Written by Gary Johnston

To determine a business price or "what you should pay for a business" a number of factors have to be considered, generally speaking, a result is normally achieved by the negotiation of a transaction by a willing Seller and a willing Buyer.

1. Basically there are 4 levels of business, simply defined as follows: :

a) Greenfield
b) Buy a job
c) Small to Medium sized businesses
d) Merger and Acquisitions


Definitions:

Greenfield

"Greenfield" is commonly known today as "A Business Start Up, which may be something simple as a lawn mowing run, domestic services such as window cleaning, general cleaning, home cleaning, dog washing etc. Sometimes it's a retail store, or a hospitality concept.

Don't be afraid to implement an idea as millions of business entrepreneurs have opened their businesses via the Greenfield concept. The biggest problem is sometimes the time taken to get the idea off the ground.

Buy a Job

This heading usually means a business operated by a sole proprietor or partnership - usually and husband and wife team. The average price range is from $40,000 to $100,000. These types of businesses rarely achieve greatness, as they generally require small levels of investment to commence and rarely offer any protection to a Business Buyer and or the Owner. The main problem being personnel - they can also open a business in direct opposition to you and sometimes even procure your existing customers.

Small to Medium Sized Businesses

This business type employs personnel, it can be operated either partially or under full management by personnel, usually provides good lifestyle privileges' and a stable profit line. Prices range from $100K to $900K+

Mergers and Acquisitions

The top end of the general business opportunities market, these businesses usually attract a price of in excess of $1,000,000 but can be as high as $10,000,000. Usually operated under management by senior personnel, these businesses have long term histories, stable trading, secure trading policies and customers; they generally provide exceptional profits and lifestyles for its owners.

Multiples - A word used widely in the market place

Is simply defined as "the number of times EBITDAPE"

EBITDAPE - is defined as Earnings before income tax, depreciation allowances and proprietor's earnings. Sometimes a largely used and open-ended statement!

Buyers and Sellers have to be reminded of one simple fact of life - A Seller will always want to sell at a maximum price while a Buyer will always want to purchase at the lowest price - after all we are human!!!

The Sellers

Most Sellers price their businesses at a value which in their mind reflects to them what the business is worth - the problem being, that sometimes this value is so over-inflated that it only causes disruption to the business, ruins its brand name and the reputation of its owner. Sometimes a Seller thinks that if the business cannot achieve his/her price then it's not worth selling - I suppose one could say - each to his own!

Some Sellers have the terminology "Multiples" stuck in their mind - A very interesting topic that requires large amounts of time, expertise and knowledge to openly debate and define accurately.

The general industry benchmarks for the utilization of "Multiples of EBITDAPE" are as follows:

Post Offices a multiple of 5 - 6 times
Child Care Industry " " " 5 times
Management Rights " " " 4 - 6 times
Newsagencies " " " 2.5 - 4 times
Wholesale, Manufacturing from 2- 4 times
Retail .5 to 2.5 times

There are always a number of factors that determine the actual business value, and each business is an individual, therefore the above table is only to be used as a guide.
Simple factors such as the annual increase applicable to a premises lease - a CPI annual Increase or 5% annual increase, normally the CPI annual increase is a more attractive proposal to a buyer and as such this can factor alone can have an effect on the sale-ability or attractiveness of a business to the buying public.

To determine a market appraisal / price, in my opinion the best advice is obtained from a local accredited business broker, this "Professional" is generally working at the "Coal Face", is constantly discussing local business principles and practices, prices and can usually "Benchmark" your business against recent sales and or current businesses for sale in your area.

Furthermore, this professional is usually contracted on a "Performance Paid" basis for his/'her services so "Market Price" is vitally important to achieve a satisfactory result.

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