What's your business really worth?

What's your business really worth?
Max Newnham
December 12, 2011 - 2:16PM


There's no foolproof rule for working out the value of a business.
One of the sad truths is that people who buy small businesses often don't get advice until after they have made the purchase. This can lead to too much being paid for a business or it being owned by the wrong legal entity.

People selling businesses justify their selling price by the profit produced. When this profit does not include a salary that should have been paid to the owner, the purchaser can pay a lot for what in reality is a job rather than a business. If the plan is to own and operate a business and then sell it for a profit a company is the worst structure to use, followed closely by a unit trust.

Q. My sister and I have run a small cattery for a bit over 10 years on our property of 10 acres. I am over 65, and we are thinking of selling because I want to cut back my workload. The business turns over almost $100,000 a year and after all costs, including wages, we make a net profit of $15,000 a year. We have been told the real estate is worth about $650,000 and are not sure what to ask for the business. Can you tell us how to value the business and what tax will we pay on the sale?

A. There is no hard and fast rule for working out the value of a business. Some industries base the value on the turnover, such as professional practices like accountants, while others have established valuation methods that are peculiar to their industry, such as newsagents.

Using accounting principles the goodwill value of a business is calculated by multiplying the sustainable net profit by a factor that relates to the risks associated with the business. Sustainable net profit is calculated by increasing the profit of a business for ownership costs, such as interest on borrowings, and decreasing it to allow for wages that have not been taken by owners that work in the business.

If your profit includes wages paid to you for the hours you have both worked, and there has been no interest deducted, your business could be worth between $45,000 and $90,000. The lower a purchaser perceives the risk, or the more they are attracted to the lifestyle of your business, the more they will be prepared to pay.

Because you live on the property, the profit on the real estate will need to be split between your residence and the business. No tax will be payable on the gain you make on the sale of the portion relating to your home.

As you own the business through a partnership, the profit on the sale of the rest of the property, and what you get for the goodwill of the business, will be decreased by the general 50 per cent discount and the 50 per cent active asset discount. The remaining profit will not be taxable if you claim the small business retirement exemption.



Read more: http://www.smh.com.au/small-business/finance/whats-your-business-really-worth-20111212-1oqs7.html#ixzz1gMrsAwXK

QUICKIES: Seven investment myths you should not fall for

Text: Prerna Katiyar | ET Bureau

Pick this stock, it's trading at 52-week low.' 'That stock is a multi-bagger, trading at such a low PE.' 'Penny stocks make fortunes while stocks trading below book value are a sure pick for making quick bucks.'

Haven't we all heard such statements at some point in our lives? If you are one of those who believe in such assertions, read on. For, these are among the many myths in investing.



Here we list seven of them


Myth No 1: Stocks trading below book value are cheap

Book value (BV) is the actual worth of a stock as in a company's books/balance sheet, or the cost of an asset minus accumulated depreciation.

BV depends more on historical cost and depreciation and often has little correlation to the current share price.

Shares of industries that are capital intensive trade at lower price/ book ratios, as they generate lower earnings. On the other hand, those business models that have more human capital will fetch higher earnings and will trade at higher price/book ratios.

"Price/book (ratio) of below 1 may be cheap but one should see other aspects such as earnings forecast, guidance, management and debt on the books of the company ," says Angel Broking's equity derivatives head Siddarth Bhamre.


Myth No 2: Stocks trading at low P/E are under-valued

Price to earning ratio (P/E) is one of the most talked about ratios in the market. This is based on the theory that stocks with low P/Es are cheap.

However, P/E alone doesn't tell much about the stock price. P/E multiples may be a quick way to value a stock but one should look at this in correlation with expected growth earnings, the risk factors involved, company's performance and growth potential .

"This is surely a myth. It is also an indication of uncertain future earning of the stock concerned," says Birla Sunlife Mutual Fund CEO A Balasubramanian.

The idea behind dividing price with earnings is to create a levelplaying field where some kind of comparison can be made between high- and low-priced stocks.

Since P/E ratios vary across sectors, with growth stocks consistently trading at higher P/E, one can only compare the P/E ratio of a stock to the average P/E ratio of stocks in that sector.


Myth No. 3: Penny stocks make good fortunes

Penny stocks by nature are lowpriced , speculative and risky because of their limited liquidity, following and disclosure.

If it's easy to invest in penny stocks - as here you shell out much less money per share than you would require for a blue-chip firm - it's also easy to lose.

Says Bhamre, "Fortune can be made by high-denomination stocks also. Denomination has nothing to do with the rationale for picking a stock. Generally , retail investors are fond of stocks that are at sub- Rs 100 levels. But there may be stocks that may be trading in Rs 1,000-plus price but may well be cheap. Clarity on earnings is more important here. Anytime, I would be more comfortable buying an ICICI Bank (currently trading at Rs 1,038) than an IFCI at Rs 45. One should look at earnings visibility."


