Business Valuation
Discussion
Myself and my co-director (50/50) are considering bringing a third director into our business as we believe that their skills have good potential to add value to the business. I am looking for advice on how to value the business as a start to negotiations with the third party. I have tried one of the online assessments but my gut tells me that the numbers crunched and spat back to me are higher than they ought to be (immediate follow up call from one of their 'advisers' always arouses suspicion).
Any advice would be most appreciated.
Cheers.
Any advice would be most appreciated.
Cheers.
There's no formula in existence that is going to produce a figure acceptable to all the parties concerned.
If I was in a similar position I and my partner would start by figuring out how much had been out into the business already buying stock, equipment etc and use that as the basis for the negotiation, adjusting it up or down depending on how much you need the third shareholder and his money.
If I was in a similar position I and my partner would start by figuring out how much had been out into the business already buying stock, equipment etc and use that as the basis for the negotiation, adjusting it up or down depending on how much you need the third shareholder and his money.
Thanks for the responses.
Our sector is civil engineering/construction.
We do not carry stock.
Competition, yes, plenty in the sector.
We rent our premises.
No tech.
No IP.
We have 8 employees and use ad hoc sub-contractors for specialist works.
Gross profit of 42%. Net profit of 17% on just shy of 1m turnover in year 2. Year 1 250k ish, GP 38%, net profit 12% (keen pricing to get us started)
Organically growing with zero leverage. Bank likes us but we don't need them at the moment but never say never.
Kicked off with 10k- 5k each.
Excellent supply chain for plant and materials.
Good will? That's a tricky one to quantify as it can be a fickle market.
What would I want for my current partner to buy me out? I'd want to know what the business is worth just the same as I do now!
Our sector is civil engineering/construction.
We do not carry stock.
Competition, yes, plenty in the sector.
We rent our premises.
No tech.
No IP.
We have 8 employees and use ad hoc sub-contractors for specialist works.
Gross profit of 42%. Net profit of 17% on just shy of 1m turnover in year 2. Year 1 250k ish, GP 38%, net profit 12% (keen pricing to get us started)
Organically growing with zero leverage. Bank likes us but we don't need them at the moment but never say never.
Kicked off with 10k- 5k each.
Excellent supply chain for plant and materials.
Good will? That's a tricky one to quantify as it can be a fickle market.
What would I want for my current partner to buy me out? I'd want to know what the business is worth just the same as I do now!
Trophy Husband said:
Thanks for the responses.
Our sector is civil engineering/construction.
We do not carry stock.
Competition, yes, plenty in the sector.
We rent our premises.
No tech.
No IP.
We have 8 employees and use ad hoc sub-contractors for specialist works.
Gross profit of 42%. Net profit of 17% on just shy of 1m turnover in year 2. Year 1 250k ish, GP 38%, net profit 12% (keen pricing to get us started)
Organically growing with zero leverage. Bank likes us but we don't need them at the moment but never say never.
Kicked off with 10k- 5k each.
Excellent supply chain for plant and materials.
Good will? That's a tricky one to quantify as it can be a fickle market.
What would I want for my current partner to buy me out? I'd want to know what the business is worth just the same as I do now!
The value of the business is the contracts you have and the goodwill attached to the brand.Our sector is civil engineering/construction.
We do not carry stock.
Competition, yes, plenty in the sector.
We rent our premises.
No tech.
No IP.
We have 8 employees and use ad hoc sub-contractors for specialist works.
Gross profit of 42%. Net profit of 17% on just shy of 1m turnover in year 2. Year 1 250k ish, GP 38%, net profit 12% (keen pricing to get us started)
Organically growing with zero leverage. Bank likes us but we don't need them at the moment but never say never.
Kicked off with 10k- 5k each.
Excellent supply chain for plant and materials.
Good will? That's a tricky one to quantify as it can be a fickle market.
What would I want for my current partner to buy me out? I'd want to know what the business is worth just the same as I do now!
In this case, I guess it is fairly minimal.
I suppose you could argue that you have hit sustainable trading within 12 months, so to startup again would have an opportunity cost of £750k turnover @ 12% NP = £90k, but realistically if you did this deal and it all fell apart, I am guessing you and your original partner could easily create a new version more quickly and easily again.
Trophy Husband said:
Thanks for the responses.
Our sector is civil engineering/construction.
We do not carry stock.
Competition, yes, plenty in the sector.
We rent our premises.
No tech.
No IP.
We have 8 employees and use ad hoc sub-contractors for specialist works.
Gross profit of 42%. Net profit of 17% on just shy of 1m turnover in year 2. Year 1 250k ish, GP 38%, net profit 12% (keen pricing to get us started)
Organically growing with zero leverage. Bank likes us but we don't need them at the moment but never say never.
Kicked off with 10k- 5k each.
Excellent supply chain for plant and materials.
Good will? That's a tricky one to quantify as it can be a fickle market.
What would I want for my current partner to buy me out? I'd want to know what the business is worth just the same as I do now!
