How Are Businesses Valued?
May 5, 2009 by
Filed under Buying A Business
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%
