Business valuation

[AyBee]

9mm said:

akirk said:

You mention that the % growth is declining due to lack of your drive in growing the business / increasing competitors - that for me would be instant warning flags in terms of buying a business - if I came to talk to you / did the DD / understood who was working for you as associates - what would be the block to stop me from setting up my own business / tempting your associates away / competing...?

i.e. what are you really selling - an ongoing concern for someone one wishing to not start from scratch, or something which I need to run a successful version of your business (client base / IP / process systems / etc.) which have a value where it makes more sense to buy than to reinvent?

if it is so simple to run, could you not just get someone local in to run it for you?

I think all businesses experience a slowdown in growth at some point. There are many reasons but the warning flags can also represent opportunities. This business works in a highly specialised field where it enjoys a great reputation with loyal customers, repeat business and recommendations. It would be quite easy and cheap to broaden its service using the existing customer base. So my lack of interest in doing it is equally a big opportunity for a new owner.

If you stick with my example of someone acting as agent for a national chain of regionally based debt collectors, with me doing some debt collecting but thinking of purely acting as agent, the blocks to stop you competing/tempting my associates away are obvious and not really any different. The problem for an existing competitor is that you will have to dramatically erode your existing profit margin as I pay my associates at least four or five times what they pay. So, as an existing debt collector, earning say £100 for a job, why on earth would you leave for £150 a job or even £300 a job, and leave someone who has provided you with all those £500 jobs for six years? Would you even leave for £500 a job - on a promise rather than six years of track record? These figures are all notional. If you want to set up in competition you will have to set up locally and hope to grow or regionally with an immediate team. Where will that team come from unless you immediately offer more than I do? I think if any of this was going to happen, I'd have seen evidence by now.

The reason that competitors exist is quite simple. They aren't as good and some customers are happy to pay less for an inferior service/product. Just as they are in the case of cars, airline travel, FX, watches, vets or hifi. I position this business as the best in the market, pay the best rates in the market but don't charge ludicrous fees. That's because the position in the market, associate loyalty and longevity are more important to me that squeezing every last drop of profit out of the business. Competitors come and mostly go.

So to answer your question, what I'm selling is a ready made income stream with the potential for growth, that can be run out of your spare bedroom for six or seven hours a week and gross you a minimum of £50K a year. I could indeed pay someone minimum wage to take care of the admin but I'd always pay someone a lot more because that would be in line with the way I treat my associates. This might be a problem for a purchaser who wants to increase profits by reducing fees paid but I'd see that as rather stupid greed. You would instantly make it easier for competitors or new entrants to tempt the associates away or incentivise them to try and work independently. Better imo to not be greedy and keep everyone happy.

Sounds like a great business, I assume it once took a lot of effort to get it off the ground? I'm intrigued as to what it is.

Are the associates contracted to you? In the debt collector scenario, I'd assume they were free to pick and choose which jobs they take so there's actually nothing to stop them doing your jobs plus jobs from others but as long as you keep jobs coming in and keep having associates to do them because you pay them well, then that all works? How much of your work is farming out the jobs to associates and how much is trying to get new customers? Or do you sit still and it all comes to you?

Where are you actually based if you don't mind me asking?

[9mm]

berlintaxi said:

9mm said:

The reason that competitors exist is quite simple. They aren't as good and some customers are happy to pay less for an inferior service/product. Just as they are in the case of cars, airline travel, FX, watches, vets or hifi. I position this business as the best in the market, pay the best rates in the market but don't charge ludicrous fees. That's because the position in the market, associate loyalty and longevity are more important to me that squeezing every last drop of profit out of the business. Competitors come and mostly go.

So what are the barriers to entry for a competitor who decides they will pay better rates and lower fees than you?

What is the tax set up?

No different to any other business and it's competitors. Give it your best shot. Perhaps someone will try but they haven't done yet. As I said, for an existing competitor, they'd need to dramatically increase the fees they pay (and reduce their profits) in order to lure my associates. Why would they do that when they are presumably happy to service a lower quality client with lower quality associates? Charging lower fees (and reducing their profits) is another option but our fees are already seen as highly competitive - despite the quality being perceived as higher.

