A business appraisal provides a business owner with an indication of the amount a business could sell for using three valuation approaches.
Ø Market approach – based on comparable sales
Ø Income approach – based on the net profit of the business and ROI to a purchaser
Ø Asset approach – the value of the assets held by the business
Other considerations in appraising a business are:
What are the barriers to entry? Would it be easy for a competitor to become established in this industry?
What is the risk profile of this business? eg. Relies on 1 or 2 clients, supplier contracts not in place, relies on owner etc.
How long has the business been established?
How unique is the business? Does the business have a well-defined "niche"?
What is the risk profile of the industry? Where is the business located?
What is the likely buyer demand?
Development Application (DA) Approval (if applicable)
Copy of your Lease
Demolition Clause Checked
Roster for average week, including Owners Hours
Lodged Financial Statements the past 3 and current financial years Including Profit & Loss
BAS Statements past 3 years
Do you own all the equipment? Yes / No
Are there any leases on the equipment? Yes / No
A completed business profile questionnaire
This depends on many factors. However, it ultimately comes down to how well the business is prepared for sale and buyer demand. A detailed information memorandum and all financial information must be ready before a business goes to market, without this buyers really won’t have confidence in making an offer on a business. We find that on average it takes 6 months from listing a business for sale to settlement. Obviously, this can very from industry to industry and the gap between what a vendor expects for their business, versus what the market is prepared to pay.
The true earning ability of the business is the adjusted maintainable net profit for the working owner (PEBITDA) or after a management wage (EBITDA).
PEBITDA = Proprietors Earnings before Interest, Tax, Depreciation and Amortisation EBITDA = Earnings before Interest, Tax, Depreciation and Amortisation. PEDITDA is sometimes referred to as SDE (Sellers Discretionary Earnings). Regardless of the acronym, it is essentially the net benefit to an owner operator.
As with all businesses, some expenses actually paid by the business are either of a personal nature or are a one-off expense, ie. an expense that is extraordinary, and in normal trading periods will not be incurred again. Add-backs normally include private financing costs, owners’ salaries, and depending on the type of business depreciation allowances. All financial institutions, including banks, take into account and fully accept items listed as add-backs, providing the add-backs can be verified and are reasonable. An add-back schedule will allow a prospective purchaser and their advisers the ability to recognise the actual operating profits of the business before personal expenses and salaries of the business owners.
The appraisal produces the capitalisation rate and multiplier of the adjusted EBIT, with return on investment based on the ‘Worth’ of the business. We use your financial statements, complete a business appraisal questionnaire, which also includes a SWOT analysis on your business. The appraisal produced gives you a range that we anticipate that your business could sell for in the current market.
A Valuation is a similar process to the above, however it can be costly, take several weeks to complete and must be carried out by a registered business Valuer. A business valuation is typically required for family law matters, or if there is a breakdown in a business partnership. SME Business Sales do not provide business valuations, however if required, we can refer clients to a business valuation specialist.
If you are planning to sell your business, a business appraisal is typically more appropriate than a business valuation.