Business Valuation

To correctly value a business, one must resort to rather complex formulas. Western valuation of land, property, and businesses differs from the approach used by our appraisers. How to properly value a business — we'll explain that. In the Russian Federation this is approached somewhat differently. The West proceeds from the idea that an organization's turnover is the primary basis. For example, the English (more precisely, their business brokers), when speaking of the price of a restaurant, equate it to its turnover for four months. The price of a pharmacy equals its one-hundred-day turnover. In Russia the actual income of a firm is known exclusively to its owner. After all, costs vary for everyone, and these are not taken into account. Therefore it would be more appropriate to take into account profit rather than turnover. More specifically, the income considered "net." Taxes, expenses, fines, etc., should be deducted from the profit.

Nowadays investors often have to buy businesses that operate from rented premises. The price of such a business amounts to seven to eighteen months' income. But there are exceptions to this. An investor may invest an amount equal to thirty months' income. This price may seem excessive to you. But if you consider that it includes the value of the real estate and the equipment? In other words, valuing an enterprise is valuing its shares, vehicles, equipment, and so on. Often the highest valuation for such a business is based on 24 months' profit, and sometimes even 60 months' profit. Of course, everything is determined by the investor's goals. For example, if a business is bought with the intention of reselling it later. Thus, not everything is determined by profit.

The list of factors affecting value does not end there. Demand for the product and supply can influence it. The more customers a company has, the more expensive the business will be. The second factor is the type of business being sold. Sometimes a company's activities are very specialized. This implies the need for certain skills, meaning one will have to look for rare specialists, etc. Specialization also suggests that the customer base may not be very broad. It's worth giving an example of a nonspecialized business. A car wash — you wouldn't even really call it a company. What does it require? Getting cleaning supplies at the right time. You don't need specialists to wash cars well. Great business! It doesn't cost much, there are no difficulties. Investors are willing to pay more for it, according to the investors themselves. However, not everyone thinks so, which is actually good. Imagine — there are only car washes all around. The purpose for which an investor acquires a business is very important. There may be personal considerations that have nothing to do with money or profit. In that case one may overpay. Price also depends on risks and assets... You should also pay attention to motives. You may not be aware that the seller wants to part with their business because of a stronger competitor that has set up nearby. In most cases an appraisal firm provides other valuation services as well — car valuation, property valuation.