We were engaged to Value a Plumbing Business as the owner wanted to ‘buy’ the business and run under another entity that he owned. The owner needed to prove that he paid ‘fair market value’ for the business and thus it was our role to assess what this figure would be.
Adding to the complexity of this job was that he (the owner) only wanted to transfer or buy part of the current business. The business itself was a Plumbing and Construction Business and the owner wanted to know the value of the plumbing aspect. Originally the business was plumbing focused and recently became involved in construction, this saw the business grow considerably, but not without its drawbacks which our investigation uncovered.
With assistance from the owner and excellent financial records we were able to separate and itemise the income, cost and expenses directly related to the plumbing aspect of the business. What we found was whilst the business as a whole was making great profits, the plumbing aspect of the business income was decreasing rapidly and profitability was very small almost non-existent. The business had been a victim of its own success and as a result the cost on jobs and wages had spiralled out of control. Recent efforts by the owner and management to implement a procedures manual with systems and software support has shown some benefit but at the time of investigation this still needed time to provide results.
In an effort to eliminate the impact construction has had on the business, adjustments were made to the financials to reflect what ‘normal’ costs and wages would be for the plumbing business. Ultimately, whilst this exercise did show the plumbing business making a profit, it was not deemed significant enough to cover the wage of an owner and provide a return on the investment.
As this business has a good solid trading history it was clear that at the time of the investigation and ultimately the purchase, this business was not prepared or ready for sale. It’s potential pool of buyers would be limited to those whom already had a construction business as the plumbing aspect had developed reliance on the construction income to keep it going. Whilst one could argue that this is feasible, a common sense approach suggests that the time, effort and money required to re-locate, re-train and implement this plumbing business into another would not provide a satisfactory return on investment to make it worthwhile.
Thus our final conclusion was that the business value was equal to the sale value of the plant and equipment it owned.