I am often asked about a rough idea of what a company is worth.
It is an interesting question, but not one that can be answered in a meaningful manner without sacrificing business specificity, since the valuation of a real world business has many variables, including industry types, different market sectors and individual levels of profit and risk that make any prophecy of asset valuation as reliable in the result as taking a trifecta bet on a track. This is particularly true in relation to a privately-owned securities if the business is built as a private company or as a sole trader.
Apart from their annual tax return, privately owned companies in Australia, they are not required to provide financial reports with any statutory body or publish any details about their public sector activities. With listed companies listed companies, there are more data for an enterprise valuation company to analyze in terms of share prices, price to performance ratios, historical results and annual reports. Comparisons can be made between these indicators to determine a range of valuation methods.
However, private companies are as different as fingerprints - no two companies are the same, as they are generally built-in around the companys owners. Business analysis and valuation of private companies must therefore, in addition to a study of the finances, include a detailed risk assessment and take into account the return on investments that the business makes for the owner and the capital cost to purchase the business.
What should you look at when you want to value a company for sale?
In general, many small and medium-sized businesses SMEs focus on corporate valuations on Return on Investment ROI. This is usually expressed as a percentage percent and is a measure of the risk of an owner compared with return. For a privately owned company in Australia this should be between 20 percent and 50 percent. The closer to 20 percent the more safe business investment - the closer to 50 percent, the more risky investments.
An enterprise valuation report showing a return of 20 percent indicates that it is unlikely to generate an investment or if a bank would not borrow funds to buy - simply the return would not suffice due to the liquidity - or the ease of conversion to cash to motivate the investment and a return of more than 50 percent would indicate that there are significant risks that would be outside the comfort of most investors and financiers.
As a general rule, private companies and valuation of private-sector companies tend to be based on historical economy with valuation of intangible assets based on adjusted net profit before tax - called EBIT Earnings before Income Tax
Adjustments are made to the auditors prepared finances to repay any operating expenses that are discretionary to the owner, plus book costs as depreciation of P & E and any abnormal one-off costs as a non-recurring debt to arrive at the actual net profit before tax of the business.
There are multiples of this net result, tempered by the companys risk profile and the return rate that determines the companys value. But while most people ask for a private or corporate valuation, its PRICE that they really want to know. Value and price can be two very different numbers. What is the difference between Value and Price when you want to value a company for sale?
When valuing companies where the reason for the valuation is for reallocation of shares to a Management Buy In, the price-fixing must relate to the market is the sales market for this type of business up or down? So that a base price can be determined at that time even if it does not any real sale of the business.
Similarly, in corporate valuation for divorce where it may ultimately be an external transaction to sell, but in some cases, a party wants to retain ownership of the business and buy the other party. In this case, both parties want to know Fair Market Value for the business so that they can settle even though the business is not actually sold.
Basically, Value can be based entirely on hypothetical theory, while price in true meaning can only be based on what the market should pay.