Myth No. 4: The worst is over in the stock market

Timing the market, a common strategy among investors, means forecasting and that should best be left to astrologers and tarot readers.

If one has done one's valuation studies, one shouldn't worry about timing the market. No one had predicted the bull run would take the Sensex from a level of 10,000 in February 2006 to over 21,000 in January 2008 - just as no one had any idea of the following crash, which saw the same index plummeting to 9,000 in March 2009.

"Timing the market is more of a gut feeling. It's more on the basis of perception, as there is no such thing (that the worst is over) when the future is uncertain. One can never surely time the market. The worst is over is more of a probability than a certainty. Timing the market is very difficult as market is driven not just by earnings but also by sentiments ," says Balasubramanian.


Myth No 5: Stocks that give high dividends are the best bet

This comes from the notion that regular dividends are extra income in the shareholder's hand. This may not always be true.

While a company may be making decent payouts every year, the share price appreciation may not be comparatively high. Before investing in companies paying high dividends, it's important to analyse if the company is reinvesting enough profit to grow its earnings consistently.

Says Brics Securities' research VP Sonam Udasi: "It's not dividend that matters but the yield. For eg, a company may pay a 100% or even a 300% dividend on a stock with face value of Rs 10.

So, the investor may receive Rs 10 or Rs 30 per share when the stock may be currently trading at Rs 800 or Rs 1000. This would translate into an yield of 1% or 3% only. Also, such companies may not necessarily be reinvesting their earnings in the business to generate future earnings and so there may be no stock movement. The dividend may be high but the EPS and growth per se may be constant."



Myth N0 6: Index stocks are the best stocks

If this was true, most investors would safely park their money in such stocks in anticipation of maximum profit without looking out for other value stocks.

Most indices are a collection of stocks with the highest market cap. Take, for eg, the Sensex.

Companies that make up the index are some of the largest, with stocks that are highly traded based on their free-float.

"Index stocks may not necessarily be the best stocks as they are mostly based on market-cap or free-float of the company and not earnings. This doesn't mean that all stocks of the Sensex are highearning stocks. One must take a stock-by-stock call," says Balasubramanian of Birla Sun Life Mutual Fund.

The stock price of a company depends on its earnings. One can find high-earning stocks outside the key indices as well, he says. The risk is certainly less with index stocks as they are well researched and leaders in their respective sectors, but, again, the margins may not be very high. So it's better to keep your eyes open to other stocks, too.



Myth No 7: Stocks trading at 52-week low are cheap

Says Udasi: "There may be a time in the economic cycle when a blue-chip stock may hit a 52-week low.

But the first thing that should come to one's mind is why did the stock hit the 52-week low.

There must be something fundamentally wrong with the stock if it has hit a 52-week low, and chances are they may hit a new 52-week low.

52-week low in itself guarantees nothing. If at all one is picking stocks at 52-week lows, they should have a long-term horizon so that when the economic cycle turns, the stock is able to recover."

Needless to say, quality matters most while buying any stock.


http://economictimes.indiatimes.com/seven-investment-myths-you-should-not-fall-for/quickiearticleshow/9438662.cms

Outlook 2012: Markets to remain volatile, uncertain

http://economictimes.indiatimes.com/markets/analysis/outlook-2012-markets-to-remain-volatile-uncertain/articleshow/10987167.cms?curpg=2

The most preferred emerging markets

http://economictimes.indiatimes.com/markets/global-markets/Emerging-markets-prospects-brighten-amid-Euro-zone-concerns/articleshow/10880321.cms

2 MAY, 2011, 04.14AM IST, SAMEER BHARDWAJ,ET BUREAU 

Selection strategy: Select those equity funds that have done well in both bear and bull markets

How does one identify the best equity mutual funds? Depending on the financial planner you approach, you will get a variety of answers. Some advocate an analysis of historical returns. Determine your investment tenure, they say, and pick the top funds in the given time frame. 

So, if you want to invest for three years, the adviser will suggest the funds that have given the highest returns in the past three years. Some ask for your age and investment goals, and then offer a list of funds whose investment objectives match yours closely. If you are young and ready to bear high risk, the planner will suggest sectoral, mid- or small-cap funds. Yet others talk of statistics and risk-adjusted returns, supporting funds with high alpha, beta, Treynor or Sharpe ratios. 

All these methods are useful, but fund performance varies in different market conditions. So, we have figured out another way to help identify the best equity funds. We zero in on those that have done well in both bear and bull markets. A fund that does well in a bull market may be affected the most in a bear phase because even stocks with good fundamentals are hammered during a bad phase. 

