How to value a business
How to value a business
Author
Discussion

RRLover

Original Poster:

450 posts

232 months

Wednesday 6th December 2017
quotequote all
As above
How would you value a business ?
Turnover roughly 750k. 200k net profit
Been trading for nearly 20 years.
Niche marketplace, business has steadily grown over the past few years.
All building owned.

Just looking for some help & info from the professionals

StevieBee

15,414 posts

285 months

Wednesday 6th December 2017
quotequote all
Many variables apply: Importance of outgoing management, customer retention, liabilities, market trends....

It used to be that a starting point was NP x 6 but I think that has long been abandoned.

Ultimately it comes down to how much you are willing to sell and how much someone is willing to pay, recognising that those who sell always feel they have undervalued the business and those that buy consider they have paid to much.

Flat-6

2,354 posts

200 months

Wednesday 6th December 2017
quotequote all
And the value of assets included in the sale (that's current value not what they cost)

Frimley111R

19,322 posts

264 months

Wednesday 6th December 2017
quotequote all
Use this as a starting point:https://firmgains.com/services/valuation-calculator/

RRLover

Original Poster:

450 posts

232 months

Wednesday 6th December 2017
quotequote all
Thank you

4x4Tyke

6,506 posts

162 months

Wednesday 6th December 2017
quotequote all
Generally net asset value over liabilities plus some multiple of the net profit averaged over recent years.

The nature of the assets makes a difference for example high capital asset values reduce the multiple, also consider the P/E above the opportunity cost of the capital.

The multiple varies but will include industry maturity, revenue trend, role of the owner and goodwill.

It is not simple and you should really look for an expert on your locale and industry.

RRLover

Original Poster:

450 posts

232 months

Wednesday 6th December 2017
quotequote all
Info is for a friend. Hes managed the business over the past few years & have improved it considerably.
He feels that its time for him to step up & give the owner an offer.
I reckoned 500k, rent the building from him on a 10 year lease with an option to buy them, buildings are worth 350k & probably of no use to anyone in current condition but they do suit the business

jonby

5,367 posts

187 months

Thursday 7th December 2017
quotequote all
RRLover said:
Info is for a friend. Hes managed the business over the past few years & have improved it considerably.
He feels that its time for him to step up & give the owner an offer.
I reckoned 500k, rent the building from him on a 10 year lease with an option to buy them, buildings are worth 350k & probably of no use to anyone in current condition but they do suit the business
Lots of other important factors if this is about persuading an owner to sell a business which might be his main / only source of income (?), given the paltry returns they can expect from a £500k lump sum in today's market. Way too many factors to fully list. For instance, is the owner looking to sell, is he young or old, does he take much of his income as divis from the profit, how much of the profit needs reinvesting into the business each year, etc. Then you have to look at competitors - is this business large or small compared to its competitors ? Would a competitor pay a large sum for strategic value, either to help dominate the market, or to help it grow quickly, etc. If so, your friend could offer a fair figure but a competitor may value the business more highly because of the value to them is greater than the value to him. Could/would the owner start a similar business after selling to immediately compete? Would the owner have an end goal which might influence what they need, regardless of what the business is worth, to persuade him to sell (rather like a house seller holding out for an unrealistic sum, regardless of the property's worth, because they need to cover a mortgage).

Put simply, you can go through a very sound valuation process, arrive at a figure, but find the price that needs to be offered is very different because of all the other potential influencing factors. We value and most importantly, also sell businesses - the 'deal price' often bears no relation to the independently assessed 'value', as 'value' is often different to each purchaser based on their unique position and different again, to the 'value' to the owner/seller

On the other hand, going back on everything I've said, there are some industries with fairly well established formulas for value, in which instance whilst the factors above still have some influence, it's easier to use said established formula. Other industries have no such formula

DSLiverpool

16,532 posts

232 months

Thursday 7th December 2017
quotequote all
RRLover said:
Info is for a friend. Hes managed the business over the past few years & have improved it considerably.
He feels that its time for him to step up & give the owner an offer.
I reckoned 500k, rent the building from him on a 10 year lease with an option to buy them, buildings are worth 350k & probably of no use to anyone in current condition but they do suit the business
Why would the owner want to do this? assuming you mean nett after salary he is making £200k a year for doing not much.

