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The Art in the Science of Appraising Businesses

Thursday 9 June 2022, 10:10AM
By Media PA
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Appraising a business is as much of an art as it is a science. The financial results (i.e., revenue and profitability) will always underpin the business value. However, as most people appreciate a business is more than just numbers. 

There are often several key non-financial factors that can drive and enhance business value. Whilst some are common across many industries some business segments have their own drivers just related to that sector or business. 

Non-Financial Aspects to Consider when Appraising Businesses 

The key to appraising a business is to have an experienced business broker conduct a market value appraisal so that you (the Vendor) know what the enterprise is worth. 

So, what are we evaluating besides the standard financial returns of the company? These non-financial aspects are taken into consideration when determining a business valuation. 

1. Sector and Industry Risk

Many people use the terms sector and industry synonymously, but "sector" is actually a broader term. Industries are more nuanced and focused on a specific area within a sector. The sector a business operates in and the industry for which it conducts business may impact the value of an organisation. Niche businesses with little competition will obviously attract a higher value.

Purchasers will form a view of the risk of operating in a sector or industry i.e., Retail and tourism/events businesses during Covid Lockdown periods. That risk can have either a negative or positive weighting on any final calculated business value

2. Company Location 

Location can impact a business's valuation because the cost of doing business varies in different parts of the country. Also, customer access, cost of living, lease costs, trading volume and cost of the transport of materials in and finished goods out can be a function of location and therefore a further factor that would differ between two identical businesses in different locations and ultimately impact on sale price. 

3. Processes and Documented Systems 

Well-documented systems are like the roadmap to a business's success. They are the set of instructions that tell you how to run a profitable business. 

Hours, days, and sometimes years go into creating and refining these processes. Yet, the value they bring to a company far exceeds the labour costs of those who helped develop them. 

Would you purchase a new device that did not have a user’s manual? Then, why would you consider buying a business that did not have a detailed set of procedures, policies, and protocols? 

4. Owner's Role & Length of time in Business

How much the business relies upon the owner is a major risk factor for a buyer. If the business has a good staff structure and customer relationships are well documented or spread around the team, there may be less risk and more intangible value and goodwill available. Another factor is the length of time the business has been operating. This usually means we can see a long-run average of revenue and profitability, and this can provide comfort around the future maintainable earnings of the operation.

Best Way to Determine a Company’s Value 

As a business owner (or prospective buyer), it can be challenging to understand all the facets involved in appraising businesses. An experienced broker can analyse and utilise financial and non-financial factors to determine the presumptive market value. 

LINK is the largest business brokerage in New Zealand and is the established authority on selling businesses. 

What many business owners don’t often understand is that there is no standard multiple of earnings that can be applied to the profit of the business to establish the likely market value

We have a comprehensive database of its historical business sales across all industry segments to provide comparable sales data. 

In fact, 95% of our listed businesses sell within 10% of their appraised value. That's why our clients work with us. They know we connect the best business sellers with the most suited buyers. 

Rick can be contacted at:

LINK Business Brokers – Waikato

22 Naylor Street, Hamilton East, Hamilton 3216

M: 021 991485

E: rick.johnson@linkbusiness.co.nz