8 August 2012
The purpose of this paper is to introduce you to the concept of business valuation and show different types of the valuation.
On completion of this paper you should have an understanding of the factors that drive value, different types of valuation techniques, and negotiations from different prospective.
Business Valuation seminar on 19/04/12 by David Cartney
Although there are several formulas you can use, there are no black-and-white answers on valuation techniques. Business valuation is a mix of methodology and professional opinion. You need to select the valuation methods that suites your purpose and the type of business (e.g. for manufacturer you might use the asset valuation method, for legal services – the capitalisation of income method, for exotics e.g. a web-based businesses – the value of specific intangible assets method etc.) [pic]
Market for SMEs growing & changing
❖ Volume of business for sale doubling since 5 years ago mostly in the smaller end of the business size ($5-10 million) ❖ Values have been declining in PE ratio terms due to greater supply of businesses for sale (the boomers), partly due to increasing retiree pressure, and expectations on PE ratios have declined since GFC ❖ Fluctuating valuations leads to uncertainty in valuations – values have broadly remained a function of turnover, profit, cashflow, quality of assets and future potential ❖ A significant portion of businesses advertised are for less than 1 year’s earnings! ❖ More buyers are entering the market and this should eventually lead to firmer prices ❖ A well-developed market for a type of business or its assets, may exist but this tends to not be true for many SMEs Fundamental aspects of the business which impact the business value Customers – depth of customer support and diversity of customer base, products or services, profitability, market position and competition, distribution and selling Operations – capacity, quality and reliability, systems, supply chain management, people and organisation, organisational structure, labour markets, performance management Financial performance – historical and due diligence aspects, forecasts, sensitivity analysis, need for additional funding to meet the plan, appropriate debt to equity structure Roadmap to understanding business valuation:
• Cost structure
• Forecast profit
• Balance sheet management
• Working capital requirements
• Assets – tangible & intangible
• Net cashflow
• Valuation methods
• Due diligence
• Exit plan
How is value considered generally by buyers or sellers?
|Elements of the value of a business |Seller - will I get what I expect |Buyer – am I paying too much? | | |or need? | | |Tangible assets (Plant & Equipment, Furniture & Fittings, Stock, WIP) |WDV of assets $100,000 |Market Value of assets $150,000 | |Intangibles assets (Intellectual property, Goodwill) |At cost $200,000 |At NCF $300,000 | |Income, Cashflow, Return (expected income stream, cashflow forecast, |$500,000 |$1,000,000 (By increasing from 1 to 2| |expected return on this type of investment) |...