I am a Chartered Accountant that specialises in the Travel and Tourism Industry.
I get asked to value Travel Business’s every few weeks.
Firstly a Return on Investment method – which says that if you invest your money in this Travel Business what return should you expect from your investment – is it going to be a risky investment – then you will need a higher rate of return. Is it a safe investment? – the return can be less. You can work this out for yourself:
Net Profit Before Tax $100,000
Add Back Owners Expenses and Salary $90,000
Add back home office and vehicle $12,000
Subtract a “fair” owners salary $80,000
Arms Length Profit $122,000
Multiply this by an appropriate multiplier taking into account the consistency of earnings, reliance upon owners, and continuity of staff, market and economic conditions. This could be between 0 and 5 for a private company. This is the accountants “Return on Investment” valuation.
Secondly an Income Valuation method – which is based upon the amount of gross profit or commission and other income that the business earns – when the new owner takes over they can assume that the income is going to continue to be earned by the Business. This method ignores the expenses of the business, because they can be so variable. This method may be very relevant in a merger. I would use a formula of 30% to 50% of income.
Thirdly a Market Valuation – this takes into account what travel businesses have recently sold for in your area. As we are involved in a number of these each year we have this information.
The Actual Sale Value of your business will hopefully be somewhere in the range of values predicted by the methods above.
What are you buying when you buy a Travel Business?
– You are buying substantially Goodwill because there are not many tangible assets.
To improve the value of your business it is best to plan carefully to groom the business for a sale.
This may take 3 to 5 years.
It takes time to put in place all the factors that are necessary to generate the best results.