HOW MUCH SHOULD YOU PAY FOR A BUSINESS?

AUTHOR

Bruce Coudrey

How much is a business worth? How much should you pay? The simple answer is that a business is worth what the market will pay for it. This is also the legal definition of value. But this definition doesn’t quantify the value of a business, or help determine what a business is worth.   Here is a quick & simple guide: When considering what a business is worth you need to start thinking about what kind of return you expect from your investment. It is usual for us to want to receive a return of between 25% & 50% on the investment. So if a business is earning $100,000 per year, on this basis it should sell for between $200,000 (50% return) & $400,000 (25%return on investment).

The next step to consider is risk. If a business is considered to be really “safe” and relatively risk-free a lower return on investment is usually acceptable. An example of this kind of business is a Post Office. These are considered to be safe, have government support, an exclusive area, no competition, and only trade for five days. Therefore, these businesses have a return of around 20% (or five times earnings).   Another kind of business is a café. These are considered to be less “safe” and therefore a greater risk applies. A café buyer will expect a 50% return on investment (or two times earnings).   So if the Post Office and Café are both earning $100,000 per year, the café will sell for $200,000 (50% return) and the Post Office will sell for $500,000 (20% return).   Be aware that businesses in capital cities will sell for more than in rural areas. Many specific industries have peculiar rules that apply to what they will sell for. Some examples are: Newsagencies, Taxis, Childcare Centres, Supermarkets, Franchises and Rent Rolls. Experienced business brokers, accountants and financiers will be aware of the market forces and what a business should be worth. It is recommended that you always seek guidance from a qualified professional to assess the value of the business that you are looking at.