We were engaged to value a Window Manufacturing business for taxation purposes to see if the business complied with the parameters for the small business tax concessions. The client also had thought about selling shares of the company to his staff.
This was an interesting Valuation as it was an excellent business in an industry in which there was little demand from buyers for such a business. Due to this poor demand, many of the businesses on the market in this industry closed down after failing to sell. This business was in excellent shape. Some of the most positive aspects were:
– Trading for over thirty years, and profitable for every one of those years.
– Test on the balance sheet indicated the business was in a very healthy financial position.
– Owners withdrew from the day to day running of the business, allowing the business to function on its own. Therefore this opportunity would appeal to investors outside the industry, considering that the key staff were long term and loyal.
Adding to the complexities in valuing this business was the lack of comparable sales. Mainly a result of many similar businesses closing down and the vast differences in the operation of businesses within the same industry.
It was decided that the final figure was going to be arrived at by conferring with reputable business brokers who have experience in the industry and risk return analysis. The conversations with these business brokers provided us with a range of what the value of the business should fall between. Using that information, we were able to complete a risk analysis to determine a multiple of EBITDA to apply. The final multiple was towards the higher end of the range mainly due to the thee positive indicators mentioned above, thus financial institutions would be more likely to lend to someone looking to purchase this business.
The next main challenge was determining the EBITDA. Normally this process is not too difficult, however due to the building boom experienced in Victoria circa 2009, the profit margins for those years were much higher. If you were only to look at the last three or four year financials, you would be easily convinced that the business was in a state of decline. Digging deeper into the financial history of the business, we discovered that of recent years (post building boom) the business profits had returned to levels experienced just prior to the building boom. As a result this gave strength to the conclusion that the last two financial years which had shown similar EBITDA were maintainable. An average of the two was decided and the multiple applied arrived at the Value of the Going Concern.
In terms of the valuation of shares to sell to the employees, your accountant should always be the first point of contact. However, a simplistic way of looking at it is that a business is an asset of the company. Thus the business in this case was valued as a Going Concern = goodwill + plant & equipment. Therefore, the value of the shares, in this case, was the value of the Going Concern, less the value of the plant & equipment (as this is already accounted for in the balance sheet) + work in progress & stock + Net Assets.