Business Valuation

Business Valuation Methods

Business Valuation Services

The equation: WILLING BUYER = WILLING SELLER will determine the price, terms and all other variables of a successful transaction.

It is important to point out that a “willing buyer” in this context is also the buyer with some cash, a strong balance sheet and the ability to raise finance from a financial institution and above all business acumen. This is what we would define as a QUALITY WILLING BUYER.

A willing seller in turn is willing to sell at a price where the market see value. Every business in the market is for sale but it is only sellers that are willing to sell at the market price that can be defined as a QUALITY WILLING SELLER.

At Tri Source we assist sellers to meet most of these requirements proactively which will result in the business being considered by many more willing, interested and capable buyers.

How to Value a Business

Almost all products and services available in the market are defined by many sellers and many buyers of the same product. This is also the case with shares listed on the stock exchange.

Many buyers and many sellers define and pinpoint the price daily. Every unlisted business is however unique in this regard where there is normally only one seller. When the business is sold successfully it is most often also to one buyer.

With our extensive experience in the market and large data base of potential buying and selling participants we strive to bring interested parties together to unlock synergies.

With our trial and tested methodology of negotiation we define the transaction value in the absence of a proper market place.

Company Valuation Techniques

Various formulae can be used to guide the buyer or seller towards a possible selling price.

Fundamental factors in Valuating a business

It is extremely important to understand that formulas only consider some fundamental values in the business. These would include profit, return on investment, assets and other factors that can be measured and expressed in Rand and Cent.
Some of the formulae which can be used to guide the “fundamental” price of a business are:

  • Price to Earnings ratio or P:E.
  • Return on investment (R.O.I)
  • Extra earning potential (E.E.P)
  • Net discounted cash flows (NDCF)
  • Net Asset Value (NAV)

And various others…

It is important to realize that sentimental value could often play a more important role in valuing a business than fundamental factors.

At Tri Source we understand these factors well as a result of years of experience and address these extensively in our consultation with businesses. These important sentimental valuation factors cannot be quantified other than testing it in the market place.

Sentimental values in Business valuations

Formal market places can often react violently on some political or financial information. When a set of formulae are applied to the individual companies they are unlikely to alter the price of the when applied. This is a typical example of a sentimental value effect.

In the small business environment there are almost too many to mention but the following are some examples:

  • A business with old technology compared to a business in the same environment using the latest technology. Consider old printing presses to a business with new digital printing equipment.
  • General economic sentiment: The “pre-recession and post-recession” valuations are for example completely different. It is always best when a business can be sold at the top of the market cycle but it is sometimes also difficult to tell if the near future (2-5 years)
    is going to be better or worse.
  • Compare a business in a recently developed business park with a one in the worst part of the CBD….
  • Compare a business which is running at capacity where significant amount of investments is required to expand to one with lots of growth opportunity without significant capital requirements.

Read our article: Business valuation, is my business an asset?