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How to value a small business??

  • 02-12-2012 12:57AM
    #1
    Horsecalf
    Registered Users, Registered Users 2 Posts: 1 ✭


    I am the joint owner of a small business. My business partner is selling his half of the business to me but Im unsure of how much I should be paying him for it. We dont have any official contract or anything like that. Anyone got any advice or guidelines on how to get an accurate and fair valuation...
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Comments

  • #2
    Peterdalkey
    Closed Accounts Posts: 2,091 ✭✭✭Peterdalkey


    The valuation of a business is not an exact science and it will depend on many factors including the type of business. There are two main formulae, the nett balance sheet value or a multiple of the profits, the price is generally the higher of the two.

    Assuming you each own 50%, it is unlikely that a 3rd party would by 50% of such a business, so there is not much chance of a competitive bid situation. If your partner is not active in the business but draws a salary etc, it would be reasonable to add back these costs to the profit figure.

    It is simply impossible to value the business without any numbers and business description or even cover anything but the basic methodologies. You could ask him what he wants for his share and then work out how long it would take you to recover the outlay. 2-3 years would be a reasonable figure in my opinion. Before you agree to anything I would urge you to take INDEPENDENT advice from an accountant, if you both use the same one, one of you needs to get a new one!

    Your situation highlights how important it is to have a written partnership or shareholders agreement in place for multi-ownership businesses. All this would be spelled out in the agreement.


    Cheers

    Peter


  • #3
    BenEadir
    Registered Users, Registered Users 2 Posts: 4,539 ✭✭✭BenEadir


    Horsecalf,

    Peter is right, there is no magic formula.

    Have a read of this article http://www.accountancyireland.ie/Archive/2005/February-2005/The-Multiple-in-Share-Valuations. It's only a couple of pages but hit's the nail on the head.

    Also, market estimates of the number of SME businesses put up for sale which actually sell range from 10% to 20% so bear that in mind also.

    Best of luck.

    Ben


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