How do you value a business that has few assets?

Question

How do you value a business that is very much sales / turnover focused and therefore relies on the people employed in it, rather than asset value?

Answer 1

What you are actually paying for is the "goodwill" of the business a very subjective figure. Reviewing the AUDITED accounts to see what profits have been generated can give an historic value judgement to what such a business is worth but will not guarantee that this level will continue.

points to consider include:

Is the business of a type where the personal reputation of the seller has been a major influence in revenue generation? If so do you think your standing in this business community is equal to or better than the present owner's?

The staff employed may have great skill at what they do. Are they likely to want to stay on a change of ownership and if they do not how easy would it be to replace them? This could have a huge effect on profitability.

If there are few assets except the skills of the sales side would you not be better off starting a new concern and recruiting such staff thereby negating the need to pay a premium for an established business. This all depends on what you think the present staff have contributed to the business and if you think equivalent skills could be found in hiring for yourself and the standing of the present business in it's marketplace N.B again how sure are you present staff would stay?

In your shoes I would definitely seek advice from a qualified accountant and a solicitor.

Good luck.

Answer 2

Value the business at 3 times the cost of the sales persons time on an annual basic, plus the standing cost of utilities and rent.

Caution, subtract from the sale price the cost to complete the sale. eg delivery,tax,wholesale price.

Devide this by the number of expected sales on an annual basic and you have acquired the revenue generation per sale, required to make a profit.

Stay within 10% of this figure on each sale and you will earn a reasonable annual return on investment.

Answer 3

It's easy then. Instead of using a balance sheet indicator, such as assets, you'd use an income statement indicator, such as net income or gross sales, or cost of goods sold, or the statement of cash flows, etc... There are many models to use to value an asset poor business. Hope this helps.

Answer 4

Base it on annual net profit times a number of years like 2 or 3. Business appraisers know how to do this. Multiplier number is very subjective and varies by business type etc.