We were engaged to assess the value of a small concreting business to assist in a marriage separation.
The first issue we confronted was the change of ownership structure. Historical financials provided were in the form of a Sole Trader ownership. In July 2015 the business changed to a Company ownership. It is unlikely that this change of ownership structure would change the final valuation result as:-
- The business value is based on a hypothetical sale of the business. Therefore a hypothetical purchaser could purchase the business in any structure they deem suitable for their purposes.
- Necessary adjustments were made during the investigations to remove ownership structure impact on business value.
What was evident from the outset of this investigation was the co-operation and excellent documentation on the financial position of the business. Experience suggests that the market is prepared to pay slightly higher figures for businesses that have maintained and have readily available financial records.
The difficulty with this type of business is that it is very hard to find records of similar businesses that have sold. Most of these types of businesses tend not to sell, they are rather passed down or wound down as the owner/operator approaches retirement, in which the physical assets are sold off. The low barriers to entry for this type of business also means many just start up their own similar business rather than purchase an existing business.
It would be a strong case to argue that the business assessment should be based on an asset valuation. I.e. the business value is equal to the value of the plant & equipment.
Given the longevity of the business, it’s relatively stable income, and the fact that it does have a contract with the Bass City Council, it was felt that there could potentially be some goodwill in the business that the market would be willing to pay.
As a result of the difficulty of finding data on similar businesses that have sold, a risk return calculator was utilised to produce a multiple that could be applied to the Future Maintainable Earnings. This calculation produced a multiplier and when compared to other smaller type building businesses sold, this multiplier was within range and thus was adopted.
A number of different approaches were utilised in order to determine a Future Maintainable Earnings Figure. This did include forecasting results for 2016 which showed a potentially higher profit to previous years. Ultimately whilst all approaches produced different results they were all around the final opinion of value. An average from all the concluding calculations was used to arrive at a final figure.
If we can help you in assessing your business please Contact Us for the first step.