For a business to make money, it needs to buy stock at a low price and sell it at a higher price. Service retailers operate under the same principle, except they sell their service for a price that is higher than the cost of providing it.

A very general, ballpark value can be calculated by roughly doubling the business’s discretionary cash flow (the total cash available to the owner after legitimate deductions for operating expenses).

Another way to calculate the approximate value is by using a multiple of net profits. Your accountant should be able to provide the multiple for your particular business sector. If, for example, the multiple is five times net profit, then it’s easy to make the value calculation.

But what happens when other factors influence that multiple? For example, an owner-run business that’s not dependent on the owner always being there is more valuable than one that is. The ability to introduce significant new product ranges into the market also affects the multiple, as does the ability to develop new distribution channels that increase the customer base.

The truth is, when it comes to valuing a business for resale purposes, the fact that it makes money is just one of many considerations valuers will look at when arriving at an accurate and fair valuation.

Other factors include:

  • Intangible assets – such as customer relationships, intellectual property and brand perception – can have a huge influence on the level of custom the business enjoys.
  • Human capital is also important, particularly in service-driven businesses. The charisma, knowledge and charm of a particular sales assistant, waiter or petrol pump attendant, for example, will not only encourage repeat business but also bring in new customers through word of mouth. A key consideration for a valuer in this case would be whether the business would continue to be as successful if that particular individual were to leave.
  • Location is always a key valuation driver, and businesses in good areas, with ample parking and easy access will always value higher than others. A prime location in a busy shopping centre will also help increase the value of the business, although a prime location usually goes hand in hand with high rental, so this will need to be taken in consideration by potential buyers.

No matter how successful a business is, valuers know that sound historical financial performance is no guarantee of future success, it merely helps to give a potential buyer an educated prediction of the potential future performance. This in turn is influenced by what the new buyer wants to do with the business, and what his or her expectations are.

At The Property Partnership East Rand, our team of valuer’s core focus is commercial, industrial, retail, development land, residential and specialised properties. Contact us today to find out how we can help you with an accurate valuation of your business.