Business owners: A brief guide to valuing your small business

Thinking of selling? Or just curious to know the value of your business in case you do decide to put it on the market at some point?

Many business owners are well-wide of the mark when placing a value on their prized asset. They overvalue it and under-prepare for their exit, believing in a huge potential for their business that buyers unfortunately don’t see.

Your business is only worth what someone is willing to pay for it!

Having an inflated price fixed in your head can seriously hold up your exit strategy. Awareness of the factors considered in determining business value will help you avoid nasty surprises when you do take the plunge.

Some factors are obvious; others not so. Some you have control over; and others you don’t.

Understanding what influences business value enables you to take informed actions to increase it in the coming months or years.

Below is a boiled-down guide to ten of the most important considerations…

1. Reasons for selling

Why are you selling the business? If you’re forced to sell (and this is known by the buyer), the value of the business naturally falls.

Selling due to owner illness is a good example where you are in a poor bargaining position when it comes to selling.

Try to give yourself as long as possible to negotiate before you sell; rapid, forced sales will ultimately be detrimental.

2. Size of business

With all other things being equal, smaller businesses are often viewed as higher risk than larger, more established companies.

The very fact that the business has more employees and generates higher revenues may be seen as a sign that it is strong. After all, it must have survived difficulties in the market in the past and possesses the people and processes that have created an environment for growth.

A larger business tends to indicate stability — and prospective buyers like to see this.

3. Longevity of the business

How many years has your business been operating?

While potential is a very important factor in determining value, so is a strong track record over many years.

If you can demonstrate years of strong performance, steady cash flow, and an established loyal customer base generating stable recurring revenues, you are ticking many potential buyer boxes.

Businesses that have been trading for a year or two are far higher risk, even if they are performing well. They may be simply riding the market or a particular trend.

4. The nature of your business’s assets

If you run a manufacturing business, your tangible assets are much greater than most office-based businesses and this is a factor in its value.

If everything else is equal, building ownership, hardware, machinery, and stock make a business much easier to value than one where intellectual property is the main asset.

In reality, the value of a business depends upon many other factors that office-based businesses may score well with (such as customer loyalty, IP, brand strength, etc.)… so this factor needs to be balanced against the others mentioned here.

For a simple ‘asset valuation’ of your business, add up the tangible assets, subtract the liabilities, and that’s it!

5. The key financials: EBIT

What are your business’s earnings before interest and tax (EBIT)?

Any prospective buyer will want to know this figure as the most common basis for calculating the value of a business.

It essentially puts a figure on your profit. This includes all the expenses in the business, except interest and income tax expenses.

Another way to put it is: the difference between operating revenues and operating expenses.

A multiple of EBIT is a common method of valuing a business. For example, a 3 times EBIT multiple for a business with an EBIT of $400,000 gives a $1.2M valuation.  Or a 5 times multiple on an EBIT of $500,000 gives a valuation of $2.5M.

What is considered a ‘normal’ EBIT multiple to use for valuation purposes?

This will vary between industries and is affected not only by the factors listed in this article, but also by market sentiment. For example, in a ‘bull market’ when there are a lot of buyers, valuations are higher and a business could attract a buyer willing to pay a 10 times EBIT multiple. That same business within a different market environment, with a less bullish sentiment many only attract a 3 times EBIT multiple.

Clearly, timing matters.

6. Future performance & projected cash flows

While past performance can demonstrate financial stability (very important), it’s future performance potential that will get buyers’ eyes lighting up.

It’s important to be able to show growth potential. With this in mind, how well does your business attract new customers and boost cash flow?

Is it retaining customers effectively so that cash flow and revenue remain healthy — or are customers dropping off the back as quickly as new ones are loaded onto the front?

7. Your specific industry sector

Your industry sector is important for two main reasons.

Firstly, selling your business at a boom time for your industry will naturally be beneficial over selling it during a depressed time. If you’re in the mining sector and the industry takes a hit, the business value is likely to decrease. Similarly, a prolonged drought might affect the value of your business if you’re in the agricultural sector.

For more of an idea on your specific industry, speak with us or a business broker experienced in your industry sector. You will be able to access data about recently-sold businesses to get an idea of valuations in your sector.

Secondly, some industry sectors have industry-wide ‘rules’ that do not necessarily apply to other sectors. For instance, the number of outlets is usually key for a real estate agency business; and customer numbers are key for a mobile phone company.

8. Structure of the deal

The way the sale is structured may affect the price you sell for. Flexibility to fit in with the needs of the buyer may help you command a higher overall price.

There are different ways to structure a deal, affecting the amount of tax payable and the debt service: an ‘all cash’ sale will usually mean a lower value than seller financing.

Here are some basic guidelines:

  • Seller financing: businesses sold without any seller financing generally sell for 10% to 15% less.
  • Stock sale/Asset sale: selling stock means a single capital gains tax for you but the buyer may prefer an asset sale to reduce income tax.
  • Allocation of sales price: consulting expenses are tax-deductible to the buyer so they may value a business more with a high allocation to consulting; you, as the seller, may want to limit the allocation to consulting because you will pay the ordinary income tax rate on it.
9. The cost of access to capital in the market

When interest rates are high, investors borrow less. It’s the rule of the market.

This naturally has an effect on the value of your business as there are fewer potential buyers; and any interested parties may drive a harder bargain than when capital is cheaper and more available, as the perceived risk is higher.

