Valuing a small business is relatively simple compared with larger businesses and is based around the Net Asset Valuation Method, taking into account “Goodwill” which is derived from the level of profitability before tax.
The starting point is to understand the owners salary or remuneration level, as business owners either pay themselves too much or too little, which affects the true level of profitability. To help achieve a more realistic level of profit, the owners salary should be deducted completely and replaced by a “manager’s salary” at current markets rates for the industry the business operates in. This will then provide a more realistic profit from which the “Goodwill” amount can then be calculated. This is normally three times net profit before tax. If the profitability is not at a consistent level, then an average (say over 3 years trading) might be taken.
The next step is to add the value of the assets eg stock at valuation, plus any other assets that may have a value. It is important to remember that a valuation for an Asset Sale, will just be the Assets, Name & Goodwill, whilst a valuation for a Share Sale will include the value of all the Assets (including the Goodwill value), less all the liabilities. For a greater understanding on the pros and cons of an Asset Sale or Share, please request our “Guide to Selling a Business”.
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