If there is one thing that puts people off buying or selling a business it is not knowing how much any particular business is worth at any particular time. And it is very sad because there is no magic involved in valuing a business.   It is a relatively straightforward procedure, with 90 per cent of it being a simple numbers exercise and only 10 per cent needing some form of ‘value’ assessment. But as with most simple things in life, there are those out there who just love to complicate and confuse. The ‘complicators’ are the professional advisers who consider business valuation to be a highly complex science. The ‘confusers’ are the sales agents and brokers who have an unfortunate habit of making up a valuation theory that delivers the price they are asking without any regard to logic or common sense. One of the most fundamental skills for assessing a business to either buy or sell is the confidence to make your own assessment of its value rather than relying on other people. To achieve this, you need to have a thorough understanding of where all these other people are coming from and their objectives.   We will discuss this in more detail shortly. In.   the meantime, let’s get down to the nitty-gritty of valuing a business. NTAs, P/Es and Goodwill No matter what it is you are thinking of buying you always have in mind two things: Is it worth it? (Can I sell it for what I paid if I don’t like it?); and What money can I make from it? If you are buying a car, you check in the paper for prices of similar cars to make sure you don’t pay more than it’s worth.   Using this philosophy, you are buying the car at its NTA (net tangible asset) value. If you are buying the car to run as a taxi you will work out how much you could earn from it to determine how much you would pay.   Using this philosophy, you are buying the car at its P/E (price/earnings) value. You may find that the car is worth $30, 000 but is being sold for $100, 000 with a taxi licence that can earn you $40, 000 a year. In this case, the NTA value is $30, 000.    The P/E value is $100, 000, which is the amount that you pay.   The difference between … Continue reading Valuing a Business