Your pals leverage is the amount of shrinkage the business experiences if he left then measure this against him starting up on his own and the perfect recipe for is for a partnership deal possibly with a full ownership option after x years and for x £

Tell him to buy in not buy all


Thankyou4calling

11,025 posts

203 months

Thursday 7th December 2017
quotequote all
200k net profit from 750k income is staggering.

I'd be very wary.

But if it s making that NET the simple answer is to put a manager in on £50k plus 20% of everything over and continue to take 150k. Minimum.



Edited by Thankyou4calling on Thursday 7th December 14:02

Jockman

18,414 posts

190 months

Thursday 7th December 2017
quotequote all
Thankyou4calling said:
200k net profit from 750k income is staggering.

I'd be very wary.

But if it s making that NET the simple answer is to put a manager in on £50k plus 20% of everything over and continue to take 150k. Minimum.



Edited by Thankyou4calling on Thursday 7th December 14:02
Wouldn't be surprised if that weren't GP.

Jockman

18,414 posts

190 months

Thursday 7th December 2017
quotequote all
jonby said:
Lots of other important factors if this is about persuading an owner to sell a business which might be his main / only source of income (?), given the paltry returns they can expect from a £500k lump sum in today's market. Way too many factors to fully list. For instance, is the owner looking to sell, is he young or old, does he take much of his income as divis from the profit, how much of the profit needs reinvesting into the business each year, etc. Then you have to look at competitors - is this business large or small compared to its competitors ? Would a competitor pay a large sum for strategic value, either to help dominate the market, or to help it grow quickly, etc. If so, your friend could offer a fair figure but a competitor may value the business more highly because of the value to them is greater than the value to him. Could/would the owner start a similar business after selling to immediately compete? Would the owner have an end goal which might influence what they need, regardless of what the business is worth, to persuade him to sell (rather like a house seller holding out for an unrealistic sum, regardless of the property's worth, because they need to cover a mortgage).

Put simply, you can go through a very sound valuation process, arrive at a figure, but find the price that needs to be offered is very different because of all the other potential influencing factors. We value and most importantly, also sell businesses - the 'deal price' often bears no relation to the independently assessed 'value', as 'value' is often different to each purchaser based on their unique position and different again, to the 'value' to the owner/seller

On the other hand, going back on everything I've said, there are some industries with fairly well established formulas for value, in which instance whilst the factors above still have some influence, it's easier to use said established formula. Other industries have no such formula
You're right to point out the intangibles. HoTs will sort some of these out eg future intentions of the vendor but, yes, there are unquantifiables.

Working out the ebitda is the easy part. Assessing which multiplier to use is much more tricky. Parts of my industry would suggest 3x or 4x. The retail side generally looks at 9x or 10x, especially if a big player like Dignity is involved.

Yipper

5,964 posts

120 months

Thursday 7th December 2017
quotequote all
Valuing a company is an art, not a science...

Apple's net profit margin is roughly 20%... Its stockmarket valuation right now is roughly 2 times annual revenue + net cash, 4 times annual revenue alone, or 18 times net profit...

Assuming your figures are true, and the business is growing, in a growth industry, with no major regulatory issues on the horizon, profit trends are stable or strong, with low or no debt, and the "key staff" cannot up sticks overnight... with a hefty ~27% net profit margin, if I were the seller, based on the (very) limited info available, I'd be looking at somewhere in the ballpark of £1m to £4m cash, and would probably settle for something around the £2m mark.

dsl2

1,484 posts

231 months

Thursday 7th December 2017
quotequote all
Speaking from personal experience (twice) being give guide valuations from so called business sale professionals is one thing, actually getting offers at anything like the suggested level quite another.

My own business with proven multi year EBITDA of circa £750k p/a & nett assets of £1.4m was advised as expecting offers in excess of £4m, after 8 mths on market & relatively little interest it was suggested that one company was considering a sub £2m offer, at that point I instructed the process to stop & decided to change tack by adding a few staff & working my way out of the door leaving my team to run it, so far so good!

