a hobby. Most entrepreneurs, however, are concerned with the economic value of a business.
There are many subtypes of economic value. This article will introduce some of them.
Book Value
The book value is the value of a business or a portion of a business that is stated in financial statements and accounting records. This value is often lower than the market value of a business due to tax considerations.
Fair Market Value or Market Value
Market Value often defined as the price the owner is willing to accept and that the buyer is willing to pay. There are many methods for determining the market value of a business. The most commonly used method is the discounted cash flow methods.
Going Concern Value
Going concern value is the value of the business as a whole and not the sum of its parts.
Goodwill Value
Goodwill includes:
The value of a business that is in excess of the total capital invested in the business.
The intangible assets of a business such as its brand name. For example, the Coca-cola brand name is worth billions.
Replacement Value
The replacement value of a business is determined by how much it will cost to replace the assets of a business.
Liquidation Value
The liquidation value is the net proceeds from selling a business. It is important, however, to take into account how the business will be liquidated. Namely, how much time does the business owner have to sell the business?
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm
Written by Bobby Jan for Gaebler Ventures
If you are looking to buy a business, it is important to understand how to define the economic value of a business. By looking at how much the business is worth through various business valuation lenses, you can determine what price you might be willing to offer.
If you are looking to business, it is important to determine the value of the business.
(article continues below)
Value comes in many different forms.
Some people buy certain businesses to increase their social standing while other run businesses as a hobby. Most entrepreneurs, however, are concerned with the economic value of a business.
There are many subtypes of economic value. This article will introduce some of them.
Book Value
The book value is the value of a business or a portion of a business that is stated in financial statements and accounting records. This value is often lower than the market value of a business due to tax considerations.
Fair Market Value or Market Value
Market Value often defined as the price the owner is willing to accept and that the buyer is willing to pay. There are many methods for determining the market value of a business. The most commonly used method is the discounted cash flow methods.
Going Concern Value
Going concern value is the value of the business as a whole and not the sum of its parts.
Goodwill Value
Goodwill includes:
The value of a business that is in excess of the total capital invested in the business.
The intangible assets of a business such as its brand name. For example, the Coca-cola brand name is worth billions.
Replacement Value
The replacement value of a business is determined by how much it will cost to replace the assets of a business.
Liquidation Value
The liquidation value is the net proceeds from selling a business. It is important, however, to take into account how the business will be liquidated. Namely, how much time does the business owner have to sell the business?
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm
Why Understand Business Valuation
Why Understand Business Valuation
Written by Bobby Jan for Gaebler Ventures
What is my business worth? It's a common question for entrepreneurs, and there are several occasions when you might need to be able to answer the business valuation question. This article introduces some of reasons for determining the value of a business.
Any entrepreneur worth their salt must understand something about business valuation as it is important for buying and growing businesses.
(article continues below)
The following are some of reasons for determining the value of a business.
Selling and Buying Businesses
Don't simply leave valuation to the professionals. Serious entrepreneurs must be able to recognize a good or fair deal. Value should be the most fundamental consideration when it comes to buying and selling businesses.
To Borrow Money
When you borrow money, sometimes a portion of your business must be offered as collateral. It would be wise to understand the value of your collateral to ensure that the terms of the loan reflect its true value.
For Insurance Purposes
Business valuation is important when determining the insurable value of assets. It is also important for obtaining fair settlement from insurance companies.
Designing Buy-Sell Agreements
Since buy-sell agreements often specify a price or a procedure for determining price, a working knowledge of business valuation is essential.
Employees Stock Ownership Plans
Employees Stock Ownership Plans, or ESOP, has many benefits over cash payments. Correctly pricing stocks, which comes from correctly valuing a business, is essential for an effective ESOP.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Why-Understand-Business-Valuation.htm
Written by Bobby Jan for Gaebler Ventures
What is my business worth? It's a common question for entrepreneurs, and there are several occasions when you might need to be able to answer the business valuation question. This article introduces some of reasons for determining the value of a business.
Any entrepreneur worth their salt must understand something about business valuation as it is important for buying and growing businesses.
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The following are some of reasons for determining the value of a business.
Selling and Buying Businesses
Don't simply leave valuation to the professionals. Serious entrepreneurs must be able to recognize a good or fair deal. Value should be the most fundamental consideration when it comes to buying and selling businesses.
To Borrow Money
When you borrow money, sometimes a portion of your business must be offered as collateral. It would be wise to understand the value of your collateral to ensure that the terms of the loan reflect its true value.
For Insurance Purposes
Business valuation is important when determining the insurable value of assets. It is also important for obtaining fair settlement from insurance companies.
Designing Buy-Sell Agreements
Since buy-sell agreements often specify a price or a procedure for determining price, a working knowledge of business valuation is essential.
Employees Stock Ownership Plans
Employees Stock Ownership Plans, or ESOP, has many benefits over cash payments. Correctly pricing stocks, which comes from correctly valuing a business, is essential for an effective ESOP.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Why-Understand-Business-Valuation.htm
Price Versus Value When Buying a Business
Price Versus Value When Buying a Business
Written by Bobby Jan for Gaebler Ventures
If you are an entrepreneur and looking to buy a business, there are a few concepts worth understanding. This article covers the concepts of price, value, and cost.
Wondering how to value a business?
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Warren Buffett once said, "Price is what you pay, value is what you get."
Business valuation is difficult and too many people use price as the signal for value. The price for value confusion can be costly.
Price is the amount of currency paid to acquire an asset. Cost is the total amount of one or more commodity to acquire an asset.
These commodities could be anything from time, natural resources, currency, etc. Cost and price are closely related and are often interchangeable. However, in many cases, the price paid for an asset and the cost of acquiring it might be significantly different.
Without getting philosophical, value is the intrinsic economic worth of an asset. Value refers to the true worth of an asset as according to some standard. For example, you an asset's value might be how much it can produce another product.
Often, the value of an asset is ultimately how much it contributes to the bottom line of a business. The goal of business valuation is to determine the value of a business.
Paying attention to price instead of value caused many personal and social tragedies in history. Investing based on price is responsible for the Tulip Mania in the 17th century, the Great Depression in early 20th century, and most recently the dot.com bubble in the late 1990s
On the other hand, buying based on value has made many individuals very wealth, including the richest man in the world, Warren Buffett.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
Written by Bobby Jan for Gaebler Ventures
If you are an entrepreneur and looking to buy a business, there are a few concepts worth understanding. This article covers the concepts of price, value, and cost.
Wondering how to value a business?
(article continues below)
Warren Buffett once said, "Price is what you pay, value is what you get."
Business valuation is difficult and too many people use price as the signal for value. The price for value confusion can be costly.
Price is the amount of currency paid to acquire an asset. Cost is the total amount of one or more commodity to acquire an asset.
These commodities could be anything from time, natural resources, currency, etc. Cost and price are closely related and are often interchangeable. However, in many cases, the price paid for an asset and the cost of acquiring it might be significantly different.
Without getting philosophical, value is the intrinsic economic worth of an asset. Value refers to the true worth of an asset as according to some standard. For example, you an asset's value might be how much it can produce another product.
Often, the value of an asset is ultimately how much it contributes to the bottom line of a business. The goal of business valuation is to determine the value of a business.
Paying attention to price instead of value caused many personal and social tragedies in history. Investing based on price is responsible for the Tulip Mania in the 17th century, the Great Depression in early 20th century, and most recently the dot.com bubble in the late 1990s
On the other hand, buying based on value has made many individuals very wealth, including the richest man in the world, Warren Buffett.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
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