To ask you how businesses value a business?

[crocodileindenial]

This is a really strange question. If someone was selling a business (not a property but the concept of the business, name, any remaining stock, if relevant) then how do they put a price on it?
Is it to do with turnover, profit etc? How do they come to the figure? Are solicitors involved?

Isn’t it 4 times the turnover or something like that

@LovelyQuiche annual turnover?

It’s usually a multiple of EBITDA (a proxy of profit). The multiple will depend on the sector the business operates in. Then it’ll be adjusted for cash/debt in the business.

In some types of business it might be based on the asset value of the business.

Accountants would usually do valuations instead of solicitors, but would depend on the context.

Usually a multiple of EBITDA (earnings before interest, tax, depreciation and amortization).

I think multiples of sustainable EBITDA is a fairer method.

Turnover is pure sales, if doesn't take into account the cost it takes to generate the sales etc. Business could be loss making or sales could be unsustainable etc

Multiple of EBITDA (could be 3-8 times). The actual multiple depends on several factors. You need to do more research on the business in question.

Well, like anything else it is worth what someone is willing to pay for it. Effectively you are valuing future profits, the customer base, the brand, whatever else it offers as an entity you could control.

Typically yes, for large businesses there is a multiple which is somewhat dictated by the sector the business operates in, which is a multiple of ebitda - earnings before interest, tax, depreciation and amortisation - which is a measure of a companies profitibilty.

Of course other factors taken into account such as uniqueness of intellectual property, barriers to entry, staff turnover - all sorts - which make a business attractive or otherwise

Yes you will need legal support for any sale of significance, but in terms of the price - as given you are asking I am assuming this is a small business - you can negotiate whatever you want, there are not any set rules. Even with large companies it is just convincing someone to buy or sell at a particular number

Good luck!

I was just going to say brand. That's a big one.

This is not my business, I'm just curious!
Who buys a business? Are there investors who just buy small businesses? What if the business is failing?

In theory the value of a business is the net present value of the cash flows that it will generate from now until the end of time. The calculation uses a discount rate to indicate risk and the time value of money ( ie a rational investor would rather have a pound now than be promised a pound in a year’s time). Multiples of EBITDA is a proxy for this.

Well why does anyone do anything? It's a bet. Someone sees something in it they think they can do better?

There are investors who buy distressed businesses and either strip the assets or try to turn it around- ie they think they have a better idea of how to run it, or possibly they can leverage some business they already have and so combined they are more profitable.

Lots of larger companies have M&A divisions (mergers and acquisitions) who will keep an eye on the market for companies who are doing things they're interested in - such as developing technology they think they can use, or manufacturing something they buy in bulk so could do with bringing in house. The company I work for has an M&A division and they deal with the bits I've mentioned above and loads of other bits, some of the things they talk about are fascinating.

If a business is failing (due to something like cash flow) it doesn't mean they can't have something of value like an IP (intellectual property) or similar that a larger company could utilise. Some other investors come in to asset strip or think they might be able to turn around a failing business.

Although EBITDA and similar calculations can be used to value the ££ of a business, there's so much more that goes into it. It's a really interesting sector to work in from what I've heard!

Who buys it? Someone who thinks they can make money out of it.

Are there investors who exist to buy busonessese? Yes there is an absolutely enormous industry which exists exclusively to do exactly this - buy business to strip the assets, milk them for profits, wind them up to take the out the market, buy at a price they think is cheap to sell at a later date...

What if it is failing? If they think they can turn it around - of course. Buying a distressed business is a risky but highly lucrative industry. Lots of recent well known examples of high street brands sold for nominal amounts - why? Because someone thinks they can make it work despite the debt - perhaps they own a similar business already so don't need the failing infrastructure and can run it more effectively and as such make a profit.

Not much different from buying a run down old house - for the right price you can sell anything vaguely viable really, just need a buyer with some cash and a vision!

Thanks all, this is really interesting

Its pretty complicated but you'd start with an ebitda multiple based on industry standards however there can be loads of adjustments for :

• growth potential
• usp's
• particular assets the business owns
• synergies the purchaser expects to generate through combination with their own business
• tax factors
• regulatory impacts

A failing business is unlikely to be worth much although sometimes a purchaser thinks a product or service is fundamentally good and will perform better with the right management. buyers may want to buy up assets or brands, or pay something to bring over key entrepreneurial individuals who hold relationships.

You can expect an eye watering invoice in the morning billed in 6 minute increments for all the great advice from the finance and consulting crew you summoned with such an enticing rhetorical business question

You can have as many formulae as you like but at the end of the day it's worth what someone is prepared to pay for it.