Case study: business valuations when buying a business
Dan wants to buy a small business in Sydney to create an additional income stream for his family. He contemplates buying an established printing business and considers Printing Company, a small business offered for sale for $200,000.
Dan is unsure if the price Printing Company is offered for sale is reflective of the business potential. He thinks that a business valuation may help him understand if buying this business at the advertised price is reasonable.
Dan engages a business valuer to estimate the fair market value of Printing Company. While performing the business valuation, the valuer identifies a range of issues which significantly affect the business value. Amongst others, the following points are reported:
- The current owner works in the business full time, performing customer service, stock ordering and general administration duties. The working owner does not receive a wage and draws from profits generates by the business. After inclusion of the owner’s remuneration as a business expense at a commercial rate, the reported earnings of the business decrease, driving the business value estimate down.
- The assets of the business, such as printing and copying equipment, are quite old and would require a replacement in the near future. After provisions for the new equipment’s capital expenditure, the estimated business value decreases further.
- The printing industry both in Australia and worldwide has been declining for a number of years. The decline is forecasted to continue due to the fact that these days more consumers and businesses trade and transact online, not using printed materials, and also use in-house printing equipment which is now more accessible than ever.
The valuation report establishes that the business’ value is in a much lower range of $120,000 to $160,000. The report provides detailed reasoning why the value is in the identified range.
Dan successfully uses the business valuation report to negotiate a lower business acquisition price with the vendor. Dan is, however, not sure if the printing industry is in a good shape to engage in at all. He decides to consider companies offered for sale in other industries and is sure to order a business valuation when his decision to buy a business is to be justified.
By Julia Podgorbunskaya, CPA, Senior Business Valuer at Professional Business Valuers
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