There may be no noticeable reason for a reduction in stock price, but it falls due to its high sensitivity to the market. Under such conditions, the fund managers who can shift from stocks to liquid instruments or cash tend to lose less than the market. Similarly, as the market turns bullish, the fund managers who have the ability to identify undervalued quality stocks gain more than the market. 
Here's how we picked the funds that did well in both the bear and bull phases. For the bear market, we analysed the returns between 8 January 2008 and 5 March 2009. The Sensex fell from 20,800 to 8,200 during this period and lost 61%; the Nifty lost 59% and equity mutual funds (on an average) lost 62%. For the bull market, we considered the returns between 6 March 2009 and 3 January 2011. The Sensex went up from 8,200 to 20,500 in this period, gaining 147%. The Nifty gained 135%, while the equity mutual funds (on an average) gained 153% in the same period. All the returns are in absolute terms. 

Next, we identified the funds that had lost less than their benchmarks and category averages in the bear phase and gained more in the bull phase. We analysed all equity mutual funds, including diversified, tax plans, sectoral funds, contra and dividend yield funds. Of the 366 funds, 25 satisfied the criterion. These were the true outperformers, having done so in both the bull and bear phases. 
The HDFC AMC tops with its five funds. Fidelity and Reliance AMCs shared the second spot with four funds each. The ones from Birla Sun Life, Franklin and Religare shared the third spot with two funds each. Canara, IDFC, ING, Principal, Sahara and UTI AMCs have one fund each in the list. 

http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/selection-strategy-select-those-equity-funds-that-have-done-well-in-both-bear-and-bull-markets/articleshow/8125386.cms

Tata Communications: With steady growth analysts shifting their stance to 'hold' or 'buy'

http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/tata-communications-with-steady-growth-analysts-shifting-their-stance-to-hold-or-buy/articleshow/10988789.cms

How the role of fund manager differs from a planner

11 JUL, 2011, 01.30AM IST, UMA SHASHIKANT,
How the role of fund manager differs from a planner

The investors who have been worried about the lacklustre performance of equity markets are beginning to ask a simple question. If fund managers are experts in investment, shouldn't they have seen this coming and protected their portfolios?

After all, most people invest in mutual funds so that their money remains protected from uncertainty. This may be a common expectation from mutual funds, but it is completely wrong. Fund managers cannot directly manage risks for investors; they are not even privy to it. The confusion stems from the fact that the roles of a fund manager and financial adviser are often mixed.

Mutual fund products are not tailored to the needs of a specific investor. They are created to mimic an asset class. So a large-cap fund is expected to invest in a portfolio of large stocks and enable an investor to gain exposure to this asset class. What an active fund manager does is to try and perform better than a large-cap market index such as the Nifty.

An investor has the cheaper option of buying a passive index fund to get the same exposure. An active fund manager takes a higher fee to alter weightages in sectors and stocks in the large-cap universe to better the benchmark index. However, if this fund liquidates the equity portfolio and holds cash because the fund manager thinks that the market is due for a correction, the portfolio would actually move away from its mandate.

First, it will underperform the index if the cash call turns out to be wrong and the market moves up. Second, there is no reason for someone to pay a fee of 2.5% for holding cash when he can put it in a liquid fund at a cost of 0.35%.

It is the job of a financial adviser to review the investors' exposure to large-cap equity, take on board the downside risks at the time, consider the risk appetite of the investor, and recommend a tactical change in weightage. It is the adviser who is privy to the investor's return targets and risk preference, who should seek liquidation of the portfolio and advise the investor to hold cash. If the adviser has already done so, the fund manager's action is superfluous and can reduce exposure to equity more than is necessary.

The fund manager's specialisation is the bottom-up research in companies and sectors, as well as the selection, timing, assigning of weightages and rotation of stocks and sectors that he holds. The specialisation of the adviser is top-down research, which should indicate how asset classes will behave and, therefore, decide the weightage in an investor's portfolio. If the fund manager's job is to deliver relative performance, it is the work of the adviser to deliver absolute performance in line with the investor's needs.

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/how-the-role-of-fund-manager-differs-from-a-planner/articleshow/9162198.cms

Volatile stock markets, low contribution rates and increasing annuity prices will result in a longer working life or less money in retirement in UK.

Your pension will be £1,750 a year less


Private sector workers without gold-plated final salary pensions can expect to receive £145 less a month in retirement than was projected just two years ago.

Annuity prices - which dictate your pension income - have increased by an average of 20pc since 2009 Photo: GETTY

By Paul Farrow

12:37PM GMT 12 Dec 2011

Volatile stock markets, low contribution rates and increasing annuity prices will result in a longer working life or less money in retirement.

