Very very Small Businesses. The Assets + SDE Valuation Method

professional profile

October 25, 2023

by a professional from Bishop's University in Moncton, NB, Canada

***New Video Alert!

How can Zafer value his small grocery store?

Is it as simple as adding up the contents and then adding some goodwill value?

What should this goodwill amount be?

We dive in to one method which attempts to do this… Assets + SDE.

Watch it here: https://youtu.be/u76t1zunMEk



Cheers

See you over on YouTube

David C Barnett


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Reply by a searcher
from Vanderbilt University in Cincinnati, OH, USA
The only caveat I would add is realistically as a buyer you shouldn't use book value at all to value in that scenario. If you've ever been around the ABL (asset-based lending) world, you're only going to be able to borrow a % of the lower of BV or FMV. This is to make sure the assets can be sold if a liquidation takes place and cover the expenses incurred during that down time.

Using your food truck analogy, paying $90K book value for the truck is probably too much because if the buyer (or seller) wanted to immediately sell the truck the market price that would likely occur at a much lower price. ($50K?) (Not unlike selling a used car back to a dealership.) The buyer has automatically overpaid because they can't get their asset investment out. The only risk for the buyer in this scenario should be the SDE payment.

Any scenario where the asset FMV is meaningfully higher than book will likely result in the seller liquidating the assets because it results in a higher overall value.
commentor profile
Reply by a professional
from Bishop's University in Moncton, NB, Canada
I believe I always referred to FMV. I never use book value for anything, esp in American businesses with all the accelerated depreciation options, book value really is meaningless.
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