Business valuation
Discussion
Bit of background - a few years I started a few small businesses by way of diversification post 2008 crash. Some didn't get off the ground, some faltered and went nowhere, a couple took off. I'm now in the process of some important (financial + business) planning and I am considering selling one of these profitable businesses. The main motivation for selling would be capital raising and freeing up time to use on a new project at the moment but there is plenty of flexibility. Actually, it's not so much the time but when the time input is needed; it's in conflict with the new project. The business isn't in trouble and would be very easy for anyone else to run, something I think might make it attractive to someone looking for decent regular income for a low level of input of maybe an hour or two a day.
Its value (I think) lies in the fact it has a six year track record of year on year growth in a vibrant sector and it really can be run from a spare bedroom with no equipment requirements. There's scope for growth and diversification but I'd rather sell that potential than put in the effort to do it myself. I've also got the idea there might be people about looking for an alternative to an annuity, perhaps with a very small pension pot that is never going to deliver anything like what this business produces.
I can and do tell people how to run a business but one area I've never understood is that of business valuation and that's where I'd like some input. I've read about multiples and such like but can anyone give me a formula and/or checklist I can use to give me a starting point? I'm quite happy to share numbers and pretty much anything about the business apart from exactly what it is and what it's called. You can probably understand why I'm dubious about web-based services which appear to be based on value of business = (x-y)* 2 or 3.
Its value (I think) lies in the fact it has a six year track record of year on year growth in a vibrant sector and it really can be run from a spare bedroom with no equipment requirements. There's scope for growth and diversification but I'd rather sell that potential than put in the effort to do it myself. I've also got the idea there might be people about looking for an alternative to an annuity, perhaps with a very small pension pot that is never going to deliver anything like what this business produces.
I can and do tell people how to run a business but one area I've never understood is that of business valuation and that's where I'd like some input. I've read about multiples and such like but can anyone give me a formula and/or checklist I can use to give me a starting point? I'm quite happy to share numbers and pretty much anything about the business apart from exactly what it is and what it's called. You can probably understand why I'm dubious about web-based services which appear to be based on value of business = (x-y)* 2 or 3.
Eric Mc said:
Finger in the air.
See who's interested.
There is no magic formula.
This is correct.See who's interested.
There is no magic formula.
edited: this sounds like something that is micro level - so any value would really needs to take in to consideration that a notional wage needs to be taken into consideration for the hours put in.
Edited by anonymous-user on Friday 24th April 11:38
9mm said:
Why then do so many people appear to use just such a thing?
I have no idea.Values are anything from 0 x to 25 times profit. Every deal I have ever done has been different. Each sector is different. The amount of work and capital required to produce the profit is different.
So there is no magic formula.
Edit - if you put some detail up I will have a stab and explain my thought process.
9mm said:
Why then do so many people appear to use just such a thing?
A few reasons but typically these two: Firstly they are inquisitive. Secondly they want to sell but have no idea what their business is worth and so this is the first step. Business valuations vary as much as businesses do. A basic valuation only considers a very few elements of the business and so, as above, can completely overlook other aspects of value such as IPR, skilled staff, brand name, staff loyalty, etc.
Others are far more comprehensive but even with these it is unwise to give an exact number. Most give a range of values and should only ever be treated as a guide.
It’s a cliché but ultimately a business really is only worth what someone is willing to pay for it.
For such a small business here valuations are almost impossible. I’d recommend looking at similar types of businesses for sale now on various websites and pitching it at your best guess.
(Above info cribbed from Frimley111R
)Edited by Undirection on Friday 24th April 12:00
Micro businesses are invariably and inextricably linked to the personality of the proprietor. It is pretty much impossible to put monetary values on -
personality
relationships
history
feelings
comfort factor
All these elements probably matter as much in businesses of this size as -
turnover
property
assets
liabilities
which are the usual benchmarks used in business valuations.
personality
relationships
history
feelings
comfort factor
All these elements probably matter as much in businesses of this size as -
turnover
property
assets
liabilities
which are the usual benchmarks used in business valuations.
aceparts said:
Company A makes no money BUT they have advanced ip that any company could buy to make an additional £10M profit per year. Value... Maybe £30M?
Company B makes £500K a year but is easily copied and has no barriers to entry / usp. Value... £0K-£1m?
This.Company B makes £500K a year but is easily copied and has no barriers to entry / usp. Value... £0K-£1m?
It is all about barriers to replication.
If the business is just wholesale to retail, no brand, no goodwill, then it may well be limited in value. If it owns a brand, IP, etc, then it's cornered it's own market for now.
desolate said:
9mm said:
Why then do so many people appear to use just such a thing?
I have no idea.Values are anything from 0 x to 25 times profit. Every deal I have ever done has been different. Each sector is different. The amount of work and capital required to produce the profit is different.
So there is no magic formula.
Edit - if you put some detail up I will have a stab and explain my thought process.
This is a business that delivers a service on a regional basis, pretty much 100% UK and Ireland, but there are no substantial barriers to taking it overseas. It's legal. Bad debt is non-existent.
There are no assets, no liabilities and no employees.
Associates, not employees, are provided with leads in their area. I (or you, should you buy this business) can provide the same service in your own area if you have the ability and the desire, thereby boosting your take. Alternatively you could possess none of the skills or desire and simply sub to a local associate. For all associates this represents lucrative part-time employment. Despite this, the skills they have are specialised, which makes them hard to source, especially when you pay the same as everyone else. I pay much more, which means I don't have that problem and my people don't leave me.
