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Valuing Businesses – Beware Average! BizStats™, the database of transaction data from actual business sales nationwide, is an invaluable resource for pricing or valuing businesses. It provides a 'point of centrality' and average ratios for various sectors. For instance, their stats tell us that (on average) cafes sell for 21.12 times weekly sales or accountancy practices sell for 66 cents per $1 dollar of gross revenue.These points of centrality provide comfort but are not conclusive. The appraiser needs to consider all the other factors that may impact on the value of the subject business ? location, security of tenure, personal goodwill, hours of operation, transferability of intangibles, industry trends, legislative changes, and so on. Many of these factors will be non-economic factors. This highlights the importance of obtaining full information on the history and operation of the business and careful analysis of the risks to sustainability of the earnings stream. As an example take two actual café sales: Café A Weekly Sales $19,233 EBTITD $350,000 Sale Price $550,000 Café B Weekly Sales $19,498 EBTITD $300,000 Sale Price $950,000 Despite lower profits Café B sold for a significantly higher price than A ? and the valuer drivers were all non-economic factors. This example also emphasises the importance of considering ?outliers? when appraising businesses and that the value of a specific business can vary greatly from the average. As always, all valuations are "opinions". Price may vary from value depending on the motivations and negotiating skills of the parties ? and the only true test of value is the market place itself. Nevertheless, a credible and defensible opinion of value will always be underpinned by full information. |
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