OpinionJun 5 2014

Calculating the true value of a business

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Unless I have completely misunderstood the report, I found his remarks about advisers who take income out of their business breathtaking.

Anybody that values a business would value it before any income taken, because a large part of the value of a business resides – of course –in the income it generates.

Whether this is taken by the management or not is entirely immaterial in respect of the value of the business.

Indeed, what is the point of leaving money in the business unless it is used to expand the business? In fact, expansion is not always the ideal. What is far more important in my opinion is to see what the costs are – this will give you a much better indication of how efficient and income-generating the business really is.

If a business has an income of £250,000 and total costs of £30,000, who cares if the advisers are taking out about £200,000 in salary? The business is still making £220,000 net.

Alternatively, if a business makes £500,000 but has to endure £350,000 of costs in order to do so, well, I know which scenario I would prefer.

Harry Katz
Principal
Norwest Consultants
Middlesex