Curious as to what your business is worth?

This DIY Business Appraisal is a very quick and dirty way to get some ideas

Selling your business is all about FACTS
No buyer will be as emotionally attached as you!

And even if your potential buyer loves your business – their accountants and bankers will happily strip the price down to what can be proven in writing.

[box type=”info” style=”rounded” border=”full” image=”none”] Any Business Price will be affected by many factors, the most common ones are:

  • Type of business and Industry
  • Number of staff
  • Average pre-tax Profit from the last three years (ie Profit number on tax return)
  • Debt levels and extent of costs of Finance
  • Amount of Owners drawings and “optional” semi-personal expenses
  • Level of operational Transparency; state of the accounts, records of all cash transactions, etc
  • Existing Premises lease length and renewal options
  • Current Book Value of Fixed Assets – plant and equipment, fit-out, land and buildings, Vehicles etc (from last year’s depreciation schedule)
  • Current Stock Value of Inventory (from a current stocktake)
[/box] Gaining a proper business valuation takes all of these factors into account, and often many more, to make really accurate calculations. That is why this process is usually both lengthy and expensive; but it is not always necessary – the steps below provide a useful guide for an approximate appraisal.
The real value in doing this exercise is to gain an understanding what potential buyers will be seeking and where you need to focus to get your business really exit ready.

 

4 steps to DIY Business Appraisal

Step I – the Papers

Before you Start your DIY business Appraisal you will need to gather:
* The last three year’s worth of Tax Returns
* Your current Rental Agreement / Lease for your Premises
* Your most current Stocktake & Asset Register or the Depreciation Schedule from your accountant

Step II – the Multiplier

Check your relevant Business Associations’ website for the standard sales multiplier. We tend to use the info on www.bizexchange.com.au but it is up to you if you want to subscribe – it is free and up to date…
(if you can’t find it don’t worry – you can use our average of 1.5 – this will only work for Aussie Businesses – see the download notes sheet for more info)

Step III – the Devaluers

Consider any Devaluers…..Not every business is immediately saleable and there are two strong reasons you may not currently be able to get any buyers:

  • Your property lease – if it has LESS than 12 months to run it will be very difficult to find a buyer. Bear in mind having to relocate premises is a massive cost and extremely disruptive so prior to listing ensure you have 3-5 years left on your lease, and ideally a renewal option for another 3-5 years as well. The exception to this is if you are totally an online business in which case your premises are irrelevant.
  • Your Personality – don’t get us wrong, we love personality, but if YOU are the reason your business exists – how do you sell YOU? As a sole trader in a “service” business (e.g. hairdresser or copywriter) running entirely on your single personality and skills will make the business quite hard to sell. The reason is Buyers, and their Banks, will imagine that your clients will leave when you do – and possibly follow you to some new venture. There are many ways to mitigate clients leaving such as exclusion clauses and dual handovers – but on the face of it, without repeatable systems in place this kind of businesses is simply an income stream without any ongoing value.

What a buyer will pay is driven by what they calculate your business is worth to them – ie how much they expect to make from your business once they are the new owner.
Either (and especially both) of these devaluers will mean your revenue streams will usually be discounted very close to ZERO.

Step IV – the Calculation

Do the maths – these are the calculations – but it is a bit complex to follow so we have also created a free excel DIY Business Appraisal worksheet for you to download and play with.
Calculate your ‘Average Appraisal EBIT’

  1. For each of the last three years’ Business tax returns find both the taxable profit and your interest expense
  2. Deduct the interest expense from the taxable profit for each year – this will give you the last three years EBIT – (earnings before Interest and Tax)
  3. Average the three years EBIT (add them together then divide by three) to get your ‘Average Appraisal EBIT’
  4. Do a quick cross check of your Appraisal EBIT to ensure this average profit number lies between your largest and smallest profit over the last three years (if not you did the maths wrong and have another go)

Apply your Multiplier to your Average Appraisal EBIT

  1. Use the number you researched at Step II. (or for simplicity 1.5) multiply your Average Appraisal EBIT you just calculated in point 3. above

Discount for Devaluers

  1. If your business is subject to either of the devaluers in Step 3 multiply your answer from point 5. above by Zero. Yes that is right – as this is a ‘quick and dirty calculation’ it is reticent to over-state your appraisal. Regardless of what your profit has been for the last three years buyers will not be attracted to a business that needs to relocate, or one that will most likely lose all of the clients once it is sold. – Feel free to contact us if you want more info.

Add the your Assets

  1. To the number you have calculated above at 6. add the Total Current Depreciated value of the stock, furniture and fixtures, the building, motor vehicles etc. USe the written down value – NOT your personally guestimated selling price – use what the buyer’s bank will take as gospel. It is an important pre-selling step so get your books in order, and have a current stocktake to maximise this part of the sale. ALSO remember if you want to keep anything to deduct it from the total here. eg you may want to keep your vehicle, or a certain piece of stock, so don’t forget to exclude it from the sale.

 

TA-DA – you just calculated your QUICK AND DIRTY Business Appraisal Amount!

If you just tried following this through and found doing it by hand confusing, download our excel spreadsheet and it will do the complicated maths and calculate your Total –
(you still need to have the right paperwork to make it accurate)

Not the BIG Number you were hoping for?

Most business owners will run personal and semi-personal expenses through their business, to minimise tax. Because the nature of these varies from owner to owner, we have not included any method of extracting or compensating for these add-backs in this DIY process. A registered business Valuer, an accountant, or even a business broker will be able to advise you more thoroughly about exactly how these will impact the sale price.
Feel free to give us any feedback or ask questions in the comments section below.

About the Author

Why own a business post - Eve Blackall Smart Accounting image
Often described as the small business answer to The Supernanny, our principal Eve Blackall also owned a Tax Accounting Practice for 15 years and also has worked as Financial Controller and advisor for various ASX listed companies.
Working with Smart Accounting you get to work one-to-one with Eve and not many consultants have her experience and expertise. She has been advising on how businesses can be more profitable, and how business owners can sell for the highest price, for over 25 years.
To start increasing the value of your business right now download one if our Free Business Checklists by clicking here.