Friday 14th of October 2022
Buying a business is a comfortable choice for budding entrepreneurs looking for a thriving opport
...unity with minimal hassles. It makes them start th...
Buying a business is a comfortable choice for budding entrepreneurs looking for a thriving opportunity with minimal hassles. It makes them start their journey after the initial hurdles have been overcome and the entity is primed for growth. It allows them to harvest the fruits that someone else has sown and nurtured. It makes them eliminate the labour involved in setting up the business, gathering supplies, buying equipment, hiring workers and developing processes. They get everything readymade to be used according to their choice for the betterment of the entity.
However, it is difficult to identify a high-performing and sustainable business for sale in New Zealand because sellers use tricky methods. They often create a false narrative about its high growth potential in their quest to get the best price for their entities. Thus, buyers must know how to check the right value of the venture. Here is a list of the methods used for business valuation before purchase. These can help determine the correct market value without biases.
The first thing buyers should look at is the business's balance sheet for sale. Reviewing financial documents is a part of the due diligence process and can be done after the potential buyer has signed the non-disclosure agreement. Examining the balance sheet and cash flow statement helps to identify the entity's financial standing. The information presented in the financial reports can be used to calculate the business's book value.
It involves adding the value of all the assets of the company, such as stock, equipment and property and subtracting the total of all the debts owed from it. In a nutshell, it can be gauged by subtracting liabilities from assets. However, it does not provide the correct value because it does not consider intangible assets like goodwill. The book value can be used as a ballpark figure when valuing the entity.
EBITDA stands for earnings before interest, taxes, depreciation and amortisation. The EBITDA multiple determines business valuation and compares it with other similar entities. It can be identified for a business for sale New Zealand with the help of the following formula: EBITDA Multiple = Enterprise Value / EBITDA.
In this ratio, enterprise value is calculated by adding the value of market capitalization, minority interest, value of debt and preferred shares and subtracting the cash and cash equivalents from it. EBITDA margin showcases the operational efficiency of the business. If the margin is high, the operating expenses are low, and the revenue is high, it showcases a profitable operation.
The earnings multiplier method is different from other methods because it compares the stock price of the entity to the earnings per share. It is also known as the price-to-earnings ratio and is calculated by using the following formula. P/E Ratio = Market Value per Share / Earnings per Share. The market value per share is identified by determining the price of the company’s stock, and earnings per share are calculated by identifying the net profit earned per share.
The stock prices keep fluctuating with the demand among investors. If more number of investors purchases the shares of the company, the prices of shares go up and vice versa. This method helps evaluate the performance of the company as compared to other businesses.
Individuals looking for businesses for sale in New Zealand who do not want to get into complex calculations or do not have the support of an accountant can use the market capitalisation method for business valuation. The formula for this method is: market capitalisation = share price x total number of shares. It can be easily determined for publicly traded businesses. However, accountants do not prefer it for valuation because it does not consider debt and only focuses on equity. Business debt comprises loans and investments from lenders that have to be repaid with interest. It is different from equity, which is the stock owned by shareholders.
The discounted cash flow method is based on the predicted cash flow of the company. The forecasting is done after reviewing the historical financial data of the business and making projections for the next three to five years. It helps the potential buyer to ascertain the amount of income the business will generate in the future.
The formula used by accountants for this analysis is as follows: Discounted cash flow = Terminal Cash Flow / (1 + Cost of Capital) number of years in the future. It considers inflation and market uncertainty while determining the terminal value, making it more accurate for recently established businesses ready to grow.
The liquidation method can also be used for business valuation. It is identified by finding the income generated by selling all the business assets. It is usually used during mergers and business bankruptcy and is thus known as liquidation value. The formula for this metric is as follows: Liquidation value = Total Tangible Assets – Inventory and Receivable Discounts – Total Liabilities. The method does not consider intangible assets and if the business is being sold due to bankruptcy, the assets will be sold at a lower value or a discounted price. Thus, it will not give the exact value of the business for sale in New Zealand, which can be higher because the entity is not liquidating.
Traditionally buyers used this method while conducting due diligence because they were unaware of the sophisticated accounting methods. It involves adding up the value of all the assets the business owns, such as equipment, vehicles, property, stock, etc. It helps understand the net asset value of the entity. It can be further refined by adding the value of intangible assets like intellectual property, licenses, goodwill, etc. It does not present the right valuation because the evaluator does not consider liabilities. This method works for businesses that have a long list of assets, such as a construction business but should not be used for service-based businesses.
Wrapping Up
Business acquisition can help amateurs become advanced learners with the help of a proven business model. However, they must choose the right entity with a high growth potential and pay the correct price for it. The valuation methods mentioned above can help them invest wisely.
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