What it is worth.
WHAT VALUE IS BASED ON
Future profits, and the risk of not receiving them.
WHAT METHODS EXIST
A multiple of earnings Asset value Revenue multiples, in some sectors Discounted future cash flows
WHY EARNINGS MULTIPLES DOMINATE FOR SMALL BUSINESSES
They are simple and they reflect what buyers actually pay.
WHAT EARNINGS TO USE
Sustainable profit, adjusted.
WHAT ADJUSTMENTS TYPICALLY APPLY
Removing the owner's excess remuneration Adding a market salary for the owner's role Removing personal expenses run through the business Removing one-off items Normalising rent, where premises are owner-owned
WHY THE OWNER'S SALARY ADJUSTMENT MATTERS
Profit that assumes an unpaid owner is not profit.
WHAT TO ESTABLISH
What the business earns after paying someone to do the owner's job.
WHAT DETERMINES THE MULTIPLE
Size Growth Customer concentration Owner dependence Sector Recurring revenue Quality of records
WHY RECURRING REVENUE COMMANDS MORE
It is more likely to continue.
WHAT ASSET VALUE MATTERS FOR
Businesses where the assets are the substance, and for the floor value.
WHAT TO ESTABLISH
Whether assets are worth their book value.
WHY
Book value reflects accounting, not what the equipment would fetch.
WHAT TO VALUE SEPARATELY
Stock Debtors Property
WHAT TO NEVER PAY FOR
Goodwill that depends entirely on the departing owner.
WHAT TO OBTAIN
Independent valuation advice.
WHY
Sellers' expectations are frequently unrelated to value.
