Accounts appraisal methodology
This is a brief explanation of the approach we would normally adopt in appraising the accounts as a first step in determining a valuation.
While there are numerous methods for the assessment of a set of accounts, the predominant methods we would encounter are: Discounted Cash Flow, Investment, Development, Depreciated Replacement Cost, Profits & Comparables.
In the case of the the Profits method, the process we will follow is illustrated below:
- Verify Figures and FMT(Fair Maintainable Turnover) – We clarify the content of each figure within the accounts, including in the appraisal only those relevant to the business to be sold. Where a business is well established, the current level of sales is often a good reflection of FMT (Fair Maintainable Turnover) assuming the business is managed by an REO (Reasonably Efficient Operator).
- Normalise - Adjust the figures, up or down, to reflect ‘normal’ operating of the business. We have considered in our appraisal only those figures relevant to the business to be sold.
- Identify FMOP(Fair Maintainable Operating Profit). After making adjustments to the accounts where necessary - generating the correct trading figures for the business, under ‘normalised’ operating circumstances – we will identify the FMOP This is similar to EBITDA (Earnings Before Interest Tax Depreciation and Amortisation), though the figures may be different.
- Capitalise – Whether you use the term ‘capitalise’ or simply apply a multiple, the essence of the process is the same – you are assessing ‘risk’. There are recognized levels of ‘risk’ multiples, for almost all business sectors, employed by companies like Adams & Co, and Valuers such as Pinders, who are employed by the High Street Banks. After applying the current, correct, multiple for the business we will have an Estimate of the Likely Sale Price based upon the trading figures.
- Comparables – While it is important to have a meaningful assessment of the accounts, we also need to view the ‘commercial sensibility’ of our mathematical estimate. Any business on the market for sale is competing with other, probably similar, opportunities for a Buyers interest. As such, we will also need to ‘compare’ the merits and values a business offers, when compared with other similar opportunities either currently on market, or recently sold.
NB: Throughout the process we are assuming a Reasonably Efficient Operator and our appraisal discounts a ‘special purchaser’ who may be willing to pay more than market value to secure a specific property. The possibility of a Special Purchaser would be examined separately.
