One way of determing the value of a business is by calculating how long  it will take for the potential buyer to pay off their purchase using the profits of the business.

If the market will accept a maximum capitalisation rate of 25%.  This means that they expect the potential owner will expect to pay off their capital investment / their purchase price in 4 years.

For example:

Sales                            $3,000,000

Direct costs                  $1,500,000

Gross profit                  $1,500,000

Indirect Costs                $1,000,000

Net Profit                      $500,000

Using the Capitalisation rate formula = Earnings / Market price of business

This formula can be rearranged to Market price = earnings / capitalisation rate

$500,000 / 25% = $2,000,000

Therefore the business will be valued at $2,000,000

If you would like to discuss further please contact us:
McNamara and Co - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com