THE TRANSFER

What you see - is not necessarily what you get...

Dear <$salutation$>,

A cynic is a man who knows the price of everything but the value of nothing.
Oscar Wilde

‘Just the job! Nice little café in Frinton on Sea: makes fifty grand a year. Suit us down to the ground, won’t it, dear?’

Hang on a minute! Was that makes or takes fifty grand a year? If it really makes fifty grand, that’s profit.

And if it takes fifty grand, that’s only turnover (Or of course it’s the owner’s best guess!)

There’s a myth that businesses are valued on their turnover – the amount of money that owner claims he brings in. But if rents are high and staff costs through the roof, even a large turnover can be eaten away until the business is valueless.

The main criterion for establishing the value of a business is its ongoing profitability. In general, a business will sell for between 1 and 2.5 times its ongoing profitability.

‘So that’s that, then?’

Actually, no. There are no KVIs, no Known Value Items such as the price of a pint of milk or of the Daily Mirror that everyone knows when it comes to buying and selling businesses. A dozen cafés in Frinton, each with profitability of £50K, will have different values and will sell for a dozen different prices.

For example, one café might have accommodation. It might make its money during shorter hours, be fitted to a higher standard, be in a better location or have been trading longer. It might have better staff and an easier menu or a history of accounting information.

It’s often these ‘soft’ values that make the difference when it comes to the value and saleability of a business. The way in which a business is presented to the market can also boost the price, as can a trusting relationship between the vendor and the buyer.

So whether you’re buying or selling a business you should take your cue from Oscar Wilde: look at these softer issues and think value rather than merely price.

The Romans had an expression for it. Caveat emptor. Scholars will tell you it’s Latin for ‘Let the buyer beware’, but that’s twaddle. What it really means is ‘Beware, if you buy that café in Frinton, sooner or later you will get a TV crew wanting to film you’.