- Toby Griffin
HOW TO VALUE A KBB BUSINESS
There are many reasons why you might start wondering what your kitchen, bathroom or bedroom business is worth. Are you thinking that it’s time to retire or - at least - step back from the day-to-day, do you want a change of career, are you looking for investment or to borrow money, do you have a change in circumstances or priorities and want to sell?
It could be more than one of the above, or many other reasons, so here’s a helpful guide to what needs to be considered when looking to value your KBB business:
What is it worth?
Well, although there are many different methods, as an example, here is a simple calculation that is a good starting point:
(Average net annual profit x 3) + Value of assets
So you need to multiply your average net annual profit by three, then add the value of the assets. Therefore we need to define “Average net annual profit” and “Value of assets”.
Average net annual profit
Defining “net profit” is pretty easy (i.e. profit after tax), but many business owners aren’t salaried and just take a share of profit for their remuneration, which doesn’t account for their input to the business in the overheads. Therefore, in this situation, you must estimate a salary for a manager/director to perform the role that you do, and remove this from the net profit calculation. For example: if the average net annual profit is £120k, but it would cost £50k/year to employ someone that carries out your duties, then the effective average net annual profit is £70k.
Value of assets
Most KBB businesses have assets that fall into one of these definitions: stock, displays, goodwill, premises, machinery, vehicles, fixtures’n’fittings, cash in the bank, and the balance of debtors and creditors. In all cases, net realisable value is required (i.e. what someone will actually pay for it, not what they should pay for it).
A rough stock valuation is pretty straight-forward, as it will generally be the price the business paid for the products less depreciation. Displays are less easy - particularly kitchens - as it will depend on their configuration, and whether they can be sold as a complete room-setting, and/or whether additional units are available. Generally fitted furniture and worktops will have a low realisable value, but appliances, brassware and sanitaryware will be much higher.
Goodwill is the most subjective aspect of a business valuation. How long has the business been established? Do you have loyal/repeat customers? Are there any guaranteed, on-going contracts that are bound by an agreement? Is the name highly regarded? Is the digital marketing (website, social-media) up-to-date and well visited? Is the business in a really good location? How much goodwill will leave when you do? All of these questions need to be answered. Until this estimated value is established by an industry expert, then it is safest to assume that the goodwill value is low or zero.
The value of the premises - as part of a business sale - depends firstly on who owns it/them. If they are owned by the business then they can be sold with it at the prevailing commercial property market value; or you could transfer them into your name and then become a landlord to the future business owner. If they are rented, then factors such as the length of the lease, break-clauses, dilapidations, etc. come into play. Machinery, vehicles and fixtures’n’fittings will generally have a low realisable value relative to their purchase price, unless they are quite new and/or easily moved.
Ready to sell?
So there we go: How to quickly get an indicative price for your business. But if you are thinking of selling, it is worth getting the advice of KBB-industry business sales experts as this will help with an accurate valuation, and will market it well to achieve a good sale price for the company. Maybe now is the time to realise your asset!