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What's The Difference Between Price & Value?

You are looking to buy a small business.  You see something you are interested in:  right industry, right location but is it the right price? In today’s market everyone is looking for a bargain.  The difficulty in assessing the price of a small business is that there may not be a lot of ready comparisons available in the market.  If you are looking to buy a business where there is a large and active market - like a newsagency, pharmacy or coffee lounge - then comparisons will be available.  And, there are industry models that typically set the pricing for these types of business.  However, if you are looking at a more unique business where there is not a lot of public information, the going can get tougher.

If you need an opinion on price, be careful and make sure you get the information you are really after.

When you value a small business it is not unusual for the valuation to come in under the asking price.  A normal reaction to this is that the business must be overpriced.  While this is sometimes true it is not automatically the case.  In a perfect market, price and value are the same thing - but we don’t operate in a perfect market.  As a result, this causes price to trade at either a premium or a discount to value. Over the past decade in Australia, price has traded at a premium of up to 30% on value for good quality businesses.  To test the price of a business, you need to understand both its value and also any information on the price that businesses of the type you are looking at have traded for in the market.

When you ask for a valuation of a prospective business, the real question you might be seeking an answer to is should I buy this business? This is a very different question to one about valuation. Should I buy this business is about a range of both financial and non-financial indicators.  It is as much about whether the business suits your lifestyle expectations and core capabilities as it is about the financial performance.  If the business is a growth business and needs lots of marketing push, then it will not suit you unless you like the marketing aspect and have the time to dedicate to it.  To assess all of this you need to understand the business and the business model in operation.  You then need to compare the model to your expectations and also your business strengths.  None of us are good everything. You need a business that matches your strengths.

You don’t want to pay too much for the business but equally you don’t want to miss out on the right business because the asking price is a bit more than you expected or what someone has told you it’s worth.  Whether or not you are prepared to pay a premium to value will depend on how much you want the business and what growth you can see in it.  Good quality businesses with good growth prospects will almost always command a premium as there are always buyers for these types of businesses. Understanding the true value of a business, is understanding what it is worth now and also what value you can add to it. Once you know both these numbers you should be ready to negotiate on price.
 


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2013 The Year Ahead For Businesses

Written on the 10th of February 2013

No age limit for super contributions

From 1 July 2013, the upper age limit for superannuation contributions will be abolished.   Employers will be required to contribute to the complying super funds of eligible mature age employees aged 70 and older.

Payslip reporting of super payments

From 1 July 2013, employers will need to provide additional information about superannuation contributions on an employee’s payslip.  Employers will need to report the amount and expected date of contributions they are making. 

Living away from home

If you have employees living away from home, you need to know about the changes to the Living Away From Home Allowance system.  The Government tightened the eligibility rules from 1 October 2012 for all new agreements entered into from 8 May 2012. Transitional rules can apply to arrangements entered into prior to 8 May 2012 but the full set of new rules will apply from 1 July 2014 or when the arrangement is modified (whichever comes first).

Basically, the new rules limit the concession to 12 months in a particular work location (except for fly in fly out employees), require temporary residents and non-residents to maintain a home in Australia, and receipts to be kept for all expenses.

In-house fringe benefit changes

The concessional fringe benefit tax treatment of in-house fringe benefits provided by employers under salary sacrifice arrangements was abolished from 22 October 2012 (transitional rules apply until 1 April 2014 for existing agreements).    This change will particularly affect retailers providing discounted goods such as clothing, and organisations such as private schools that provide discounted education for children of employees.

Previously, in-house property and residual benefits were eligible for a 25% reduction in the taxable value.   While this change occurred in 2012, we are likely to see the full effect in 2013 and beyond.

Building and construction industry reporting

A new reporting regime came into effect on 1 July 2012 requiring businesses in the building and construction industry to report payments to contractors.  The first of these reports is due on 21 July 2013.  Businesses affected by the reporting regime need to report the contractor’s ABN, name, address, gross amount paid for the financial year, and total GST included in the gross amount.
 


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2013 The Year Ahead For Businesses

Written on the 10th of February 2013

No age limit for super contributions

From 1 July 2013, the upper age limit for superannuation contributions will be abolished.   Employers will be required to contribute to the complying super funds of eligible mature age employees aged 70 and older.

Payslip reporting of super payments

From 1 July 2013, employers will need to provide additional information about superannuation contributions on an employee’s payslip.  Employers will need to report the amount and expected date of contributions they are making. 

Living away from home

If you have employees living away from home, you need to know about the changes to the Living Away From Home Allowance system.  The Government tightened the eligibility rules from 1 October 2012 for all new agreements entered into from 8 May 2012. Transitional rules can apply to arrangements entered into prior to 8 May 2012 but the full set of new rules will apply from 1 July 2014 or when the arrangement is modified (whichever comes first).

Basically, the new rules limit the concession to 12 months in a particular work location (except for fly in fly out employees), require temporary residents and non-residents to maintain a home in Australia, and receipts to be kept for all expenses.

In-house fringe benefit changes

The concessional fringe benefit tax treatment of in-house fringe benefits provided by employers under salary sacrifice arrangements was abolished from 22 October 2012 (transitional rules apply until 1 April 2014 for existing agreements).    This change will particularly affect retailers providing discounted goods such as clothing, and organisations such as private schools that provide discounted education for children of employees.

Previously, in-house property and residual benefits were eligible for a 25% reduction in the taxable value.   While this change occurred in 2012, we are likely to see the full effect in 2013 and beyond.

Building and construction industry reporting

A new reporting regime came into effect on 1 July 2012 requiring businesses in the building and construction industry to report payments to contractors.  The first of these reports is due on 21 July 2013.  Businesses affected by the reporting regime need to report the contractor’s ABN, name, address, gross amount paid for the financial year, and total GST included in the gross amount.
 



2013 The Year Ahead For Businesses

Written on the 10th of February 2013

No age limit for super contributions

From 1 July 2013, the upper age limit for superannuation contributions will be abolished.   Employers will be required to contribute to the complying super funds of eligible mature age employees aged 70 and older.

Payslip reporting of super payments

From 1 July 2013, employers will need to provide additional information about superannuation contributions on an employee’s payslip.  Employers will need to report the amount and expected date of contributions they are making. 

Living away from home

If you have employees living away from home, you need to know about the changes to the Living Away From Home Allowance system.  The Government tightened the eligibility rules from 1 October 2012 for all new agreements entered into from 8 May 2012. Transitional rules can apply to arrangements entered into prior to 8 May 2012 but the full set of new rules will apply from 1 July 2014 or when the arrangement is modified (whichever comes first).

Basically, the new rules limit the concession to 12 months in a particular work location (except for fly in fly out employees), require temporary residents and non-residents to maintain a home in Australia, and receipts to be kept for all expenses.

In-house fringe benefit changes

The concessional fringe benefit tax treatment of in-house fringe benefits provided by employers under salary sacrifice arrangements was abolished from 22 October 2012 (transitional rules apply until 1 April 2014 for existing agreements).    This change will particularly affect retailers providing discounted goods such as clothing, and organisations such as private schools that provide discounted education for children of employees.

Previously, in-house property and residual benefits were eligible for a 25% reduction in the taxable value.   While this change occurred in 2012, we are likely to see the full effect in 2013 and beyond.

Building and construction industry reporting

A new reporting regime came into effect on 1 July 2012 requiring businesses in the building and construction industry to report payments to contractors.  The first of these reports is due on 21 July 2013.  Businesses affected by the reporting regime need to report the contractor’s ABN, name, address, gross amount paid for the financial year, and total GST included in the gross amount.
 


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