Net Asset Value

For smaller businesses, we find that the Proprietors Earnings and the value of assets can have a much greater impact on the price paid for the business. 

For this reason, we tend to adopt the Net Asset Value methodology which calculates the value of Goodwill based on a Multiple of Proprietors earnings separately to the Fixed Assets, Stock and Working Capital of the business.

Net Asset Value Formula:
Value = Proprietors Earnings x Goodwill Multiple + Fixed Assets

Proprietors Earnings

Firstly, an Adjusted PEBITDA Earnings is required.  This is the total Gross Earnings to one full time working owner.  Refer to the article on Understanding Business Earnings for more detail on how to calculate this. 

We tend to use the most recent years historical earnings as the basis for most valuations and factor any trends or volatility into the subjective assessment of risk and opportunity in the business.

Goodwill Multiple

The Goodwill Multiple is very much a subjective assessment based on the risks, opportunities and demand for a particular business and takes into account the results achieved for similar businesses in the past.  Below is a table showing the average Goodwill Multiples achieved on a sample of businesses that have actually been sold by Business Brokers Queensland. 

Based on this sample, you can see the following:

• Manufacturing business have sold at a relative premium to other categories at around 2 times PEBITDA Earnings plus Fixed Assets. 
• There is a broad range of multiples on most businesses range from 0.7 times to as high as 2 times.   

Fixed Assets

The Fixed Asset Value is determined based on the market value of the fixed assets of the business in situ.  This may or may not be reflected in the Balance Sheet and for businesses with more substantial level of assets, an asset appraisal or valuation should be undertaken.

Total Funds

It is important to note that this formula calculates the Purchase Price of the business and not the Total Funds Invested.  Whether Buying or Selling a business, you should  consider the total funds required:

• Purchase Price
• Stock
• Working Capital (Trade Debtors less Trade Creditors)
• Deposits and Bonds (Rental Bond)  

In addition, there are likely to be additional costs associated with the sale transaction such as stamp duty and professional fees.

For more information on Valuation or to ask us to value a business for you, please click here or call us on (07) 32178922