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THE SUNDAY TIMES - BUSINESS DOCTOR
30 May 2010
TS writes: I have a couple of small hardware shops in the Midlands which I would like to sell to my nephew. How should we work out a fair price given that not much is moving in the market these days? Turnover is well down this year but the shops are still breaking even.
Dear TS: A fundamental principle of valuing a business is the concept of “willing buyer-willing seller” writes Eoin Ryan, Director, Corporate Finance & Rescue, with Horwath Bastow Charleton in Limerick. This principle implies that the value of a business is dependent on what one person is prepared to accept and what another is prepared to pay for transferring ownership of a business. The price arrived at by the two parties is ultimately the market value.
The concept of “willing buyer-willing seller” is somewhat complicated where a scenario such as that outlined by TS exists. An uncle and nephew are connected parties (i.e. not at arms’ length) under relevant tax legislation applying to the transfer of business assets. In other words there isn’t an automatic presumption that the price agreed is the market value where two connected parties are involved. It is for the parties to demonstrate to the satisfaction of the Revenue Commissioners that the price agreed equates, on a reasonable basis, to the market value that say an arms’ length party would pay.
There is no “right” way to value a business. The main methods used for valuing the type of business outlined are focussed on earnings/cashflow. The business in question is currently not achieving profits, however I would suggest that TS prepares a set of projections to reasonably assess what profit the business might achieve in the next say, 3 – 5 years. Where established these profits should form the basis of a valuation which will seek to apply a multiple to the earnings. The multiple to be used will likely be lower than one might have historically seen for similar businesses – this reflects a number of factors including less liquidity and fewer buyers in the market, uncertainty as to future performance, and potential question marks over the business’s links to the construction sector. It is best to engage an experienced advisor to consider issues such as the appropriate multiple. 
Horwath House, The Red Church, Henry St., Limerick, Ireland
T: + 353 (61) 310 311 F: + 353 (61) 31 88 99 E: Mail Addresses
Authorised by the Institute of Chartered Accountants in Ireland to carry on investment business.