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Thread: Valuation of SMEs

  1. #1
    Silver Member Vincent's Avatar
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    Oct 2007
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    Valuation of SMEs

    Business valuation is not an objective exercise, and neither a precise science. Business valuation is greatly a subjective issue, depending on who and what the valuation is done for. There are no right ways to estimate the value, only the many factors that influence the price for example;

    • The history and nature of the business the Company is engaged in.
    • The outlook for the overall economy and the industry the Company is in.
    • The latest financial condition of the Company.
    • The future earning capability of the Company and the associated related risks.
    • The capability of the Company to continue to generate the necessary cash flow to support a purchase.
    • The worth and value of the goodwill/intangible assets of the Company.

    The price of a business will depend on the availability of accurate information and figures relating to the business. Essentially, price is a tariff, payment or sum that you are willing to pay for a business. Value, however, relates to how desirable or important the business is to buyer. Most businesses are sold because of their profitability, which is an attraction for buyers. A business that generates profits should establish a good selling price in the market place.

    Determining the value of a business is one part of the transaction that is fraught with difficulties and differences of opinion. The buyer and seller often have different ideas about what the price of the business should be.

    Boger and Link (1999) suggest that: “Fair market value is the price at which the (business) would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.” In other words the best standard of value is the market value, provided that the new owner(s) of the Company have the necessary resources and commitment to not only acquire, but also to grow the Company. Fair market value makes the assumption that all the relevant facts are known, which is accomplish through a rigorous due diligence process to verify all purported facts, estimates, calculations and suppositions and not rely solely on a valuation document to support a purchase decision.

    In placing a price tag on your business, you need to consider:

    • Key factors: what factors are most important to buyers within your industry? What are secondary?
    • Adding value: How can you boost these important factors before the sale?
    • Normalisation of Financial Statements: How might your accountant adjust your financial statements, before showing them to potential buyers?
    • Valuation methods: What methods and formulas are used to put a price tag on a business?
    • Partial interests: If you're only selling part of the business, how does that affect the price?

    For a buyer, the key is that an ongoing business has everything in place. Further issues to consider are the company's tangible and intangible assets:

    • Furniture/Fixtures/Equipment customary to the normal operation of the business.
    • All customer lists and information and past/present sales and marketing data.
    • All proprietary Company information and methods of doing business.
    • All rights/patents/trademarks for the Company’s proprietary products.
    • All rights to the Company trade name and Web site.
    • All Goodwill and other intangible assets not specifically listed.

    Remember that valuations are not scientifically based; they're subjective. Valuation is a personal formula - What's the business worth to YOU?
    Vincent Marino
    Maximising the sales value of your business!

    Business 24-Seven |MyBlog Twitter |facebook |Phat feesh & chips

  2. Thanks given for this post:

    Dave A (18-Sep-08)

  3. #2
    Diamond Member wynn's Avatar
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    Oct 2006
    east london
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    I have allways believed that any business is worth a little less than it would cost to sucessfully open exactly the same business across the road.

    In most cases to open in opposition works because you are hungry and the other guy is usually complacent.

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