Evaluate a small business

[patongphil]

I have the oppurtunity to buy into a small business here in Thailand. It is a Day Care come Nursery school which has been operating for a number of years and shows strong profits.

What I need to know is how to put a value on such an enterprise?

Internet searches lead me to evaluate the "Goodwill" part at 3 times Weighted Annual Profit.

Then add this to the value of capital invested. to get the Full value.

Is this a real and acceptable way to evaluate the business?

[oogster8]

I think since you need to ask this question you should stay away. Leave business to business people.

[innerspace]

Certainly dont add capital invested since that could already be money down the drain.

Dont consider purchase value of assets either.

The figure worth considering is the actual deprecated value of remaining tangible assets.

Do the profits include paying yourself a reasonable wage? If not deduct that from the profits prior to your calculations.

Is the current owner a key asset to the company? Will it fall apart or lose customers when they leave?

Are you prepared for 16 hours a day 7 days a week?

Do you have funds to support this business while you find your feet running it, after the initial buyout?

Any doubts on the above and consider giving it a miss.

[brit1984]

i recommend you don't use random ratios of random accounting figures invented by random people

i recommend you do go in there and do primary research to get a feel for the real profit, and the key profit drivers

ask manager/owner some questions and use your common sense as to whether profit will grow/shrink

stick your estimates in an excel file (or piece of paper) and calculate what portion of that profit will be yours

have a think to yourself how much that stream of future expected cash flows is worth to you today

then subtract a little (or a lot) to protect yourself from your own over-optimism - good luck

[wooloomooloo]

Leave business to business people.

God loves a trier and you'll never know if you could be a successful businessman until you've chanced your arm.

[BruceSmith]

Certainly dont add capital invested since that could already be money down the drain.

Dont consider purchase value of assets either.

The figure worth considering is the actual deprecated value of remaining tangible assets.

Do the profits include paying yourself a reasonable wage? If not deduct that from the profits prior to your calculations.

Is the current owner a key asset to the company? Will it fall apart or lose customers when they leave?

Are you prepared for 16 hours a day 7 days a week?

Do you have funds to support this business while you find your feet running it, after the initial buyout?

Any doubts on the above and consider giving it a miss.

i recommend you don't use random ratios of random accounting figures invented by random people

i recommend you do go in there and do primary research to get a feel for the real profit, and the key profit drivers

ask manager/owner some questions and use your common sense as to whether profit will grow/shrink

stick your estimates in an excel file (or piece of paper) and calculate what portion of that profit will be yours

have a think to yourself how much that stream of future expected cash flows is worth to you today

then subtract a little (or a lot) to protect yourself from your own over-optimism - good Luck

Think about it:

If you listen to these intelligent and articulate persons, how are you ever going to learn anything?

– unless you make every possible mistake yourself

[oogster8]

Leave business to business people.

God loves a trier and you'll never know if you could be a successful businessman until you've chanced your arm.

God could care less..............lol. Seriously, if op wants to buy a nursery he should get a job working in one to see WHATS UP.

[oogster8]

Op question about value of nursery. None. Maybe chairs, beds, rubber balls ,etc.

If i were a parent i surely wouldnt send my kids to an unknown farang to care for them.

[bocceball1]

What's to keep the seller of this business from opening another "Day Care come Nursery" and then contacting your customers and stealing them by offering the same services cheaper etc.....think about it. The real value to this business is the existing customer base and maybe a friendship/loyalty has been built up so it would extremely easy to steal your customers ....then what is the business worth? Zero?

Don't even think that a "non-compete" clause is going to work in the contract to buy! This is Thailand!

How much does it cost to rent a location (house with a nice yard for the kids to play in, coat of paint, some toys etc and hire a few employees)?

[Paul888]

It sounds as if you would be buying into an existing business rather than buying the business itself right?

In which case, specialist knowledge of the business itself is not essential, but you should "know" the present owner/manager and believe them to be straight and honest people (or at least know of no specific reason that they couldn't be trusted) plus you need to assure yourself of the legitimacy of any stated reason for the required investment (be it a need to take money out for personal use or to invest in something related to the business).

Then it comes down to common sense and the ability to do simple maths involving the following numbers.

1. The amount you need to invest

2. What that investment is secured upon (ie percent of "business" shares in a limited company etc)

3. What your expected returns are

4. What your recourse is if the expected returns don't materialise etc.

If you are satisfied that your return is reasonable and that the business can afford to pay you what it is supposed to pay you when it is supposed to pay you and most importantly you have a way to get your money out if it can't then it could be a goer but ALWAYS factor in that you could lose all of your investment due to an unforeseen reason, with any business anywhere but more so here.

