Do evaluation methods exist?
The true value is determined by the market.
As a matter of course, more technical methods exist in order to evaluate an SME. However, we cannot forget that, as in all markets, the true value of a business depends on external elements, such as:
– The number of potential buyers
– The legal structure: a company, which has property on its balance sheets sometimes constitutes a handicap.
– The company organisation. If a second in command exists, the buyer is reassured.
– The business sector (an SME sub-contractor on a stricken market is difficult to sell whatever the value)
– Current affairs (the value of air companies has been effected by 11th September 2001 )
– Opportunity (a buyer or a rival, who wants to purchase your part of the market is willing to pay the price)
Generally, you have to be in the mindset of the buyer who is looking to increase the value of the future and not the work already accomplished.
The principal evaluation methods of an SME are as follows:
– Re-evaluated net assets
– Value of substitution
– The market value
– The liquidation value
– Price / earnings ratio
– Discounted cash flow
– Method of dividend capitalisation.
– Investor’s Method: Multiple of EBIT (-) financial debts
– Transactions within the same business sector
– Comparison in relation with companies listed on the stock exchange.
– The sale price can be very different to the net price received by the vendor after tax.
– Technically complex methods are rarely used with regards to the sale of SMEs.
– Multiple net result or EBIT methods are the most frequently used.
– A negotiation price is always a round number.
A French study carried out by BDPME (see documents/ studies page) on a cross-section of 900 SME sales has shown that the average PER transactions was 7. (The average sale price of an SME is seven times its net result after taxes)
Whatever the asset or profit value, the value of a business can drop depending on the following elements:
– The business has one important client that accounts for more than 40% of its business.
– The head of the company maintains personal relations with big clients.
– There is not sufficient goodwill, a similar business could be created by a competitor or by an employee.
– Investments have been stopped.
– A minority shareholder does not want to sell.
– There is a dispute in process
– The company is in contention with its lessor.
– Other at risk activities are integrated into the business.