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Small business valuations are they still realistic?
There are many fallacies about valuing businesses one such fallacy is that businesses are valued on multiplies of turnover - for example three times sales. Well if that were true it would be simple to increase the value of your business by cutting your prices and increasing your turnover. However you would not be making any money by selling at close to cost. No, the main criteria for valuing a business is based on a multiple of profits. There is a number often quoted for shares on the stock exchange and that is the P/E ratio. This is the profit earned per share issued. In essence, the P/E tells us how much an investor is willing to pay for £1 of a company’s earnings. Now P/E ratio’s on the stock market have fallen significantly over the last year, both Vodafone’s and Next’s P/E ratio is now 8 times. So if you wanted to buy Vodafone the value would be technically 8 times their profits. Some business transfer agents including many that have gone into administration had been working on P/E ratio’s of 4 times for even the smallest business, which was always totally unworkable, hence they didn’t sell those businesses. Most reputable agents who had been selling businesses had been working on P/E ratio’s of 1 to 2.5 times profits for the small business, however if for the largest businesses that multiple has halved, perhaps there should be a new realism amongst the small business owner? What might keep the values constant? As I have mentioned before it might be new buyers being made redundant without an alternative but to buy a business, start a business or go on the dole. In a way business transfer agency businesses are recession proof as often it is these new buyers that keep the market ticking over and mean that businesses are still sold at a reasonable price even during a recession.
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