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    5 Replies Latest reply on May 30, 2008 6:39 PM by dcashley

    How do you determine the valuation of a new business?

    Mozart Wayfarer
      Aside from the start-up costs, how do you determine or calculate the valuation of a new business?
        • Re: How do you determine the valuation of a new business?
          Techie Wayfarer

          You may want to check out some books on this topic. Check out the author L. Tuller who is a graduate from HBS and Wharton. He has a book out on how to determine the value of a small business. Good luck!
            • Re: How do you determine the valuation of a new business?
              dcashley Newbie

              This is how to start the process:
              1. Add up the purchase price of all salable inventory. If you can't sell the stuff in inventory, it has no value.

               

              2. Add up the purchase price of all furniture--if you were to buy replacements for it--as it exists now.

               

              3. Add up the purchase price of all computers, office machines, office supplies etc. use method in item 2.

               

              Now you have a number that represents all the "things" in the business. You could start your own business, and purchase these "things" for that amount of money.

               

              4. Determine the income from operations.

               

              5. Determine the net income.

               

              Now you have two numbers that represent the market value of your products less your expenses.

               

              6. Determine if the number of sales transactions have increased or decreased during the last few years.

               

              7. Determine the dollar amount of the increase/decrease.

               

              8. Graph items 6 and 7.

               

              9. Decide if you think the growth rate will continue, increase, or decrease, AND what you intend to do to make it increase.

               

              10. Establish a growth percentage, and subtract inflation.

               

              11. Apply item 10 to items 4 and 5.

               

              12. Multiply items 4 and 5 by 5 years.

               

              13. Add item 12 to Items 2 and 3.

               

              Now you have a number that represents the growth of your business PLUS the cost of the "things".

               

              14. Now, proceed with an NPV analysis.

               


              This gives you a startign point for your future determinations only. This does not set a final price/value. With the aforementioned numbers, visit your banker.
            • Re: How do you determine the valuation of a new business?
              Score133 Wayfarer

              Hi There Mozart -

               

              Placing a value on a business is typically done by standard, widely-accepted formulas. For example,

               

              you will have to determine if the business you want to buy is well established and has a "dependable" clientele, what its market position is, the potential for continued earnings, its competitive advantages, how well it has been managed and how much management oversight it will need after you purchase it, staffing, etc. Then you simply multiply the current profits by one of the "multiples" (formulas) to determine if the asking price is right. Let's say you're going to buy a business that has been around for 15 years, is the only one of its kind in town, has long-tenured employees and a high quality product. If it has an annual profit of $200,000, you would configure a multiple of 8 to 10 for a sale price of $1.6 to $2 million dollars. If, on the other than you are going to purchase a little business without much of a track record, the multiple would only be one. The in-between multiples are 5-7 for a well-run business and 2-4 for a business without much to set it apart. Hope this helps.
              • Re: How do you determine the valuation of a new business?
                Tracker
                There is no surefire way to value a company for buying and selling purposes. The true value is the perceived value to a buyer who is ready, willing, and able to buy it. But here are some different methods of establishing value used in the M&A industry (you can find out details about them by using the phrase in a Google search or just search for "business valuations"):

                Capitalized Earning Approach
                Excess Earning Method
                Cash Flow Method

                Tangible Assets (Balance Sheet) Method

                 

                Cost To Create Approach

                 


                One of the most common approaches to small business valuation is the use of industry rules of thumb. While most financial analysts cringe at the use of these approaches, they do have their place, which we believe to be as adjuncts to other methods. One industry rule of thumb says an Internet Service Provider company is worth $75 to $125 per subscriber plus equipment at fair market value. Another says that small weekly newspapers are worth 100% of one year's gross income.

                 


                The problem with these and all rule of thumb formulas is that they are statistically derived from the sale of many businesses of each type. The rule of thumb averages may be accurate for those businesses whose performances are right about at the average. The business with expenses and profits that are right on target with industry averages may well sell for a price in line with the rule of thumb formula. Others will vary. To apply the rule of thumb to a business that varies significantly from the average is not appropriate.

                Dennis Lowery
                Adducent, inc.