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Valuation of a Business (2)

What to Look at When You Value a Business
  Commonly, many SME (Small to Medium Enterprises) business asset valuations focus on the ‘Return on Investment’ (ROI). This is usually expressed as a percentage (%) and is a measure of the Risk to an Owner versus the Return. For a privately held business in Australia this should be between 20% and 50%. The closer to 20% the more ‘secure’ the business investment – the closer to 50% the more ‘riskier’ the investment.

A business valuation report that demonstrates a ROI under 20% indicates that it would be unlikely to generate an investment (or a Bank would not lend the funds to purchase) – quite simply the return would not be enough (because of the liquidity – or ease of conversion to cash) to warrant the investment and a return of over 50% would indicate that there are significant risks which would be outside of the comfort zone of most investors and financiers.

As a general rule, private businesses and the valuation of companies in the private space tend to be based on historical financials with the valuation of intangible assets based on the adjusted net profit (before tax) – called EBIT (Earnings before Income Tax)

Adjustments are made to the Accountant prepared financials to ‘add back’ any expenses to the business profit which are discretionary to the owner(s) personally, plus ‘book’ expenses like depreciation of P&E and any abnormal ‘one off’ expenses like a non recurring bad debt to arrive at the real Net Profit (before tax) of the business.

It is multiples of this Net Profit, tempered by the Risk profile of the business and the ROI percentage which will determine the Value of the business.

But whilst most people ask for a private or corporate business valuation, what they really want to know is the PRICE.

Value and Price can be two very different numbers.
  Contributed by: Value a Private Company.com.au
  About the Author:
  Paul Nielsen is a graduate of Chicago’s Loyola University School of Business Administration and is a Certified Mergers and Acquisitions Advisor (CM&AA).

He holds qualifications in Australia as a Certified Practicing Business Broker (CPBB) from both the REIQ & AIBB, is a Certified Machinery & Equipment Appraiser (CMEA), Licensed Real Estate Agent, Licensed Second Hand Dealer and Accredited Sponsor of the Australian Small Scale Offerings Board.

Paul is a Fellow of the Institute of Directors & Managers (FIDM) and an Accredited Senior Business Analyst (SBA) with the International Society of Business Analysts.

For three successive terms Paul was the elected National President of the Australian Institute of Business Brokers (AIBB) and is an active Member of the Australian Institute of Company Directors. Operationally, Paul has served on the Boards of Publicly Listed and Private Companies as Chairman, Executive and Non Executive Director over a 38+ year period.

Paul lives in Brisbane, Australia and can be contacted on +61 7 3010 9711 or +61 408824122 or by Email at pauln@avantiacorp.com.au

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