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Valuation in the Volatile World Business buyers are buying the future income stream or profits of a business. Historic results are no guarantee of future performance. Financial statements will show past profits and trends but cannot tell you what will happen next year. Averaging figures for the last 3 or 4 years can be dangerously misleading, particularly if the business is experiencing a decline in the present downturn. The most recent results are the best indicator of the future but the appraiser has to make a subjective judgement as to what the future really holds. The current recession may well be deeper and longer than many anticipate. But the economy will rebound eventually and many businesses will emerge leaner, meaner and stronger from the experience. After every bust there is a boom. The challenge for the appraiser is to guestimate the future performance of the company, how much the downturn will impact results, and how much prices will be supported by the increased supply of buyers as unemployment rises. Business valuation is never a precise science. All valuations are opinions and the only true test of value is an arms-length sale in the market-place after a thorough marketing program. BEWARE BUYING A BUSINESS ON THE INTERNET! We are hearing some sad stories from people who have bought or sold businesses on the net without protection from their professional advisors or intermediaries. Owners risk litigation if they do not fully understand the requirements of the Employment Relations Act, the Fair Trading Act, and any relevant licensing or legislative requirements. They may be ill-informed as to the real value of the business, their warranties and responsibilities to the buyer ? and, worst of all, may be disclosing confidential commercial information to unqualified buyers or opposition! Buyers, also, are living dangerously if they buy a business off the net without adequate advice or protection. How do they check the claimed sales and profits? How do they ensure a suitable training and transition period? Do they receive a secure non-compete undertaking? What are they actually buying ? assets or shares? Have they security of tenure? And will key employees continue to work with the business? Professional business brokers add value to the buying and selling process. They have a fiduciary responsibility to the seller and an ethical responsibility to the buyer. They understand the problems and pitfalls and will protect both parties. |
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