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Valuing Your Business for Sale
LINK’s corporate division sells privately owned businesses, focusing on acquisition, divestment and facilitation. In recent years we have been able to sell more than 200 businesses, each over $1 million.
The PE (Price to Earnings) Ratio allows LINK to gather information and statistics from their own database as well as from others to calculate the value of specific businesses. The PE, also known as an “industry” multiplier, is market sector driven, creating variables.
In spite of its importance in tracking the earnings history of businesses, the PE Ratio is not considered to be the best way to determine value. Of equal importance are performing assets and revenue strengths, which are more focused on what can be done for the future of the business.
LINK has narrowed down what we think are the best approaches to valuing a business. This is an industry specific formula which draws on ideas from the “real world” in the market.
The 3 valuation methods:
• Earnings based
• Asset based
• Market based
These three concepts aim to value a business, basing their findings on industry experience and comparable sales.
The Valuation Appraisal Opinion
Our opinion on the total value of the business is usually given on a Going Concern basis.
The sustainability of earnings will be based on the historical and current earning capacity of the business, (i.e. willing, informed but cautious buyer’s expectations of the ability of the business to maintain profitability for a foreseeable period of time).
Our report relates to the entire workings of the business, which details:
- The financial documentation supplied.
- The business culture and infrastructure.
- Its relevance to its market sector.
- An assessment of risk factors and the market within which it trades.
Our opinion on Business Value will be directly related to:
1. The industry average multiplier on true earnings. This market driven multiplier can differ according to anticipated industry risk factors and earnings sustainability, as well as comparisons to the past earnings.
2. The fair market value of the free assets (e.g. plant, fixtures, fittings, equipment and in specific cases the value of debtors) = the value of stock at historical cost.
3. Goodwill/Intangible Assets. This method of valuation is not easily measured as it depends on various factors, which will change from business to business. The specific characteristics of each business mean that not one method can be put into place, regarding both tangible and intangible assets. Market evidence of required rates of return (ROI) can be given, with some risk, for investing in businesses.