How to avoid the most common error with business valuations

A commonly made mistake when valuing a business is taking the approach to valuations the wrong way around.  Being aware of this and knowing the right way to go will improve the accuracy of your advice to your clients.

The issue arises from the attempt to value goodwill of the business separately from the assets.

At first glance this statement could sound a bit illogical. Isn’t that what needs to be done?

Establish the value of goodwill in order to establish the value of the business as a going concern? The answer is a big NO.

The only way to calculate the value of goodwill is exactly the opposite.

Where the standard for a valuation is ‘fair market value’ then the valuer needs to calculate the value of the business as a going concern first.  Meaning market value of the enterprise taking into consideration and including tangible assets, goodwill, working capital, stock and any other components and then work backwards to arrive at the value of goodwill.

The reason for this is that the value of the business is driven and dictated by the market and market forces. Buyers on the open market calculate value of the business based upon enterprise value. This means total investment necessary for acquisition. To understand this in a bit more detail lets look at the following hypothetical example.

Example;

At the same time there are two competing business for sale on the market. The two businesses are very similar except that the value of the assets in one is larger than the value of the assets in the other.

Business 1:

Returns a profit of $100K EBITDA  (P) and has plant and equipment value of $250K (A)

Business 2: 

Returns a profit of $100K EBITDA (P) and has plant and equipment value of $100K (A)

A willing buyer is looking for a return on his capital of 25% (I) 

So the formula for calculating value from a buyers point is P/I=Value

The formula for calculating goodwill will be Value – A

Business 1:

Value = $100K/25% = $400K

Goodwill = $400K – $250K = $150K

Business 2:

Value = $100K/25% = $400K

Goodwill = $400K – $100K = $300K

In both cases the value of the business is the same but the goodwill value in example 1 is $150K compared to example 2 of $300K. That is 100% higher in business number 2!

Due to this, in the two examples above, if the value is calculated differently by calculating the value of the goodwill, which would be the same,  then adding assets on top of it, the business value will be different by $150K. This is a 25% higher valuation for business 2 than business 1 that real buyers would price identically.

The value of the physical assets don’t necessarily have an impact on business operations and business value. The value of the business assets could be different due to management decisions, market forces at the time of purchase of those assets etc. Businesses can be over or under capitalised but this does not increase or decrease the value of the business.

In real life the error is made even bigger due to inexperienced valuers adding the value of the inventory on to their calculation and ignoring working capital completely which buyers include in calculating their total investment.

Larger the asset component, the larger the potential error.

Further more the most common method used for this incorrect calculation of goodwill is the capitalisation rate method. Most valuations that I have seen done this way usually don’t have a strong case for the rate used for the calculation which makes the valuation even more inaccurate.

The value of the goodwill in fact has nothing to do with the value of the business. It is actually a  derivative of business value.

Zoran Sarabaca

Registered business valuer, Principle of Xcllusive.

15 years experience in sales and valuation experience.

Xcllusive Business Sales provide business sales and valuation services Australia wide for SME’s up to $10million in value.
Call today for more information 1800 VALUE 1 (1800 825 831)
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Business Broker of the Year 2018 Award REIV

We are excited to announce Choon Ng from Xcllusive Melbourne has won the “Business Broker of the Year 2018″ Award for the Real Estate Institute of Victoria (REIV).

The REIV Awards for Excellence showcase the best of the best in the industry and celebrate leading real estate agency practices and professionals.

Choon is a valuable member of the Xcllusive team and your industry experience, knowledge and high level of service to your clients is something to be proud of! Congrats Choon! #reiv #reivaward #reiv2018 #broker #businesssales #xcllusive #teamxcllusive

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Business Champions Finalists for 2018

Xcllusive have been recognised as a Champions Finalists for 2018. We are super excited to be finalists and look forward to joining everyone at the Awards night in April. A big shout-out to our Team, Clients and Partners that help make Xcllusive a success!

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The truth about overseas business buyers: What you need to know about ‘overseas buyers’ with ‘deep pockets’.

On the road to selling your business you will likely come face to face with someone claiming that they can sell your business to an overseas buyer for more than it is worth. Despite recent actions taken by the ACCC against unscrupulous vendors (1) making these claims, the myth about overseas buyers continues to plague business sellers.

Advertising overseas will cost as much if not more than it does in Australia and knowing the truth about overseas buyers could save you a lot of wasted money.

So, if you’re thinking of selling your business through a business agency now or at any time down the road, take the time to arm yourself with the myths and facts about overseas buyers.

Myth: Many overseas buyers are willing to pay up to three times what a business is worth.

Fact: If somebody has enough money to pay three times a business’s value you can assume one thing about them: They have a lot of money. There are only a handful of ways to get a lot of money, and most of them revolve around being a savvy investor and/or a good business person, neither of whom would even think about paying three times anything’s value.

Myth: The overseas market is brimming with buyers for the Australian market.

