Small business evaluation

[RedlineBrett]

Does anyone know a good resource that outlines common practices for small business evaluation?



I would like to put a value on my business outside of my real estate assets with an eye to either raising funds based on its performance or securing debt corporately. I also need it for my personal net worth statement to assist with qualifying on commercial loans.



Also, a few of the properties I have been looking at lately come with the businesses operating out of them, and I need some help in skinning that part of the deal.



I have heard 10x revenue as a loose term, but I'm looking for something better. Feel free to PM me if you want.

 

[bizaro86]

10x revenue seems pretty aggressively high to me. Unless you meant 10x revenue to the owner (aka profit) or something like that.



There are a number of books written about valuing small private businesses, one I'd recommend is here: http://www.amazon.ca/gp/product/1889150479



Also be cognizant of the fact that if you limit your potential market to people who have the specific professional expertise to operate your business, you'll get a lower price. Another great book that talks about that is Michael Gerber's E-Myth Revisited.



Regards,



Michael

 

[housingrental]

10X revenue = exceptionally unlikely in most business, especially smaller ones, unless significant growth expected / valuable patent / cash in bank etc..



It will depend on the particular business and area. A phone call with commercial broker that specializes in this in you area will be the fastest option. They are accountants and CBV's that are fee based and can provide you greater analysis but will be material $'s. If you have a personal interest in this you can pickup many books on business valuation at chapters etc.. as a starting point - but this will give you a tool set to analyze further not knowledge of what a dry cleaners in 2012 have sold for in a certain area of Calgary and why.

 

[Rickson9]

10x rev is way way way too high. If you get an offer like that in writing, you should lock it up straightaway!

 

[bizaro86]

The two reasons you want to evaluate businesses have different goals, which is in important point, imo.



Your "active" business has a balance sheet value that you'd like to know. You can use it on your balance sheet to boost your net worth for qualifying, in which case you want the highest number defensible. It might also help you understand the things you can do to increase the value of your business.



In terms of buying businesses with the properties they're in, I'd question whether you intend to own and operate these businesses or sell them on to an owner/operator. If the second, I'd be very careful with anything other than a business which anyone will think they can run (c-store, fast food, etc) as it gives you more potential buyers to market the business to.



If you intend to keep these businesses, I'd recommend making sure that owning a dry-cleaners (or whatever) gets you closer towards you goals, and would be a good use of your time.



Regards,



Michael

 

[Thomas Beyer]

Revenue is not the key figure, profit is. Assuming profit includes a reasonable wage for owner or someone that will replace the (selling) owner as a broad rule of thumb three times profit is a good valuation base .. More if rapidly expandable due to competitive advantage, less if business is the owner. Some businesses have no value without the current owner.

 

[RedlineBrett]

Thanks guys. Some good insight here.



Appreciate the replies.

 

[ChrisDavies]

Brett, I met a pretty good business broker the other day. Give me a shout and I'll pass along a couple names.

 

[TangoWhiskey]

Some time ago I was looking at targeting owners of light industrial properties who owned both the business and the RE and wanted to sell both to retire. The model I looked at was buying the RE and selling the business to the employees (or a top employee) and then leasing the premises back to the new buyer. I was amazed to learn that the multiple of net profits a business might trade at is as low as 2 times, and in some cases 0-1 depending on the complexity of the business and how well prepared for sale it was. Compare that with an apt building where you're looking at 8-16 or more x NOI. Truly the value is in the real estate and given the complexity of organizing such a system I gave that up to focus just on the RE.



In a business like RE I would be surprised if there was that much value placed on a brand given the low barriers to entry for competition, although Redline seems to have quite a unique niche and considerable success.

 

[RedlineBrett]

[quote user=TangoWhiskey]In a business like RE I would be surprised if there was that much value placed on a brand given the low barriers to entry for competition, although Redline seems to have quite a unique niche and considerable success.


I agree that the low multiples of net profit make more sense. Branding in RE is important but very few realtors ever think about what they are going to do when they want to exit the business. There is a reason you don't see me branding myself personally and why I am in my own outfit rather than a bigger brokerage.



