Putting a value on a small business, especially in Vietnam, may seem like a daunting tasks. This guide aims to offer practical strategies, insights, and tips. It’s important to note that these tips are geared towards small-scale brick and mortar businesses, and generally, the smaller the business, the simpler it is to determine its value.
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The below steps represent a practical way to assess the value of a small business. Please note that there are several alternative valuation methods available. Typically, a combination of these methods are used in valuing a business to arrive at an accurate and practical valuation. If you’re interested in exploring alternative methods, feel free to check out this link for more insights.
Firstly, Initiate the valuation process by looking at the business’s cash flow, a foundational element in small business valuation. The goal in the first step is to understand how much profit the business is generating per year.
Now you will need to choose an appropriate “earnings multiple“. The earnings multiple method is 1 way to value a business by applying a multiple to its earnings. For instance, if a business has annual earnings (earnings before interest, taxes, depreciation, and amortization – EBITDA) of $80,000, and the industry average earnings multiple is 3, the estimated business value would be $240,000.
Different industries have varying standards for earning multiples. Click this link to explore the diverse earning multiples in our more in-depth article.
For instance, a service-oriented business with steady profits might have a multiple of 3, leading to a valuation of $240,000 (3 times $80,000). Conversely, in a dynamic technology sector, a growth-focused startup might justify a higher multiple, like 5, resulting in a valuation of $400,000 (5 times $80,000).
Once you’ve determined the earnings multiplier, it’s time to assess the businesses assets, as they inherently hold value. For instance, a restaurant possesses various assets such as cooking equipment, tables, chairs, cutlery, and more. You can request an inventory list and estimate the ballpark value of this equipment—consider the resale value, accounting for factors like age and condition. Then, add this value to the earnings multiplier.
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Acknowledging the owner’s role in day-to-day operations remains essential. A restaurant with a renowned chef-owner might see an adjustment to its valuation to reflect the integral role of the chef. As if that chef-owner leaves the business, it may affect the businesses performance and brand. This consideration adds a layer of realism to the valuation, recognizing the impact of key personnel.
Considering the potential for future growth and expansion is also important. A business with strong growth prospects may be valued higher than one with limited growth potential. Therefore, the value could increase if there is reliable evidence indicating clear potential for future growth.
A robust brand has a positive impact on business valuation by fostering customer loyalty, trust, and differentiation from competitors. This brand strength contributes to increased revenues, market share, and resilience to market changes, thereby enhancing the overall perceived value of the business for investors and buyers. However, it’s worth noting that some business owners might overvalue the brand.
Certain small businesses might operate under a nominee structure, using a Vietnamese partner’s name, or they might not be registered at all. When a business is officially registered as foreign-owned, it becomes simpler to transfer ownership to a new owner, especially if the buyer is also a foreigner. This registration can open up opportunities for the new owner to potentially apply for a long-term visa. Therefore, having a registered foreign-owned business structure may enhance the overall value of the business. Here is an article on how to register a business in Vietnam.
For a physical store (brick and mortar) business, the location plays a crucial role. In such cases, the lease duration becomes a key factor. Let’s say the buyer expects to recover their investment in 2 years according to the valuation. If the lease is only for 3 years, it poses a higher risk for the buyer, with just 1 guaranteed year of profitability. Therefore, for a brick-and-mortar business, having a longer leasehold will enhance the overall value of the business.
It is also a good idea to compare the above valuation with other valuation methods, here are some other simple valuation methods that can be used, separately, or in combination with other methods.
The Comparable sales method assesses the value of a business by comparing it to recently sold similar businesses. For example, if comparable businesses in the market have sold for an average price of $500,000 and the business under consideration shares similar characteristics, its valuation could fall within a similar range.
This method estimates the value of a business by evaluating the cost of recreating it from scratch. This involves considering expenses such as the lease, building facilities, purchasing equipment, and other necessary costs. However, it is essential to factor in the time it would take to bring the new business to the same position as the one being valued. In many cases, this process could span over several years, requiring the calculation of yearly salaries and marketing costs.
For businesses operating online, agencies, and B2B enterprises, it’s advisable to develop a financial forecast. This practice proves beneficial in demonstrating the business’s value, especially when there’s noticeable growth or pending clients/contracts not reflected in financial reports. Based on our observations in Vietnam, investors typically focus on a 2-3 year Return on Investment (ROI). However, this timeframe can vary depending on factors like risk, business potential, market size, and other considerations.
Got Any Questions?
Based on our experience in Vietnam, investors often prefer lower-risk opportunities, particularly when one of their main goals is to obtain a long-term visa that is sponsored by the business. Typically, they aim for a 2-3 year return on investment (ROI). When valuing a restaurant, consider that with a 4-year lease and a 2-3 year ROI, the investor may only secure profits for 1-2 years, posing higher risk. To boost investor confidence, it’s advisable to have a longer lease or a quicker ROI.
In equity sales (partial ownership), we’ve suggested to some of our clients a strategy where investors receive a higher percentage of profits until the ROI is met, after which their share of profits adjusts to their ownership stake. This approach tends to ease investor concerns.
We hope that this guide has provided you with insights into valuing a small business. Evaluating a business involves various factors, and the valuation is not a precise science. However, by following the steps outlined above, you can obtain a more accurate understanding of the business you’re valuating. We have also written an article on “how to buy a business in Vietnam” for further information. If you have any questions, feel free to reach out to our team. Additionally, we can connect you with a professional business valuator if necessary.
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