That's all good info, the reason i asked what it'd take to buy you out is that is a valuation figure to go from. Would you sell for 100k ? if so, business is worth 200k.Our sector is civil engineering/construction.
We do not carry stock.
Competition, yes, plenty in the sector.
We rent our premises.
No tech.
No IP.
We have 8 employees and use ad hoc sub-contractors for specialist works.
Gross profit of 42%. Net profit of 17% on just shy of 1m turnover in year 2. Year 1 250k ish, GP 38%, net profit 12% (keen pricing to get us started)
Organically growing with zero leverage. Bank likes us but we don't need them at the moment but never say never.
Kicked off with 10k- 5k each.
Excellent supply chain for plant and materials.
Good will? That's a tricky one to quantify as it can be a fickle market.
What would I want for my current partner to buy me out? I'd want to know what the business is worth just the same as I do now!
Normal is a valuation of between 4 and 10 times EBITDA but these things are rarely normal.
Good luck
Thankyou4calling said:
Trophy Husband said:
Thanks for the responses.
Our sector is civil engineering/construction.
We do not carry stock.
Competition, yes, plenty in the sector.
We rent our premises.
No tech.
No IP.
We have 8 employees and use ad hoc sub-contractors for specialist works.
Gross profit of 42%. Net profit of 17% on just shy of 1m turnover in year 2. Year 1 250k ish, GP 38%, net profit 12% (keen pricing to get us started)
Organically growing with zero leverage. Bank likes us but we don't need them at the moment but never say never.
Kicked off with 10k- 5k each.
Excellent supply chain for plant and materials.
Good will? That's a tricky one to quantify as it can be a fickle market.
What would I want for my current partner to buy me out? I'd want to know what the business is worth just the same as I do now!
That's all good info, the reason i asked what it'd take to buy you out is that is a valuation figure to go from. Would you sell for 100k ? if so, business is worth 200k.Our sector is civil engineering/construction.
We do not carry stock.
Competition, yes, plenty in the sector.
We rent our premises.
No tech.
No IP.
We have 8 employees and use ad hoc sub-contractors for specialist works.
Gross profit of 42%. Net profit of 17% on just shy of 1m turnover in year 2. Year 1 250k ish, GP 38%, net profit 12% (keen pricing to get us started)
Organically growing with zero leverage. Bank likes us but we don't need them at the moment but never say never.
Kicked off with 10k- 5k each.
Excellent supply chain for plant and materials.
Good will? That's a tricky one to quantify as it can be a fickle market.
What would I want for my current partner to buy me out? I'd want to know what the business is worth just the same as I do now!
Normal is a valuation of between 4 and 10 times EBITDA but these things are rarely normal.
Good luck
How much cash at bank? What value to place on that? Certainly not £1 for £1, so 80p?
Jockman said:
Agreed. It would also be important to know the value of shareholder funds to see what reserves are being built up or are they being extracted as dividends as soon as they are made?
How much cash at bank? What value to place on that? Certainly not £1 for £1, so 80p?
Why wouldn't you pay full value for the cash?How much cash at bank? What value to place on that? Certainly not £1 for £1, so 80p?
OP - does the net profit allow for a full salary for the roles you and your partner perform?
Once you have a value on the business as a whole, you still have to consider the value of the stake you're transferring.
If the shareholding is currently split 50:50 then both shareholders are currently required for a resolution to pass. Transfer part of the shareholding to the third party and you could potentially be outvoted by the other two shareholders. Hence it's not unreasonable for you to want a premium to cover risks of this loss of control.
Conversely your new investor will be looking at the value of their holding in terms of much control you still have. If their holding will be:
<10% - gives them no real control over the company, just rights to the dividends and capital growth
>15% - they could appeal to court on variation of rights (if you have different classes of shares)
>25% - they can block a special resolution (e.g. prevent voluntary liquidation of the company)
Assuming it is a private limited company, the articles of association might grant the other shareholders preemptive rights to buy the shares or find a buyer when one of the shareholders wants to sell. Such limits on transferability also reduce the value of a holding from a new investor's perspective so they'd be looking for a discount on the valuation of the business.
If the shareholding is currently split 50:50 then both shareholders are currently required for a resolution to pass. Transfer part of the shareholding to the third party and you could potentially be outvoted by the other two shareholders. Hence it's not unreasonable for you to want a premium to cover risks of this loss of control.
Conversely your new investor will be looking at the value of their holding in terms of much control you still have. If their holding will be:
<10% - gives them no real control over the company, just rights to the dividends and capital growth
>15% - they could appeal to court on variation of rights (if you have different classes of shares)
>25% - they can block a special resolution (e.g. prevent voluntary liquidation of the company)
Assuming it is a private limited company, the articles of association might grant the other shareholders preemptive rights to buy the shares or find a buyer when one of the shareholders wants to sell. Such limits on transferability also reduce the value of a holding from a new investor's perspective so they'd be looking for a discount on the valuation of the business.
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