I personally have seen a much higher ROI on dollars invested in my business than in my real estate projects in the last couple of years. But I suspect that's largely because we were small. Now things are getting more serious as we need a much bigger office, I have staff reporting to staff, not me etc. My quest to put a value on the business is more for an internal compensation model - IE the issuance of private shares to employees / partners / investors. You can only pay so much salary, but an equity component would work well and help retention which is so vital. But you need to be able to put a number to something and I think such a model would be received better if it came from industry practice rather than what the boss says.

 

[Thomas Beyer]

[quote user=RedlineBrett]industry practice
Industry practice is to value a business on multiples of profit. Say your profit is $50,000 year even if you left and were replaced by a hired person. Then the business is worth about $100,000 to $250,000 depending on how sustainable this $50,000 is. Higher if in high growth market with upside potential, lower, to zero, if not sustainable or easily cloned or heaviliy reliant on the owner.



I would be very hesitant handing out equity or shares. Give that only if they actualy contribute to the growth of the firm. A better option is to offer then opportunity to invest cash, i.e. buy shares at 15-50% off so that the business can grow. Shares handed out for free with an unknown liquidity event have little value to you and the employee.



Rather institute a profit sharing plan, say of revenue exceeds X you get a bonus of 10 or 20% of your salary.

 

[Albertritchot]

The Chartered Business Valuators is a group of individuals that can provide valuations for business.














https://cicbv.ca/cbvs/














This particular link should provide a list of CBV in the Calgary area.














https://cicbv.ca/find-public/?action=search&sq=Name%2C+email%2C+company%2C+bio+keywords&country=CA&province=AB&city=Calgary














In terms of books, the following might be an interesting read:









http://www.castore.ca/product/purchase-and-sale-of-privately-held-businesses/129

 

[RedlineBrett]

[quote user=Albertritchot]

The Chartered Business Valuators is a group of individuals that can provide valuations for business.


Very cool! Thanks for posting. I'm going to look into this. Looks like they can basically do a professional appraisal on your business which is exactly what I'm after.

 

[MaximeValmont]

Don't even try to find the value of your business. You will end up way off, except if you are a CFA or a chartered in business valuation. It's way more complicated than just having the profit. You need the good multiple at which all the segment of your company sells at in the area you are at. You are a broker, manager and investor, these are 3 different businesses. Three different multiples.



It takes 7-8 of university in Finance to be able to do it properly. Same to evaluate commercial properties. Way more complicated than just knowing the cap rate and the revenues. Wayyyyy more complicated.



For a small business like yours it's going to cost like 1000$ maximum anyway.





Valmont

 

[Thomas Beyer]

[quote user=MaximeValmont]

It takes 7-8 of university in Finance to be able to do it properly. Same to evaluate commercial properties. Way more complicated than just knowing the cap rate and the revenues. Wayyyyy more complicated.
Of course it is not easy valueing a business, but in the end it is about finding a price that someone is willing to pay for it, and that of course is a function of not only the revenue and profit, but also the location, the area, the upside, the sustainability of the revenue stream with a new owner, the brand, the employees, the systems in place, the interest rate environment etc.



Commercial buildings are far easier to assess, manage, finance and value than a business, and that is why they trade by and large for low CAP rates (4-12%) whereas most businesses who require far more involvement once owned trade for 12% to 50% "CAP rates" i.e. multiples of 8 to usually around 2-3, maybe 4-5 if stable.



This is btw, the preferred way for big firms to grow: they buy small firms with a low multiple, as big firm trade for bigger multiples. So if Microsoft trades for a 12 P/E multiple and buys a smaller software firm with a 5 multiple for say $100M they immedietly made $140M as the new combined firm trades at the new multiple of 12, or $240M, up $140M.

 

[MaximeValmont]

I agree with everything you said,



But I don't business valuation is harder than Real estate valuation. Evaluating a house can be harder than appraising a corner store, specially in high end houses where comparables are hard to find.



And commerial real estate is extremily hard to valuate, way more than most business in my opinion. Let's take an office tower downtown Calgary. I not only have to calculate alot, but also have to read ALL the leases in the building. I have to know what kinf of tenant is there, if his business is healthy, etc. One specific clause in the lease can make ALL the difference.



In commercial, the value is in the lease. So you almost have to valuate the business of the tenant to get to the value of the building. Shopping centers are probably the worst IMO.