Determining Value of a Business

Determining the value of a business is a complicated task that can only be done by a professional who understands all the influences and criteria which affect the value.

Firstly the business needs to have its profit assessed. The profit needs to be determined on the most appropriate basis for the particular industry and the size of the business in question. For example, is the profit based on a pre-tax basis or post-tax?

Is it based on an under-management or owner-driven profit or on a couple owning and running it? Is it NPAT, EBIT, EBITDA, PEBITDA, or some other basis of profit calculation?

Clearly, the basis for determining the profit for a business with 1000 employees will be different from that of a roadhouse owned in the outback by a husband and wife!

Determining the value of a business is also based on the profit than being capitalised at a rate appropriate to the industry. (or an industry multiple being applied).

An engineering firm may have a capitalisation rate of 25% ROI (or an EBIT multiple of 4.0 times maintainable earnings) but what if this multiple is strengthening or weakening, how would you personally know? You need an expert on your side, someone who knows the market intimately and knows of all the latest sales and of all the emerging risk factors.

Determining the value of a business is a job for a professional valuer. An unassisted purchaser cannot hope to determine the value of a business on their own.

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The contents do not constitute legal advice, are not intended to be a substitute for legal advice, and should not be relied upon as such for any purposes. You should seek legal advice or other professional advice in relation to any particular matters you or your organisation may have.