A common method of valuing your business is applying the maximum capitalisation rate to the net business earnings. Sometimes, Earnings before Interest, Taxation, Depreciation and Amortisation is used (EBITDA).
The Earnings amount can be calculated from the financial statements, however the capitalisation rate is often more difficult to obtain.
When calculating the capitalisation rate things to consider include:
1. Stability of the earnings.
2. Reliance of business on the owners.
3. Are documented systems in place?
4. The level of competition.
5. The quality of the business and accounting records.
6. The stability of the business premises – type of lease is in place.
7. The age of the business.
8. Are customers repeat customers?
9. Are the customers loyal?
10. Are there a variety of suppliers to choose from?
11. Is there a variety of clients / customers or is the business reliant on a select few?
12. Is the business too reliant on a select number of employees?
13. Is it relatively easy to replace employees?
14. Is there growth potential in the business?
15. Are there costs to achieve growth significant?
16. Is the business in a desirable location?
17. Does the business offer desirable products and services that can adapt to changes in the economy and market?
18. Does the business meet all it compliance obligations with:
- Australian Taxation Office.
- State Revenue Office.
- Australian Securities and Investments Commission (ASIC).
- Workers’ Compensation.
19. What are the working capital requirements of the business, including:
- Debtors days.
- Creditor days.
- Inventory days.
- Cash Conversion Cycle.
- Work In Progress (WIP) days.
20. Are your professional advisors in favour of your potential purchase, i.e., your accountant and financial planner?
Once you have both your earnings amount and your capitalisation rate you can calculate your value.
For Example:
1. EBITDA = $450,000
2. Capitalisation Rate is 25%
Value of business is $450,000 / 0.25 = $1,800,000.
If you would like to discuss further please contact us:
McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com
