The super profits method for payday loans
The general approach to valuation that we recommend business owners to take is to employ two valuation methods and to compare the results. Your final opinion could, perhaps, be based on the average of these two results. The two methods we suggest that you use are the ’super profits’ method and price earnings (P/E) ratio method, which are explained below. For completeness I will also explain the discounted cash flow and ‘industry yardstick’ methods.
The super profits method (or more accurately, the super profits plus net assets method) arrives at a total value of a business by calculating the goodwill value and the net asset value separately and then adding the two values together. It is used mainly in smaller private companies.
To calculate the value of a business using this method you take the following steps:
Step 1: Calculate the average super profits for the last three years – which we will call the maintainable super profit (MSP). Do not deduct taxation.
Step 2: Capitalise the MSP by a factor of between 1 and 2 to arrive at goodwill value. The rationale for this is that the goodwill value of a small private business represents one or two years’ before-tax MSP of the business.
Step 3: Calculate the value of the net tangible assets of the business. This is achieved by placing a gross current market value on a going-concern basis on all tangible assets, less any liabilities that are being taken over (for example, creditors and borrowings and lease payments owing on the assets).
Step 4: Add the goodwill value to the net tangible asset value to arrive at total value of the business.
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