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business buying valuation

what is the company worth?

This is one of the biggest questions buyes will have when making a value assessment on a company.

Basically, your perceived "value" will determine the price. If you think the price is too high in relation to the "value" delivered, then work to negotiate the price down.

That is where the Novars Group can be a valuable player in your price negotiation. We will complete an industry assessment to determine whether the offer price meets your perceived value and more importantly, whether the price is in-line to other similar business on the market or have sold.

So do you have a price that you would like us to look at?
Contact us at:

The Novars Group
571-306-3590

or e-mail your questions to: info@novarsgroup.com

 

How to Measure "Perceived Value"

The pricing point from the buyer's postion is whether the cash flow from the business will justify the purchase price for the business.

The basic formula is as follows:

Cash / Price Formula:

Take the:
owner's discretionary cash flow
ask for a 3-year or 5-year weighted average

Reduce this by:

Annual debt service
this will include the principal and interest payments for financing the purchase price of the business less the down payment

Buyer or manager annual salary
the market rate for managing the business either as the owner or through a hired manager

Capital Expenditures
the amount that must be paid to maintain, service, and replace business equipment and other fixed assets. A good benchmark is to replace all operating assets within five years. Take the market value of the operating assets and divide by 5

Return on Down Payment
the investment return on the down payment

Equals:

Remaining Cash Flow
this amount needs to be positive to justify the asking price
Example:
Estimated Asking Price: $550,000
Buyer Down Payment: (20%) $110K
Financing Terms: $440,000
8.0%
7-Yr Note
Market Value of Operating Assets $35,000
Estimated Return on Down Payment: 5.0%
Step 1: Forcasted Annual Cash Flow $210,000
Step 2: minus annual debt service $82,295
Step 3: minus 20% debt service cushion * $16,459
Step 4: minus owner salary $90,000
Step 5: minus market value of assets $7,000
Step 6: minus lost value on down payment $5,500
Cash Flow Remaining $8,746

The asking price is justified in this example given the positive cash flow position after deducting financing cost, management salary, return on the initial investment, and capital expenditures.

*Note: Standard cushion required by lenders when underwriting this loan. This amount covers the cost of financing in the event of economic or market turndown. The amount is not an expense and would be an additional amount to cash flow.
Another Example
Estimated Asking Price: $650,000
Buyer Down Payment: (20%) $130K
Financing Terms: $520,000
8.0%
7-Yr Note
Market Value of Operating Assets $35,000
Estimated Return on Down Payment: 5.0%
Step 1: Forcasted Annual Cash Flow $210,000
Step 2: minus annual debt service $97,258
Step 3: minus 20% debt service cushion * $19,452
Step 4: minus owner salary $90,000
Step 5: minus market value of assets $7,000
Step 6: minus lost value on down payment $6,500
Cash Flow Remaining -$(10,210)

The asking price in this example shows that the cash flow position from the buyer's perspective is negative and does not support the asking price.

*Note: Standard cushion required by lenders when underwriting this loan. This amount covers the cost of financing in the event of economic or market turndown. The amount is not an expense and would be an additional amount to cash flow.
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