A new entrant to the market will need the associates. These are in short supply and I've already illustrated the choice an associate would have to make. Trust this new kid on the block with their promises over my track record. I guess a parallel would be something like house surveys. If it was as simple as lowering their fees and offering better rates to surveyors, only one company would provide the service. AFAIK they don't.

Ultimately, it's rarely as simple as paying better rates and charging lower fees or it would be simple to dominate a market. I have competitors and I'm sure some of them have thought of doing it but so far they haven't. Who would? The risks are considerable. On the other hand, should this business decline (for whatever reason) I walk away with no liabilities of any kind. There is a lot to be said for not being greedy and trying to wring every last penny out of a business.

I'm not going to comment on the taxation arrangements/business status to keep things suitably vague. It doesn't affect the saleability of the business in any way.

[berlintaxi]

9mm said:

I'm not going to comment on the taxation arrangements/business status to keep things suitably vague. It doesn't affect the saleability of the business in any way.

Of course it does, massive difference between a sole trader selling a business and a limited company, especially as you keep saying you have no liabilities.

[bad company]

When I sold my business I got a free valuation from here:-

http://www.turnerbutler.co.uk

Then managed to sell to a buyer I already knew but the valuation helped the negotiations.

[Tyre Tread]

Please just don't sign anything with ANY Business Transfer Agent unless you read it all very carefully.

[bad company]

Tyre Tread said:

Please just don't sign anything with ANY Business Transfer Agent unless you read it all very carefully.

Yes, good advice. I got their valuation but DID NOT instruct them to sell.

[9mm]

berlintaxi said:

9mm said:

I'm not going to comment on the taxation arrangements/business status to keep things suitably vague. It doesn't affect the saleability of the business in any way.

Of course it does, massive difference between a sole trader selling a business and a limited company, especially as you keep saying you have no liabilities.

It may have an impact on valuation and the degree of complexity but not the basic saleability.

If you just use the debt collection or house survey examples I've given it should be obvious why there are no liabilities but I'll say it again, trying to make it as realistic as possible.

You are, let's say, a commercial surveyor in Cornwall. You typically get paid £200 a survey which is the market rate. You could do a better job but to be frank there's little incentive. The people that employ you charge the client £2000 for the survey. The people who use your services often have big offices, big overheads and big liabilities.

I am a commercial surveyor in London. Due to being a very good surveyor who has built up a solid reputation I get to the point where I can't satisfy the demand that is coming from all over the country. One such place is Cornwall. I approach you and offer you £800-£1000 for a job that would have paid £200. I charge the client £2100. I have no overheads.

You are delighted, the client is delighted. I am delighted.

To add: if you try and go to the clients directly and charge £800-£1000 you won't get past reception because you don't possess the credibility I have with national coverage and the status that goes with that. You might get the odd job, perhaps at double your usual £200, but why wouldn't you work for £800-£1000 for me. You'd be mad not to.

Edited by 9mm on Wednesday 29th April 11:11

[9mm]

AyBee said:

9mm said:

akirk said:

You mention that the % growth is declining due to lack of your drive in growing the business / increasing competitors - that for me would be instant warning flags in terms of buying a business - if I came to talk to you / did the DD / understood who was working for you as associates - what would be the block to stop me from setting up my own business / tempting your associates away / competing...?

i.e. what are you really selling - an ongoing concern for someone one wishing to not start from scratch, or something which I need to run a successful version of your business (client base / IP / process systems / etc.) which have a value where it makes more sense to buy than to reinvent?

if it is so simple to run, could you not just get someone local in to run it for you?

I think all businesses experience a slowdown in growth at some point. There are many reasons but the warning flags can also represent opportunities. This business works in a highly specialised field where it enjoys a great reputation with loyal customers, repeat business and recommendations. It would be quite easy and cheap to broaden its service using the existing customer base. So my lack of interest in doing it is equally a big opportunity for a new owner.

