Pricing right

As an example, we were recently referred a business that was primarily a service provider but also designed and built solutions for SOEs and large businesses primarily in the North Island. The factors we took into consideration in setting the value were as follows:

• One of few businesses we had seen where the result for the 2009 year was up on 2008.

• Vendor will stay on indefinitely as an employee to ensure successful transition.

• At least 30% of income is long-term contracted work.

• Significant barriers to entry with both the technical nature of the business and the market acceptance.
• Multiple income streams, no concentration risk.

• Quality debtor book with government departments, SOEs and large private sector companies. Over 90% of debtors inside 30 days and a significant portion inside 14 days.

• Great growth prospects on the table for a new owner to benefit from.

• No capex requirements.

After taking these factors into consideration we advised the owner that we thought a fair market value for that business would be set at 3.1 times (30% cap rate) 2009 EBITDA ($420,000) or 3.3 times (32.3% cap rate) three year average EBITDA ($453,000), which gave us a value of $1.4 million. This multiple/cap rate we believe is on the high end of what is achievable in the current market, but after taking into account the factors above we felt it was fair. When we marketed this opportunity we advised all parties that these were the factors we took into account in setting that multiple or cap rate. The business was on the market for 10 days, we had four offers and the business is currently in due diligence.

So if you are a business owner and wondering what the fair market value of your business would be, what factors might influence the value of your business and how you could enhance them and/or how you might go about selling your business, you should look at the factors listed above and see how your business measures up. Then you should call an experienced broker and get them to spell out the process and agree on a fair market value for the sale of your business. Conversely, if you are looking to buy a business, the factors above will help you analyse whether the opportunity is worth the asking price. You should always ask the broker to advise what factors and assumptions they took into account when setting the fair market value and asking price on the opportunity they are marketing.

David Newport is a principal at Switch Business