As with most things in life unless it’s something very unique or special interest it’s worth what some one will pay for it.


RRLover

Original Poster:

450 posts

232 months

Friday 8th December 2017
quotequote all
Jockman said:
Wouldn't be surprised if that weren't GP.
Its NET. I went through some stuff with him last night. Its an incredible figure for a small business.
Owner just takes a wage at end of week, doesnt have any input, my friend wants a piece of the pie as its all his making.
Business is well respected in their field, therefor he doesnt want to start on his own. He's the figurehead just now tho.
Opportunity is massive to expand.
I'd like a cut smile

RRLover

Original Poster:

450 posts

232 months

Friday 8th December 2017
quotequote all
Thanks for everyones input.
I think he's better to buy in, rather than buy it all.

superlightr

12,920 posts

293 months

Friday 8th December 2017
quotequote all
RRLover said:
Its NET. I went through some stuff with him last night. Its an incredible figure for a small business.
Owner just takes a wage at end of week, doesnt have any input, my friend wants a piece of the pie as its all his making.
Business is well respected in their field, therefor he doesnt want to start on his own. He's the figurehead just now tho.
Opportunity is massive to expand.
I'd like a cut smile
but its not your friends "all his own making" is it. He has no set up, no on going risks, no risk of compliance and fines, its hard to build up trust and reputation etc that goes with a business owner.
It annoys me that people say they are doing all the hard work etc and want a bit of the pie when they don't want to put their own neck on the line and start up a business themselves.

If the opportunity is there to expand then work out a pay deal of x + bonus on expansion or to buy in if possible - else leave and get paid whatever he can earn from a cold start up or make an offer the owner cant refuse to buy. I would imagin many business owners do view their business as a child, something more then just money as it is very personal in setting up and running your own business with the risks and commitment you have to do so as other posters have said yes on paper it may be worth about £xyz but the owner may well value it much higher as its his baby and if he doenst really want to walk away from the business then its going to have to be a very high bonus to sell.

I know for my own business we would never allow a buy in from staff as we would then lose control which is one of the reasons for being self-employed. We are happy to pay a bonus for achieving better than expected results and staff have set goals for that etc.


Edited by superlightr on Friday 8th December 12:28

DSLiverpool

16,532 posts

232 months

Friday 8th December 2017
quotequote all
Its a buy in or grab balls and set up on his own - he can choose the timescale.

If I was the owner I would have foreseen this coming and made a prior deal of either exit shares or a scheduled release of shares to him.

Owner doesn't want to lose him, he doesn't want to leave its a deal-making perfect storm.

bob-in-toon

423 posts

235 months

Friday 8th December 2017
quotequote all
RRLover said:
As above
How would you value a business ?
Turnover roughly 750k. 200k net profit
Been trading for nearly 20 years.
Niche marketplace, business has steadily grown over the past few years.
All building owned.

Just looking for some help & info from the professionals
Depending on sector, the pricing may depend on the quality of earnings and cash generation of the business. Particularly the balance between its contract, repeat and spot revenues. Also from a MBO perspective, if relevant of course, the vendors ambitions will be important. If they are going to support the buyout with some form of deferred consideration, the price may be higher than, say, an equity sponsor getting involved and the vendors being delivered a clean exit.

So, depending on the structure, the price range is therefore likely to sit at somewhere between 4x and 6x, so crudely, £800k to £1.2m cash free debt free.

In reality, when a business is doing say 200k ebitda then the perception is that it doesn't necessarily take too many bumps in the road to turn a profit into a loss - as opposed to say a business doing 1m+ ebitda which may be able to absorb shorter term issues and when you get over 1-2m+ multiples will tend to be stronger.

Without knowing the business and property aside, from experience, I'd tend to be guessing at a value of 700-800k. Achieving a multiple of 4x would be a decent result. Having said that if the business has some good / unique IP and sits in a particular sector / could be a good bolt on to a larger business then a better multiple could be possible.

All IMO of course!


Edited by bob-in-toon on Friday 8th December 16:56