If you stick with my example of someone acting as agent for a national chain of regionally based debt collectors, with me doing some debt collecting but thinking of purely acting as agent, the blocks to stop you competing/tempting my associates away are obvious and not really any different. The problem for an existing competitor is that you will have to dramatically erode your existing profit margin as I pay my associates at least four or five times what they pay. So, as an existing debt collector, earning say £100 for a job, why on earth would you leave for £150 a job or even £300 a job, and leave someone who has provided you with all those £500 jobs for six years? Would you even leave for £500 a job - on a promise rather than six years of track record? These figures are all notional. If you want to set up in competition you will have to set up locally and hope to grow or regionally with an immediate team. Where will that team come from unless you immediately offer more than I do? I think if any of this was going to happen, I'd have seen evidence by now.

The reason that competitors exist is quite simple. They aren't as good and some customers are happy to pay less for an inferior service/product. Just as they are in the case of cars, airline travel, FX, watches, vets or hifi. I position this business as the best in the market, pay the best rates in the market but don't charge ludicrous fees. That's because the position in the market, associate loyalty and longevity are more important to me that squeezing every last drop of profit out of the business. Competitors come and mostly go.

So to answer your question, what I'm selling is a ready made income stream with the potential for growth, that can be run out of your spare bedroom for six or seven hours a week and gross you a minimum of £50K a year. I could indeed pay someone minimum wage to take care of the admin but I'd always pay someone a lot more because that would be in line with the way I treat my associates. This might be a problem for a purchaser who wants to increase profits by reducing fees paid but I'd see that as rather stupid greed. You would instantly make it easier for competitors or new entrants to tempt the associates away or incentivise them to try and work independently. Better imo to not be greedy and keep everyone happy.

Sounds like a great business, I assume it once took a lot of effort to get it off the ground? I'm intrigued as to what it is.

Are the associates contracted to you? In the debt collector scenario, I'd assume they were free to pick and choose which jobs they take so there's actually nothing to stop them doing your jobs plus jobs from others but as long as you keep jobs coming in and keep having associates to do them because you pay them well, then that all works? How much of your work is farming out the jobs to associates and how much is trying to get new customers? Or do you sit still and it all comes to you?

Where are you actually based if you don't mind me asking?

There was hard work in the first couple of years when I set up systems, devised templates and established a customer base, market presence, etc but now those things are all in place it's just a question of fine adjustments and sailing the ship. As I do less providing of the service and switch to admin the workload and time demand decreases.

Associates are not formally contracted to me but they work to a set of rules and they know that if those rules are breached the relationship will end. It has only happened twice and in both cases the consequences for them have been dramatic - a return to scratching around for crap money from the people that pay peanuts. That lesson isn't lost on the other associates. People might be tempted to replicate the model but you have to understand that what I give them is highly attractive - regular leads, prompt payment way more than they can earn elsewhere and no admin. The skills they need to do the job are not the same skills you need to provide them with that package so many are not remotely interested in 'running the business' and nor do they resent my take because they recognise I make life very easy for them.

They can take work from whatever source they like, including competitors but it's easy to see why they would rather do one job for me than four for a competitor. I like them to do jobs for competitors if I'm not using them as it only reinforces what a good deal they have with me. I don't need to do any 'active' marketing. I effectively sit still and the business comes to me via website, social media, recommendation and word of mouth. That's a consequence of six years' market presence and a customer base to go with it.

The business is national but I'm based in the south east. As with other work, there tends to be more in the south, but this business has customers all over the country and could be run from anywhere in the country. In fact, when I'm holiday abroad, it's run via a smartphone.

Edited by 9mm on Wednesday 29th April 11:50

[berlintaxi]

9mm said:

berlintaxi said:

9mm said:

I'm not going to comment on the taxation arrangements/business status to keep things suitably vague. It doesn't affect the saleability of the business in any way.

Of course it does, massive difference between a sole trader selling a business and a limited company, especially as you keep saying you have no liabilities.

It may have an impact on valuation and the degree of complexity but not the basic saleability.

If you just use the debt collection or house survey examples I've given it should be obvious why there are no liabilities but I'll say it again, trying to make it as realistic as possible.

