How Are Businesses Valued?

Mark Fregnan — Tue, 05 May 2009 08:41:03 +0000

Business valuation can be a difficult figure to obtain because there are so many variables. Business valuation models (methods) have been developed to make the process easier and more accurate. Some of the methods include :

Return on Investment (ROI) method
Market value
Asset value going concern
Asset value liquidation
Net present value

The most appropriate method of valuing the majority of small businesses (up to $1 Million) is through the ROI method. The technique measures the return (i.e. profit before owner’s salary) received from an investment (i.e. purchase price) and is calculated by the following formula:

Price = net annual profit x ROI % (for that industry)

For example: if a business is making $50,000 profit and the accepted ROI for that industry is 30% then the price equals $166,667.

Here are example ROI’s for different industries (information provided by GMO Business Brokers – September 2009):

Book Stores 20% to 25%
Boutiques 75% to 80%
Florists 70% to 100%
Liquor Stores 22% to 28%
Lotto Kiosks 22% to 28%
Newsagencies 25% to 30%
Restaurants (Fine Dining) 70% to 80%
Lunch Bars 50% to 75%
Manufacturing 25% to 38%
Wholesale 27% to 35%

About the author. I’m Mark Fregnan, founder of Kinetic Media & Marketing, an Australian consulting business that focuses entirely on making our clients MORE PROFIT WITH LESS EFFORT. We understand the financial and time pressures felt by small business owners especially in the new world economy. We rely on our proven marketing and business strategies along with smart systems to produce and maintain a healthy increase in sales and profit for our business clients.

Mark Fregnan of Kinetic Media & Marketing on Small Business Marketing » ROI

How Are Businesses Valued?