According to Mercers, the actuarial consultancy, a 50 year-old can currently expect to receive £145 less a month, or £1,740 a year, in retirement income than was projected in 2009. A person in their thirties will be around £100 a month worse off.

The calculations showed that annuity prices – which dictate your pension income – have increased by an average of 20pc since 2009, hampering members' chances of obtaining a good retirement income.

This dramatic increase has meant that someone with a defined contribution pension pot of £200,000 at age 65 can now expect to get an annuity income of around only £5,800 a year, compared with £7,000 a year in 2009. Mercer said that a person nearing retirement might need to work for over three years longer in order to retire on the same income that they expected based on conditions back in 2009.

The decline in prospective pension values has been accentuated by a drop in contribution levels – employees are paying less in than they used to (an average of 4.2pc), while employers have frozen contribution rates, at an average of 7.2pc of a worker's salary, over the past year.

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Tony Pugh of Mercer said: "When considering the financial and regulatory pressures pension schemes are facing, the stagnation in employer contributions doesn't come as a big surprise. With a double-dip recession looming things are likely to get worse before they get better.

"We expect, however, that rates will trend upwards again over the long term, as employers start to recognise that lowering contributions to defined contribution schemes will change the workforce profile as a result of older employees having to work longer. Equally, employee pressure to increase contributions is likely to have an impact.

He added: "The impact on individual members is significant, especially for those about to retire. Members should keep a close eye on how their pension pot is invested and make sure to shop around for annuities to get the best out of their retirement savings.

"Those eligible are likely to increasingly use drawdown options, but these are not without risk as investment values could fall."

http://www.telegraph.co.uk/finance/personalfinance/pensions/8950888/Your-pension-will-be-1750-a-year-less.html

Ask an expert: Shares v houses

Shares v houses
March 2, 2011

Question: The idea of common sense investing needs to be taught as a mandatory subject in our education system. But if you BUY Australian blue chips stocks and hold them over your lifetime the magic rule of 72, with marvelous compounding effects will return profits far in excess of an average residential home.


Take for example Westfield shopping Centers, if you invested just $1,000 back in 1960 and then reinvested the dividends, it would now be worth over $132 million dollars!!!


The average house purchased for $1,000 at that time would now only be worth around $500,000. That means shares outperform houses by a margin of over 264 times!!!


I not recommending buying Westfield shares, but what I'm saying is the investment thought process in this country is too biased towards real estate, through elements like our parents, media, political benefits, etc.


Over our lifetime there are much more rewarding investments we could make. The most intelligent advice I could give any young couple now would be something that most people don't want to hear!


Don't buy an OVERPRICED house, instead invest all your savings into the Big 4 Bank stocks, so you can retire much earlier from receiving Fully Franked TAX FREE dividends from all the other sheep in mortgage stress for the next 30+ years.


"Fortune favors the brave"



Answer: Australia seems to be divided into share lovers and property lovers and I tend to be on your side. The benefit of shares is that you can buy and sell quickly and in part and never have the worries of maintenance, land tax, vacancies, etc. On the other hand you can't generalise about the property market as some properties have done spectacularly well. For most people a diversified portfolio is still the way to go.


Read more: http://www.smh.com.au/money/ask-an-expert/blogs/ask-an-expert/shares-v-houses-20110301-1bcfu.html#ixzz1gHDqVARv

Investing an inheritance
March 9, 2011

Question: I am 23 years old and have recently inherited $100,000. I am uncertain as to whether I should simply leave this money in a high interest cash account, or invest in shares. Although I have studied some finance, I am unsure as to where I should go for impartial share advice. What is the best thing to do with this amount of cash at present?


Answer: Your best strategy depends on your goals because it is unwise to invest money in property or shares unless you have at least a seven to ten year timeframe in mind. Leave it in a high interest online cash account while you examine your options but cash is probably the best place for it if you are thinking about buying a house in the next three or four years.



Read more: http://www.smh.com.au/money/ask-an-expert/blogs/ask-an-expert/investing-an-inheritance-20110307-1bkop.html#ixzz1gHF0FT5a

Why invest directly?

Why invest directly?

Direct investment gives the investor control over those assets and investments, including the making of decisions relating to those investments and their day-to-day management and administration.  Accordingly, direct investment will suit those investors with the time and expertise required to manage their own affairs, either by themselves, or in conjunction with an adviser.

Direct share investments offer a number of advantages:

• Liquidity (quick conversion to cash)
• Daily valuation of your investment
• Growth through new issues (e.g. bonus issues)
• Flexibility
• Safeguards/security 
• Free and open market
• Convenient and easy transferred ownership, and
• Usually no holding cost once purchased.

http://www.asx.com.au/courses/shares/course_09/index.html?shares_course_09

Investment checklist:  Liquidity, Valuation, Stock Exchange lsited, Cost effective