Edited September 26, 2013 by Paul888

[givenall]

1. Be cautious

2. do not invest more than you can loose, all businesses are risky

3. Do not trust the data from the owner. ask for the income and tax data that he filed to the government. The tend to report less than they make so it is safe if that shows profit

4. make sure you check for any liability for the business since you will own the liabilities when you purchase. This is a bit hard and there could be hiding these since no real way to check for

5, Also make sue you make a solid agreement that the present owner will not start the same business sine they can still all your customers

[patongphil]

It sounds as if you would be buying into an existing business rather than buying the business itself right?

In which case, specialist knowledge of the business itself is not essential, but you should "know" the present owner/manager and believe them to be straight and honest people (or at least know of no specific reason that they couldn't be trusted) plus you need to assure yourself of the legitimacy of any stated reason for the required investment (be it a need to take money out for personal use or to invest in something related to the business).

Then it comes down to common sense and the ability to do simple maths involving the following numbers.

1. The amount you need to invest

2. What that investment is secured upon (ie percent of "business" shares in a limited company etc)

3. What your expected returns are

4. What your recourse is if the expected returns don't materialise etc.

If you are satisfied that your return is reasonable and that the business can afford to pay you what it is supposed to pay you when it is supposed to pay you and most importantly you have a way to get your money out if it can't then it could be a goer but ALWAYS factor in that you could lose all of your investment due to an unforeseen reason, with any business anywhere but more so here.

Thanks for that. You are correct in that I am looking at buying into an existing business which is looking to raise some capital for an expansion.

All the numbers are fairly robust and I have been involved from the outside for a number of years.

I am only looking for advise on a basic tool to evaluate the actual worth of the company in order to assess the percentage I can expect for the baht invested.

[jbaldwin]

I have the oppurtunity to buy into a small business here in Thailand. It is a Day Care come Nursery school which has been operating for a number of years and shows strong profits.

What I need to know is how to put a value on such an enterprise?

Internet searches lead me to evaluate the "Goodwill" part at 3 times Weighted Annual Profit.

Then add this to the value of capital invested. to get the Full value.

Is this a real and acceptable way to evaluate the business?

There are many ways to value a business. Using different methods will give a range of very different values and none of them is an alternative to a proper professional valuation. Remember that any reported profit will be dependent on the accounting policy used. You must understand the accounting policies and there implications on stated profits. I would also recommending checking tax returns. If accounting profit and taxable income are different then you need to understand why. Also if it is an owner managed business then stated profit will depend on how they get there income. They could receive dividends, which would give a higher stated profit then if they receive salaries.

I would suggest that the most reliable valuation methodology would be

Fair value divided by book value should equal sustainable return on capital divided by the cost of capital.

What this means is, for example, if assets provide an income stream that will be twice your cost of capital it is worth twice the book value of the assets

[Gsxrnz]

Most of the assumptions from posters thus far are that you would be an owner/operator. Your latest post implies that you will be purchasing either an equity shareholding or possibly a partnership. My response is based on the equity shareholder proposal.

The returns you can anticipate are therefore as an investor as opposed to an owner/operator. Normally, shareholder returns (dividends) cannot be guaranteed because they are determined by the financial position of the company, including profits, cashflows, future capital investment, business expansion, working capital etc.

Valuing a small business (for equity investment purposes) is actually more difficult than valuing a public company. The principal reason being that a public company regularly has willing buyers/sellers that trade the stock on the sharemarket. Whilst the share price may not represent a true/fair value using any one of a many valuation calculations, the fact that the shares trade is indicative of the fact that there is a trading mechanism that allows the willing buyer/willing seller to trade their shareholdings.In a privately held company you don't have that luxury.

You therefore have to determine the likely returns (dividends) you can expect, plus any potential capital gain/loss on the initial investment and do in-depth analysis of the financial and business performance of the company as though you were actually buying outright. You have to be aware of qualitative and quantitative aspects of the business.

This is not a simple task and you can use many methods, but unless you understand the principal of discounted cashflows, EBIT, EBITDA, working capital etc, you're kind of screwed if you try and get too technical beyond your financial knowledge.

