Business valuation can be a difficult figure to obtain because there are so many variables.
Business valuation models (methods) have been developed to make the process easier and more accurate. Some of the accepted methods include :
- Return on Investment (ROI) method
- Market value
- Asset value going concern
- Asset value liquidation
- Net present value
The most appropriate method of valuing the majority of small businesses (up to $1 Million) is through the ROI method. The technique measures the return (i.e. profit before owner’s salary) received from an investment (i.e. purchase price) and is calculated by the following formula:
Price = net annual profit x ROI % (for that industry)
For example: if a business is making $50,000 profit and the accepted ROI for that industry is 30% then the price equals $166,667.
Here are example ROI’s for different industries (information provided by GMO Business Brokers):
- Book Stores 20% to 25%
- Boutiques 75% to 80%
- Florists 70% to 100%
- Liquor Stores 22% to 28%
- Lotto Kiosks 22% to 28%
- Newsagencies 25% to 30%
- Restaurants (Fine Dining) 70% to 80%
- Lunch Bars 50% to 75%
- Manufacturing 25% to 38%
- Wholesale 27% to 35%