***Advertisement: Ascent Partners 15 September 2010***
In the latest installment of his Q and A series, Ascent Partners’ Richard Rasmussen answers how to appraise a business when it is marginally profitable or making a loss.
Question: How do you appraise a business when it is marginally profitable or making a loss?
Answer: Unfortunately, in today’s environment I see a lot of printers in this situation. The value of these types of printers lies in the sum of the value of the assets.
The assets are basically made up of three components – Plant and Equipment, Goodwill and Stock.
1. Plant and Equipment
P&E values have deteriorated greatly in the last couple of years. So for many who have not kept abreast of what their equipment is worth, they may be in for a shock.
There are many ways to value equipment. Perhaps the two most commonly used are “market value” and “auction value”. Clearly, from a vendor’s point of view they want to get market value, as this will provide the most value. This is usually realised when the purchaser of the business wants all the plant and equipment in its existing site. Clearly there are a lot of trade based purchasers out there that want to pick the eyes out of the equipment, and let the vendor look after the sale of the rest, so the aim for a vendor is to find purchasers, at least initially, that pay market value.
Sometimes this is easier said than done. Aged equipment, for example, is very hard to get market value for. There are simply not enough local purchasers out there that want to buy this sort of business / equipment.
Also, frequently vendors will have a mix, where some are sold at market value and some at auction value.
Obviously due consideration needs to be taken as to what approach, or combination of sales approaches, is taken.
2. Goodwill
This is really the client list, but may also include the quoting and estimating system, the accounting software files, the cutting formes, the job bags, the artwork (electronic and hard copy) and the terms that the goodwill is passed over.
The terms that the goodwill is passed over are very important. Vendors need to think about what period of time they will work on to help in the transition. They also need to consider what payment terms, if any, they want to offer.
Even though a business may be marginally profitable, or perhaps making a loss, the goodwill component still has a value. In fact, for these sort of business, goodwill is usually the most sought after of all the assets. Its value is largely determined by the type of clients, the mix of clients, the spread of clients, the ability to hold, and perhaps grow the clients. Another consideration that will attribute to the calculation of value is what customer facing staff are able to make the transition to the new entity
3. Stock
Whilst you may not carry a lot of stock (paper and the like), Work in Progress (WIP) has a value, as does pre printed stock you are holding for a client. Most purchasers obviously take on the WIP, and standard / frequently used stock. Pre Printed stock can also be sold, but the purchaser obviously needs some surety that they can sell this stock.
So the sum of these three values (P&E, Goodwill and Stock) is what marginally profitable or businesses that are making a loss are worth.
Obviously if there are some extenuating circumstances, that have reduced the businesses profitability, these also need to be taking into account.
Once vendors know these values, they then need to work out what will be left for them after taking into account major items such as staff entitlements, liabilities, collecting debtors, paying out creditors and others involved in the sale of the business / assets.
Ascent Partners is the industry specialist in appraising business and advising how to achieve the most sales value. Phone Richard Rasmussen on 0402 021 101 for a confidential discussion