I commonly get asked by business owners, purchasers and professionals “what is a business worth” and I usually respond with “it depends”.
It depends on a number of factors that should be taken into consideration when establishing a business value including industry, location, owners input, staffing and supply chains to name a few.
However, the most important factor is the “Future Maintainable Earnings” (FME) of the business and whether that is transferable to a new owner.
Wayne Lonergan puts it well in his book (The Valuation of Businesses, Shares and Other Equity), states: “Too many FME-based valuations are flawed in that they automatically employ historical profits as a proxy for FME, without undertaking sufficient critical examination of the past performance and likely future events. An understanding of the future profits of a business is essential for an accurate valuation, yet is omitted when historical profits are used in isolation”.
The key question for me when assessing a business is to understand the environment they are currently operating in and the impact this has in establishing the FME.
As we well know, the business environment for a lot of businesses has changed dramatically over the past 18 months due to the pandemic, supply chains and a tightening labour market.
To complete a valuation appraisal we effectively undertake a full due diligence on the business examining the owners’ involvement and skills, staff structure, lease arrangements, customer breakdown and industry sector. Once we have completed an analysis of this information, and established the “Future Maintainable Earnings” of the business we are then in a position to compare the subject business with sales data from other similar businesses that have been sold. This comparative data our own business examination essentially forms the basis for establishing the valuation range.
At Tabak’s we are engaged to complete appraisals for a variety of reasons including to establish a market value for sale purposes, martial and business ownership disputes and management buy outs. In all cases we work closely with accountants and business advisors to provide a realistic market value that we are prepared to stand behind.
Tabak brokers are in the fortunate position of being able to have our appraisals peer reviewed by members of our wider Tabak NZ team which include Chartered Accountants, MBA Graduates, Business and Management Degree Graduates, holders of the Advanced Business Valuation Diploma plus other brokers who have been involved in business ownership. We all combine to have many years of experience in appraising, negotiating and selling businesses.