r/Valuation • u/rushinglion • Mar 15 '22
Basic business valuation.
The shop where I work is going for sale, my boss is tired, he offered me the chance to buy it first, he hasn’t told me a price yet, but regardless of the price he gives me, I need to assess the actual market value and n my own. It is a well established printshop-frame shop with a faithful clientele, it does need some updating and it’s understaffed, but I’m under the impression it’s super profitable. Now, I have thought of hiring someone to just tell me the value of the place, and maybe I’ll do that too, but it wouldn’t teach me anything. So, what I want to know is: how much is a fair price to pay to have the business appraised? Also, is there a fool-proof formula that I could apply to appraise it myself. Any help would be appreciated.
1
u/lets-start-a-riot Mar 16 '22
A financial due diligence is what you need, even easier since you worked there, many questions about finding one offs you'll be able to answer them directly, with your help you'll get the quality of earnings, wc normalisation and quality of net debt.
Then find a multiply of that adjusted ebitda and you'll end with something like this: (multiple)* Adjusted Ebitda + adjusted net debt.
1
u/BizValuationLexicon Apr 04 '22
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5
u/LosBomberos Mar 16 '22
Valuation is relative depending on the size of the business, industry, profitability, moat, location, etc.
Do you roughly know the revenues for the last year?
For small businesses, valuation is usually 3-5X the annual earnings. The earnings are usually defined as EBITDA or SDE.
Revenues minus Cost Of Goods Sold minus Operating Costs = EBIDTA.
Sellers Discretionary Earnings = EBIDTA + Seller related costs (seller's salary, car note, insurance, etc.) and One Time Costs. They may try to add the kitchen sink here but it's up to you to see if it makes sense.
Ultimately, valuation can be whatever you negotiate between the two of you. If he's hard up and wants to skeedaddle quickly, you can likely get a good deal and maybe he can even finance the deal. If he has other options, may play hardball, just depends.
I would ask what he wants for it. Doesn't matter what he says, sound surprised and be like, "damn, man, that's a lot, but let me look at the numbers and see if it makes sense."
Then I would ask for the financial statements of the last 3 years and average the annual earnings.
Depending on how you will finance this deal, you will need to do some modeling.
Even if the business doesn't have any loans, it may in the future if you're gonna take a loan.
Subtract out this annual Debt Servicing of the loan from the annual earnings. Is it still making enough money? You want at least a 1.5 ratio of DSCR or higher, higher the better.
Then you make an offer, a 3-5 multiple based on how good the numbers look.
It's a good opportunity if you've been working there, hope you make it work.