These associates are extremely well paid for what they do, more than they can earn from working for a competitor. This has contributed to high levels of loyalty - most having been with the business for several years. They can try and leave and set up on their own but this has never succeeded yet. I can't say exactly why, only that breaking into the market without national coverage is extremely difficult to do and setting up national coverage is also difficult when you will need the people who presently work with me. They earn very well so will require a considerable incentive and know they are giving up guaranteed income from me before they would go elsewhere - and they don't.
Leads are obtained via website (it has a top three, page one listing on most Google searches and doesn't need Adwords) and social media but as the business has matured so has the number of leads represented by recommendation or repeat business. Once a lead has been converted into a sale - tends to be quick and easy to filter the sales from the dross - it will be offered to an associate with a price/fee. If they don't want it, it will be offered to someone else. If anyone other than me delivers the service, I take a fee and they take a fee. If I do it personally, it's all mine. If I put everything to associates, this does not take more than a couple of hours a day and requires nothing more than a PC and telephone. However, over time a successful sales process has obviously been developed including templates and all the other things you would need to convert an inquiry into a sale. Associates are responsible for paying tax on their fee - I never see their fee as it's paid directly to them.
Some figures. Over five years the gross income has grown from £7K pa to circa £100K pa. Growth has been proportionate year on year although it has now slowed and I project the current year to exceed last year's income by a single figure percentage. The total payment to associates is around 40%. I would be close to 50% if I purely fed leads and didn't provide the service myself. The main reasons for the slowdown in growth are an inevitable maturation, a disinclination on my part to grow the business due to the time investment it would require and increased competition.
So there you have it. A business that grosses you £50K pa for two hours a day (probably six days a week for nine months of the year, much less for the other three months).
As you can imagine, I've looked at how much you'd need to buy an income of £50K a year. This isn't guaranteed of course, but what business is? The track record is indisputable and picking up on Eric's point, my personality isn't a part of it. With the systems and templates I have in place, anyone with a decent brain could run it and grow it. Should the market collapse, I have no-one to make redundant, no contracts to satisfy - I just walk away.
You'd be buying the business as a going concern, which includes website, domain name(s), customer list going back six years and the associate list. I'd be quite happy to guarantee to stay out of the marketplace.
I'd be really interested to hear what you think it's worth.
So in essence we are talking about a small internet marketing business with decent existing relationships and some of the SEO legwork done.
It depends on the market sector and my internet experience is limited to insurance and sports related but I would say at the size it is and showing a growth plan that is slowing down I would say somewhere between 25K and 50K. Payable on the Drip over 12/24 months.
It may be worth a lot more in a sexy sector or to a competitor or associate. In my experience selling to someone you know will improve the business will get the best deal.
It may be worth paying someone a few hundred quid to draw up a sexy business plan showing different growth scenarios.
It depends on the market sector and my internet experience is limited to insurance and sports related but I would say at the size it is and showing a growth plan that is slowing down I would say somewhere between 25K and 50K. Payable on the Drip over 12/24 months.
It may be worth a lot more in a sexy sector or to a competitor or associate. In my experience selling to someone you know will improve the business will get the best deal.
It may be worth paying someone a few hundred quid to draw up a sexy business plan showing different growth scenarios.
desolate said:
So in essence we are talking about a small internet marketing business with decent existing relationships and some of the SEO legwork done.
It depends on the market sector and my internet experience is limited to insurance and sports related but I would say at the size it is and showing a growth plan that is slowing down I would say somewhere between 25K and 50K. Payable on the Drip over 12/24 months.
It may be worth a lot more in a sexy sector or to a competitor or associate. In my experience selling to someone you know will improve the business will get the best deal.
It may be worth paying someone a few hundred quid to draw up a sexy business plan showing different growth scenarios.
Thanks. I struggle with the idea that it's worth what I could pretty much guarantee you'd receive in the next twelve months if 'you' bought it from me now. That seems like quite a good deal to me and makes me think I'd be better off just milking this business until it stops providing an easy income stream and in that time subbing out the admin so I can get on with the other project.It depends on the market sector and my internet experience is limited to insurance and sports related but I would say at the size it is and showing a growth plan that is slowing down I would say somewhere between 25K and 50K. Payable on the Drip over 12/24 months.
It may be worth a lot more in a sexy sector or to a competitor or associate. In my experience selling to someone you know will improve the business will get the best deal.
It may be worth paying someone a few hundred quid to draw up a sexy business plan showing different growth scenarios.
Eric - I'm sure you know that I was being traditional tangible in my comments about assets and liabilities. There is no plant, no contracts, no debt, no employees, etc.
loafer123 said:
Definitely sell to your most trusted associate - they'll understand the business, believe you can make money out of nothing, and won't need to DD it too much.
It's not money out of nothing, it's a service, just not one I'm going to specify, but the model applies to all sorts of things. If I said I collect debts (I don't) and have X associate bruisers around the country (I don't), all of whom take a fee and that I also do some collecting in my own area, can you see the business model?What makes this one a bit different is that the overheads are minuscule. Unfortunately my most trusted associate (and the least for that matter) doesn't have the cash to tempt me.
What's DD?
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