Fact: Though there is a chance of selling to an overseas buyer, unless you are a major international, that chance is insignificantly remote. In fact, one of the sites we use to sell businesses have portals in France, Germany, Hong Kong, Italy, Luxembourg and new Zealand. So technically we advertise businesses for sale in an overseas forum. So why don’t we advertise that we have ‘overseas buyers’? Because the number of overseas buyers is infinitesimally smaller than the number of local buyers and it would be close to unethical to even mention them.

So, knowing what you know now, exactly what percentage of businesses do you think actually sell to overseas buyers? Based on a survey of the Australian Institute of Business Broker’s 353 Members, in the 2012 financial year only 2.6% of businesses were actually sold to overseas buyers or to overseas entities.(2)

In summary, only a tiny, tiny fraction of buyers come from overseas. The ones that do aren’t looking to bankrupt themselves to get a visa, they are good business people and they have the time to be picky. So in short, if anybody tells you they can sell your business for more than its worth to overseas buyers, they’re probably not the business agent for you.

By Zoran Sarabaca

Have you ever been told by an agent that they can sell your business to an overseas buyer? OR have you actually sold your business to an overseas buyer? We’d like to here from you!

To find out more about this topic or if have any questions about business sales make sure you give us a call on (02) 9817 3331 or submit a response or enquiry through the site. We look forward to talking to you.

Disclaimer: The information in this article is intended as information only and should not be taken as professional business advice.

Sources:
(1) http://www.aibb.org.au/press_release.php?Id=23
(2) http://www.aibb.org.au/press_release.php?Id=29

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Xcllusive Business Club

Grow, Systemise, Keep, Sell and Drive PROFITS

Register for ONE of our FREE Information Sessions below:

Thursday 16th of November – 8.30am to 10.30am

OR

 Thursday 23rd of November – 8.30am to 10.30am

 @

Aqua Luna Waterfront Dining – 461 Henley Marine Drive, Drummoyne NSW 2047

www.aqualunawaterfront.com.au

http://www.xcllusive.com.au/xcllusivebusinessclub.html

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Free Seminar – Shellharbour NSW : Exit Planning and How to Prepare Your Business for Sale

Exit Planning and How to Prepare Your Business for Sale

Wednesday 11th of October 2017

The Shellhabour Club

Arrive at 6.15pm for 6.30 start until 8.30 pm

(Refreshments on arrival and there will be further refreshments and nibbles following the event up until 9pm)

Thinking of selling, exiting or retiring from your business? This practical seminar will show you what you need to consider before you make the big decision. Selling a business is never easy, but this session will help you minimise the uncertainty and provide you with all the tools to prepare your business for sale.

This seminar brings to you an expert team of Business Professionals who will provide you with vital, practical and actionable information to assist you getting your Business ready for sale now or in the future!

Our three experts will discuss:

  1. How to value & sell your business – Market buyer’s value process.
  2. Taxation & Accounting Considerations – What you can do now to minimise tax on the sale of your business.
  3. How to avoid delays in the legal process - What can you do now before a buyer is identified?

 

Zoran Sarabaca

Xcllusive Business Sales – www.xcllusive.com.au

Principal of Xcllusive Business Sales / Most successful agency for selling $1m to $6m businesses / Author of ‘How to sell a small business’ / Winner 2014 Best Business Strategy Award / President of the Australian Institute of Business Brokers.

 

Andrew Webb

Andrew Webb Family & Business Accounting  - www.webbaccounting.com.au

Owner and Chartered Accountant / Andrew has a wealth of experience from working with rural and small business clients to Australian branches of global companies, and high net worth clientele / Providing a fresh take on accounting, Andrew is interested in peoples’ stories, and looks forward to meeting you, not just your business.

 

Peter Franke
Stacks Heard McEwan – www.stacklaw.com.au/heardmcewan

Director at SHM /Peter’s specialty is in Property and Business Law / An excellent problem-solver and negotiator who provides advice with a focus on client communication and building lasting relationships / His expert advice and knowledge has helped numerous clients avoid potential pit-falls and capitalise on best possible opportunities.

RSVP TODAY to Reserve your seat - Please book early as seating is limited.

 

Ways to Register:

Register here at Eventbrite  https://www.eventbrite.com.au/e/shellharbour-sell-your-business-with-certainty-tickets-37589521270

Email us at [email protected]

or call Sophie at Xcllusive on 02 9817 3331
** Lucky Door Prizes on the Night – So don’t forget to bring along your Business Cards and Questions for our Presenters **

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Free Seminar(Central Coast NSW – Wyong) : Exit Planning and How to Prepare Your Business for Sale

Exit Planning and How to Prepare Your Business for Sale

Tuesday 9th of May from 6.30pm

Wyong Golf Club

Arrive at 6.15pm for 6.30 start until 8.30 pm

(Refreshments on arrival and there will be further refreshments and nibbles following the event up until 9pm)

Thinking of selling, exiting or retiring from your business? This practical seminar will show you what you need to consider before you make the big decision. Selling a business is never easy, but this session will help you minimise the uncertainty and provide you with all the tools to prepare your business for sale.

