And why do I need to know?
Well from a start up point of view you might be looking at whether to buy an existing company or start it yourself. You may have built up a business and thinking of selling for whatever reason, or you may just be nosy at how much your business is worth.
The first lesson seems to be that it’s never worth as much as the seller thinks its worth.
The second is that turnover has very little to do with the value of a business, it’s all about the value of stock and the net profit.
Investors will always look to get their money back within 3 years (less in the current climate) so the value will rarely exceed 3 times net profit. Remember net profit is the amount left over after you (or someone qualified to do your job) has taken out a wage as well as all other costs.
As a buyer (or as a seller looking to increase the value) you’ve got to look at if you can cut costs and increase the profit while keeping the same turnover. You’ve got to look at the value of the stock and if it’s been replaced recently – if people are winding up a business or if they’ve been extracting as much money as possible for a few years then chances are the equipment is old, hasn’t been replaced and will affect future business.
The final thing to look at for a marquee hire business is bookings – are there many future bookings already in place? How much of the existing business is repeat business? – This is worth a lot as you know year on year you’re getting some returns on investment.
After all that -if you can buy a business for the value of the stock or less and it has no liabilities then you know you’re on fairly safe ground.
I’m not an expert on selling businesses but I did go through the process a few years ago and I’ve been involved in buying and selling a few businesses over the years. My best mates favourite anecdote about my Dad is of joining us on a long car journey and being handed several sets of accounts to value businesses for an hour when we were 12!
Thanks for reading