10. Other ‘intangibles’ in the business

The value of any business will also depend on other more subjective, intangible factors. These may change with the perceptions of different buyers and may be harder to quantify:

  • How crucial is the owner to the success of the business?
  • Is it located favourably?
  • Is the business highly dependent on a few customers?
  • Are customer and supplier relationships strong and likely to last?
  • Is the management team and staff strong — and likely to stay if the business is sold?
  • Does the business have intellectual property of great value (trademarks etc.)?
  • Are systems, processes, and procedures clearly defined and documented?
  • What is the business’s reputation in the market?
  • Is it favourably placed against competitors?
  • How marketable is the business?
Focus on what you can control!

Now you have an idea of the main factors involved in valuing your business, what are the next steps?

Beyond being prepared and making sure that all your paperwork is in order (including cash flow statements, historical and projected profit and loss statements etc.) make sure you have an exit strategy planned.

This should be flexible enough that you are not in the position of HAVING to sell for less than you would like.

Focus on the factors that you can control rather than those you cannot. This will help you get your business into the best possible health for when the right opportunity comes along.

If you have one employee but less than 19

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If you have one employee but less than 19, You must be Super Stream ready by 30 June 2016

  • Do you have 19 or fewer employees?
  • Are you an SMSF Trustee? Self-managed super funds (SMSFs) must be able to receive employer contributions and the associated data electronically.
  • APRA – regulated funds

From 1 July 2016, the ATO’s SuperStream standards are set to be enforced.

A reminder:

  • If you are a larger employer, you should already be using SuperStream.

A Brief Overview

These new rules require employers to pay and report contributions to superannuation funds electronically. Both the payment and the reporting will need to be completed on the same day.

  • These measures don’t apply to individuals who are making personal contributions direct to their superannuation funds, only employers.

SuperStream will make it easier for you. 

  • You need to use SuperStream when paying employees super.
  • With SuperStream contribution payments are made electronically and you can pay all your employees super; sending all their information through one clearing house; saving you time and effort.
  • Providers must be approved by the ATO and are listed on the ATO website.

You should have already started transitioning by choosing an option to make super contributions electronically: 

  • Your payroll system
  • Your super funds online system, or
  • The Small Business Super Clearing House (SBSCH). This is a free service administered by the ATO whereby you can make super guarantee contributions as a single payment to the clearing house and it distributes the payments to the employees fund/s.

Next: You need to collect the following information on your employees. 

  • Their Tax File Number (TFN) and,
  • A Unique Super Identifier (USI)
  • Super fund ABN
  • For employees who have selected a SMSF for their contributions, they will also need to provide their Fund’s Bank Account details and Electronic Service Address (ESA)

Once this is done, these details must be entered into your preferred clearing house site.

For new employees, the ATO has updated the Super Choice form to include collection of the extra information required.

Start using SuperStream as soon as this process is completed so that any problems can be solved before 30 June, 2016.

If you any questions on setting up SuperStream super contributions for employees, please contact McAdam Siemon.

A new office in Buderim

McAdam Siemon Business Accountants Upper Mt Gravatt, Noosa Heads & Maroochydore. Specialising in Accounting, Taxation, Management Rights, SMSF Administration, Business Advisory, Business Valuations. New office

We are excited to let you know that McAdam Siemon has a new office in Buderim, saving a huge commute for those of you that travel a long way to visit our Noosa office.

This will allow us to provide you with services more conveniently.

Susan and Adam will be working from the Buderim office  and John will be there each Wednesday or when appointments are made.

For those of you that like to meet either John, Sam or myself at the coast and this office is closer to you, please don’t hesitate to make your appointments with us at Buderim.

Middy’s Complex
Shop 16
29 Main Street
Buderim  Qld  4556

 There is off street parking available.

Are you thinking about buying a franchise?

 

Are you thinking about buying a franchise?

Before you do, you should assess whether or not you are the right kind of person to own a business.

  • Have you a passion for a particular type of business?
  • Are you dissatisfied in your present occupation?
  • You would like to work more flexible hours, more or less?
  • You want to be your own boss?
  • Will the pressures of a new business affect your significant others? Research shows that franchisees with highly supportive families perform better than those that don’t have this.
  • Do you have a strong desire to build wealth?
  • Do you have an ability to be creative and entrepreneurial but remain within the boundaries of a brand or a system?
  • Do you know how to lead a team?
  • Do you have strong organisational skills?
  • How much money are you thinking of investing?

The list goes on ……..

McAdam Siemon understands that a franchise business has unique features that differ from other businesses.

For that reason, we have established a franchising division and are members of the Franchising Accountants Network, so timely and accurate advice can be provided to you.

So that you can make informed decisions, we have a structured approach to the way we deal with franchising from buying through to selling.

These have been specifically designed for the franchise industry sector and you will be advised of the costs upfront.

If you would like to discuss buying into a franchise, do your due diligence first, and/or give Rob a call to find out how I can help you.

 Upper Mt Gravatt: 07 3421 3421

Client Focus – Little Kickers

Client Focus – Little Kickers Qld 

  • Have you got young kids and would like them to play  soccer?
  • Has your child a birthday coming up and you would like something different to do?
  • The holidays are coming up – Why not think about enrolling your young kids in a holiday course.

 

Little Kickers provides fun and safe soccer classes for boys and girls aged 18 months up to 7th Birthday, in venues around Brisbane, Gold Coast and Sunshine Coast (free trial classes are available). They also offer day care programmes, holiday courses and birthday parties. Their motto is play not push and we are proud to offer this fantastic programme which has been created to get kids interested in sport by way of imaginative play.
Contact Name: Karen Tannoch-Bland
Website: http://www.littlekickers.com.au
Phone: 07 3299 3361