This seminar brings to you an expert team of Central Coast Business Professionals who will provide you with vital, practical and actionable information to assist you getting your Business ready for sale now or in the future!

Our three experts will discuss:

  1. How to value & sell your business – Market buyer’s value process.
  2. Taxation Considerations - How to prepare your business for sale well before you put it on the market.
  3. How to avoid delays in the legal process - What can you do now before a buyer is identified?

 

Zoran Sarabaca

Xcllusive Business Sales - http://www.xcllusive.com.au

Principal of Xcllusive Business Sales / Most successful agency for selling $1m to $6m businesses / Author of ‘How to sell a small business’ / Winner 2014 Best Business Strategy Award.

 

Troy Marchant

Robson Partners  – http://www.robson.com.au

Director of Robson Partners and CA /  Director of Business Coaching & Development and runs the U Factor Coaching division where he shares his  global experience on how to grow your business, stay profitable and improve financial position.

Anna Cruckshank

Aubrey Brown – http://www.aubreybrown.com.au

Managing Director of Aubrey Brown, Anna specialises in Commercial law, working closely with clients from a range of industries including pharmacy, medical, registered clubs, building, childcare, hospitality and wineries.  Anna is also an accredited mediator, and an accredited collaborative lawyer, with over 24 years’ experience.

 

RSVP TODAY to Reserve your seat - Please book early as seating is limited.

 

Ways to Register:

Via https://www.eventbrite.com.au/e/sell-your-business-with-certainty-tickets-33232592579

Register here at Eventbrite

Email us at [email protected]

or call Sophie at Xcllusive on 02 9817 3331
** Lucky Door Prizes on the Night – So don’t forget to bring along your Business Cards and Questions for our Presenters **

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Free Seminars (Albury and Wagga) : Exit Planning and How to Prepare Your Business for Sale

RESERVE YOUR SEATS TODAY:

 

Albury, NSW | Commercial Club Albury

 

Tuesday, 21 March 2017 from 6:30 pm to 8:30 pm (AEDT)

Albury – https://www.eventbrite.com.au/e/albury-sell-your-business-with-certainty-tickets-31697536184

 

Wagga Wagga, NSW | Commercial Club Wagga

 

Wednesday, 22 March 2017 from 6:30 pm to 8:30 pm (AEDT)

Wagga – https://www.eventbrite.com.au/e/wagga-sell-your-business-with-certainty-tickets-31736030321

Exit Planning and How to Prepare Your Business for Sale

Thinking of selling, exiting or retiring from your business? This practical seminar will show you what you need to consider before you make the big decision. Selling a business is never easy, but this session will help you minimise the uncertainty and provide you with all the tools to prepare your business for sale.

This seminar brings to you an expert team of Local Business Professionals who will provide you with vital, practical and actionable information to assist you getting your Business ready for sale now or in the future!

Our three experts will discuss:

  1. How to value & sell your business – Market buyer’s value process.
  2. Taxation Considerations - How to prepare your business for sale well before you put it on the market.
  3. How to avoid delays in the legal process - What can you do now before a buyer is identified?

RSVP TODAY to Reserve your seat - Please book early as seating is limited.

Ways to Register:

Register here at Eventbrite above on the above links.

Email us at [email protected]

or call Sophie at Xcllusive on 02 9817 3331

 

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Client Testimonials

We always love to hear feed back from our Clients.

Most recently we heard from a Vendor who was looking to sell their family business and retire. After a very successful business sale was achieved, here is what they had to say about their Xcllusive experience:

We ran a very successful electrical, air conditioning & solar company on the south coast of NSW. We decided to sell our company, after months of talking and decision making, due to our age and wanting to improve our quality of life.

When I started looking for a business broker I researched and had quite a few teleconferences with companies who promised that they could help us out but Xcllusive was the only one which actually came down to actually see us for our initial introduction because they wanted to get a feel for what we do. Once we decided to sign with Xcllusive Business Sales we met out broker, Peter George, who also came down and he spent quite a bit of time in person and via phone and email to find out exactly who we were and what we wanted.

The process of dealing with Xcllusive was streamlined and thorough but I think the thing we liked best about Peter and the Xcllusive team was that they were pro-active in our search for a buyer. They didn’t just wait for the phone to ring they approached buyers to show them our company. And, in our case, we met the buyer within 6 weeks of our sales prospectus being completed. I would recommend Xcllusive Business Sales to anyone who is serious about selling their business. My husband and I are enjoying our retirement and are very thankful to the Peter and the Xcllusive team.

Kind Regards, Dee-Anne

You can read more Client Testimonials or get in touch with us over at: http://www.xcllusive.com.au/Testimonials.html

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NSW Business Chamber Webinar

 

 

We recently had the opportunity to present a Live Webinar in Conjunction with the NSW Business Chamber.

In case you missed it you can listen in via the link here : Webinar – How to value and sell your business with certainty

 

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