HOWEVER, I am assuming that as this is an existing company run by owner operators that have owned the business for some time, they will/should have adequate financial records that allow you to make some rough assessments of the basics. Further, if they are seeking your equity to expand/grow the business, they should have detailed budgets and forecasts that show the logic behind their growth plans.

If they DON'T have detailed budgets containing details of customer base growth/demographics, charges, income streams, detailed expenses/overheads, profits, taxes, cashflows, capex, dividends etc and simply verbally mention random numbers and "great expectations" of profits.......RUN FOREST, RUN!!!! Reason - if they themselves don't truly understand their business and don't have this level of business skill, they won't be too bothered about looking after your equity investment. They don't need to worry about returns to an equity investor, because YOU are paying your money and taking your chances. They can take their money in wages/drawings.

However - if they DO have detailed budgets, go through every single expectation they have for income and expenditure. Probe, question, interrogate!! And then do it again and again. It really isn't rocket science once you get into it. For me, I would expect a return that represents the risk-free cost of money, plus the risk return that any investor wants. Risk-free value of money for me is say 5%, and I want at least 10% on top of that for the risk.

Assuming the forecast shows a return to shareholders of X Baht, and you're happy with that return, go for it. if not, keep your money in your pocket. Beauty and value are in the eye of the beholder - only you can decide if the returns warrant the risk. So you MUST understand the business and you MUST understand and believe their business forecasts.

If they haven't got forecasts - walk away. Why would anybody invest money with somebody who doesn't have a roadmap. And a final point - make sure you discuss your exit strategy. I'm assuming you don't want your money to stay there forever.

Good luck.

[Paul888]

It sounds as if you would be buying into an existing business rather than buying the business itself right?

In which case, specialist knowledge of the business itself is not essential, but you should "know" the present owner/manager and believe them to be straight and honest people (or at least know of no specific reason that they couldn't be trusted) plus you need to assure yourself of the legitimacy of any stated reason for the required investment (be it a need to take money out for personal use or to invest in something related to the business).

Then it comes down to common sense and the ability to do simple maths involving the following numbers.

1. The amount you need to invest

2. What that investment is secured upon (ie percent of "business" shares in a limited company etc)

3. What your expected returns are

4. What your recourse is if the expected returns don't materialise etc.

If you are satisfied that your return is reasonable and that the business can afford to pay you what it is supposed to pay you when it is supposed to pay you and most importantly you have a way to get your money out if it can't then it could be a goer but ALWAYS factor in that you could lose all of your investment due to an unforeseen reason, with any business anywhere but more so here.

Thanks for that. You are correct in that I am looking at buying into an existing business which is looking to raise some capital for an expansion.

All the numbers are fairly robust and I have been involved from the outside for a number of years.

I am only looking for advise on a basic tool to evaluate the actual worth of the company in order to assess the percentage I can expect for the baht invested.

As others have stated there are a multitude of ways you can value a going concern business but no accurate way you can do it without a lot more information.

You have been far too vague with the details for anybody to offer any prcactical help or even determine the best basis for valuing the business as we have no idea what if any assets the business has, the scale of operation, whether it is owner managed, or owner plus staff managed, whether the owner takes out a salary, whether the business is seasonal, what its core business is (birth to kindergarten, after school, weekends only, school holidays only etc). Not to mention where it is located, size of the market, what competition it has etc?

Plus we have no idea if you are talking about a majority or minority stake, whether it's a 10,000 baht investment or a 1 million baht investment, the terms of said investment, whether it is really just a loan, or if it secured on anything? Plus of course what the money would be used for as that could be important.

Notwithstanding all of that, the simple rule of thumb that I have always followed is to be reasonable.

You know how much return you would get for that money in the bank, and you know that this is a more risky investment so emotion and friendship aside (as they should be) you should logically expect more.

I would generally look at getting a fixed return that [a] I was happy with and the business could afford to pay rather than a straight percentage of profits so that the harder the present owner worked the more return they would make for themselves. I would also make specific provision for an exit route if either you get bored or if the present owner wants to buy back your investment at a later time.

[NBD]

Only sensible way to look at it is as an investment.

What is the rate of return, after paying yourself a salary if you will be working there, and what is the likely capital appreciation or depreciation. And if you're paying yourself a salary, do you justify it from a business POV. (Employing yourself is a weird game!)

When you need to look at the business and decide for yourself if you think the risks and headaches justify the return as compared to what you could in other investments.

The various formulae for valuing big corporates don't really apply so much to very small businesses.