You are, let's say, a commercial surveyor in Cornwall. You typically get paid £200 a survey which is the market rate. You could do a better job but to be frank there's little incentive. The people that employ you charge the client £2000 for the survey. The people who use your services often have big offices, big overheads and big liabilities.

I am a commercial surveyor in London. Due to being a very good surveyor who has built up a solid reputation I get to the point where I can't satisfy the demand that is coming from all over the country. One such place is Cornwall. I approach you and offer you £800-£1000 for a job that would have paid £200. I charge the client £2100. I have no overheads.

You are delighted, the client is delighted. I am delighted.

To add: if you try and go to the clients directly and charge £800-£1000 you won't get past reception because you don't possess the credibility I have with national coverage and the status that goes with that. You might get the odd job, perhaps at double your usual £200, but why wouldn't you work for £800-£1000 for me. You'd be mad not to.

You still have tax and possibly VAT to pay on the fee you charge and how you are set up could make a big difference to the amount of tax you will be paying on that fee affecting how much I as an individual could earn from the business, hence my question on your tax set up.

[9mm]

Swings and roundabouts in terms of pros and cons as you know but I don't believe it would make a significant difference to the value of the business whatever the setup. Subject to things like thresholds, the status can always be changed.

[akirk]

It is difficult without knowing the details...
however there are I think some issues with how you describe it...

you apparently have no overheads or costs, so no barrier to entry for someone there...
you haven't tied your associates to you, so no barrier to entry there
you say that one of your selling points is the amount you pay, but if the figures work for you, they will also work for someone else
you say that your associates are loyal to you and when a couple misbehaved the consequences were dramatic... seems a bit OTT...
you say that others can't compete as associates want to use you as you pay more - maybe others are making more profit?

the difficulty is that I can't see what you are actually selling - other than the convenience of avoiding the startup process...
however balancing that against a purchase cost is an interesting debate - the lack of anything you are actually selling also means a lack of barrier to entry for someone else - so person A comes and buys the business, but possibly would have been better spending that money on starting their own / as incentives for associates / etc. - or person B comes andsets up in competition has person A lost a chunk of value in what they bought?

normally there is a reason for the purchase - IPR / customer base (and prefereably ongoing contracts) / brand & market share / assets / etc. it could simply be the time & cost barriers to entry which can be avoided... but if none of that exists, all you are buying is an income stream but it is volatile, with little to help retain that into the future... it doesn't mean that there is no value - but it certainly would reduce the value considerably...

definitely worth talking to some agents where you can discuss the actual details rather than a forum playing guessing games

[anonymous-user]

I think he has already addressed what the business has:

It has a good reputation, an established database of clients requiring whatever service he does and a website that does well in natural searched without requiring pay per click.


So the business gets leads, intros them to other businesses to deal with and takes a cut. Fairly standard stuff.

It's worth buying to either secure the brand and the leads or to shortcut the need to SEO work (can be expensive and time consuming if you can't do it yourself) or to pay up front for click through to the website.

Either way - I would be considering paying someone to do the admin (even at £100 an hour there's good profit) and take the remainder as nil-input cash or (more probably) seek to control more associates and take more of the total spend on the product/serivce

[bad company]

Let's be honest here. I and others have advised ways of valuing the business. The op is really looking to sell to a PH'r reading the thread.

Am I wrong ?

[akirk]

desolate said:

I think he has already addressed what the business has:

It has a good reputation, an established database of clients requiring whatever service he does and a website that does well in natural searched without requiring pay per click.


So the business gets leads, intros them to other businesses to deal with and takes a cut. Fairly standard stuff.

It's worth buying to either secure the brand and the leads or to shortcut the need to SEO work (can be expensive and time consuming if you can't do it yourself) or to pay up front for click through to the website.

Either way - I would be considering paying someone to do the admin (even at £100 an hour there's good profit) and take the remainder as nil-input cash or (more probably) seek to control more associates and take more of the total spend on the product/serivce

Fair points - but nothing there which stops competitors, which the OP seems to think he has...
Agreed though, I would see much more value in keeping the business than he might get in selling it

[AyBee]

bad company said:

Let's be honest here. I and others have advised ways of valuing the business. The op is really looking to sell to a PH'r reading the thread.

Am I wrong ?

It's difficult to know whether I'd be interested based on the information provided though.

Do you have a NDA for potential buyers OP?

[9mm]

bad company said:

Let's be honest here. I and others have advised ways of valuing the business. The op is really looking to sell to a PH'r reading the thread.

Am I wrong ?

Yes, completely.

[9mm]

akirk said:

It is difficult without knowing the details...
however there are I think some issues with how you describe it...

you apparently have no overheads or costs, so no barrier to entry for someone there...
you haven't tied your associates to you, so no barrier to entry there
you say that one of your selling points is the amount you pay, but if the figures work for you, they will also work for someone else
you say that your associates are loyal to you and when a couple misbehaved the consequences were dramatic... seems a bit OTT...
you say that others can't compete as associates want to use you as you pay more - maybe others are making more profit?

the difficulty is that I can't see what you are actually selling - other than the convenience of avoiding the startup process...
however balancing that against a purchase cost is an interesting debate - the lack of anything you are actually selling also means a lack of barrier to entry for someone else - so person A comes and buys the business, but possibly would have been better spending that money on starting their own / as incentives for associates / etc. - or person B comes andsets up in competition has person A lost a chunk of value in what they bought?

normally there is a reason for the purchase - IPR / customer base (and prefereably ongoing contracts) / brand & market share / assets / etc. it could simply be the time & cost barriers to entry which can be avoided... but if none of that exists, all you are buying is an income stream but it is volatile, with little to help retain that into the future... it doesn't mean that there is no value - but it certainly would reduce the value considerably...

definitely worth talking to some agents where you can discuss the actual details rather than a forum playing guessing games

That's a helpful post (I appreciate those from others too) and the bit in bold a reasonable analysis.

These helpful posts have helped me to clarify my thinking both in terms of value and the decision whether to sell or not.

Just to clarify a couple of points from your post:

The consequences were dramatic because the business relationship with me was terminated and that put them (back) in the position of needing to do four or five jobs to every one of mine. The terms of our relationship were explicit and they were clearly and deceitfully breached. In those circumstances there can be no second chances. I think it's helpful in many walks of life to be clear about what everyone can expect of each other and then to follow through when those agreements are breached.

It may be that others are making more profit but that's not my concern as long as I am making a comfortable (notional) £50K for the effort and time I'm putting in. In many ways I don't want to rock the boat and make more or I could become a threat resulting in all sorts of time consuming hassle and potentially lost business, say in the case of a price war type scenario.

[9mm]

akirk said:

desolate said:

I think he has already addressed what the business has:

It has a good reputation, an established database of clients requiring whatever service he does and a website that does well in natural searched without requiring pay per click.


So the business gets leads, intros them to other businesses to deal with and takes a cut. Fairly standard stuff.

It's worth buying to either secure the brand and the leads or to shortcut the need to SEO work (can be expensive and time consuming if you can't do it yourself) or to pay up front for click through to the website.

Either way - I would be considering paying someone to do the admin (even at £100 an hour there's good profit) and take the remainder as nil-input cash or (more probably) seek to control more associates and take more of the total spend on the product/serivce

Fair points - but nothing there which stops competitors, which the OP seems to think he has...
Agreed though, I would see much more value in keeping the business than he might get in selling it

This is my conclusion. Why sell something for the current annual income when that business has made several times that in the last six years and is likely to continue producing that annual income for the forseeable future. 'Employing' someone to take care of the admin and just take the money for as long as it lasts would seem to be the sensible approach unless something happens to change the status quo. If the income drys up, I just shut down, with no liabilities beyond HMRC.

[akirk]

interesting thread - just to support the way in which the thinking is going... I know someone who built up several businesses of this type - moving each over to someone else to run for them - ended up with a very nice passive income stream... biggest challenge each time was not the business, but finding the right person to run it once it was mature...