Interesting business for Sale - Valuation?

[Mezger]

A friend plans to sell their company - basically it's a tech platform that enables expats to play the UK and Euro-million lotteries.

The business has been trading for 5yrs - most recent quarterly performance (Dec, Jan & Feb) was;

Revenue: $564k
Total Costs: $403k (back to back ticket purchases)
Gross Profit: $161k

They have built a reasonably sophisticated tech platform to handle all of this.

How does one go about valuing a business of this type? Is it 3x annual profit? 2x Revenue?

How do you ascribe value to the tech platform they have built?

Profile of buyer I imagine will impact their valuation - for example someone may just want the traffic and customer base, whereas another buyer mayh want the whole lot (tech platform included)..

Where to start...

[Petrus1983]

I’ve noticed that where the lottery website and app used to block you if you were abroad or using a VPN it now just displays the following -



And allows you to complete your purchase. I’ve just tested that by setting my VPN to USA and purchased a ticket for Tuesday.

[Mezger]

Petrus1983 said:

I’ve noticed that where the lottery website and app used to block you if you were abroad or using a VPN it now just displays the following -



And allows you to complete your purchase. I’ve just tested that by setting my VPN to USA and purchased a ticket for Tuesday.

You are right. Their approach is an 'agency' model whereby the company buying the ticket (UK residents) is in effect the winner and legally agrees to pass all winnings to the customers.

[Mezger]

What methods do people use to value this type of business - 5yrs DCF with an illiquidity mark down of 20-30% for a private company?

[Dr Interceptor]

Petrus1983 said:

I’ve noticed that where the lottery website and app used to block you if you were abroad or using a VPN it now just displays the following -



And allows you to complete your purchase. I’ve just tested that by setting my VPN to USA and purchased a ticket for Tuesday.

Interesting... I couldn't buy them online or via the app when I was in Portugal up until mid-January, so that must be a recent change.

Fortunately for work I was remote-desktopping my PC in the office in the UK, so just bought them on that.

If that's the case that people overseas can now buy them directly, surely it makes the requirement for an agency buying on your behalf redundant?

[Petrus1983]

I think it is a recent change - I’m actually in America in May so will look again. The argument for the business model I guess is the part where you agree you’re accessing the app whilst in the UK.

[The Moose]

Petrus1983 said:

I think it is a recent change - I’m actually in America in May so will look again. The argument for the business model I guess is the part where you agree you’re accessing the app whilst in the UK.

I’m in the US and just tried to buy tickets on the national lottery website. It wouldn’t let me.

[Petrus1983]

That’s really cool - we don’t need to wait until May to find out now

[AyBee]

Very difficult to put a price on it to be honest. Could a change of rules kill it tomorrow? How much upkeep does the business need? Is it paying any salaries? How much marketing does it need? Are the customers sticky (direct debit lottery payments)? On the face of it, it looks like it could be a decent cash generator, but it could also be killed tomorrow by a rule change...!

[Camelot1971]

Dr Interceptor said:

Petrus1983 said:

I’ve noticed that where the lottery website and app used to block you if you were abroad or using a VPN it now just displays the following -



And allows you to complete your purchase. I’ve just tested that by setting my VPN to USA and purchased a ticket for Tuesday.

Interesting... I couldn't buy them online or via the app when I was in Portugal up until mid-January, so that must be a recent change.

Fortunately for work I was remote-desktopping my PC in the office in the UK, so just bought them on that.

If that's the case that people overseas can now buy them directly, surely it makes the requirement for an agency buying on your behalf redundant?

If you breach their T&Cs by not being a UK resident and being in the UK at the time of purchase, surely they would just not pay out if you won?

[Dr Interceptor]

Camelot1971 said:

If you breach their T&Cs by not being a UK resident and being in the UK at the time of purchase, surely they would just not pay out if you won?

If I had a large win on a Friday night, I'd have been in the car Saturday and home Sunday, ready to make the claim on Monday morning

[Countdown]

What’s to stop the vendors setting up a similar operation using somebody else as a front man/

[h0b0]

Dr Interceptor said:

Petrus1983 said:

I’ve noticed that where the lottery website and app used to block you if you were abroad or using a VPN it now just displays the following -



And allows you to complete your purchase. I’ve just tested that by setting my VPN to USA and purchased a ticket for Tuesday.

Interesting... I couldn't buy them online or via the app when I was in Portugal up until mid-January, so that must be a recent change.

Fortunately for work I was remote-desktopping my PC in the office in the UK, so just bought them on that.

If that's the case that people overseas can now buy them directly, surely it makes the requirement for an agency buying on your behalf redundant?

It will not let me buy as I am based in the US

[skwdenyer]

Mezger said:

A friend plans to sell their company - basically it's a tech platform that enables expats to play the UK and Euro-million lotteries.

The business has been trading for 5yrs - most recent quarterly performance (Dec, Jan & Feb) was;

Revenue: $564k
Total Costs: $403k (back to back ticket purchases)
Gross Profit: $161k

They have built a reasonably sophisticated tech platform to handle all of this.

How does one go about valuing a business of this type? Is it 3x annual profit? 2x Revenue?

How do you ascribe value to the tech platform they have built?

Profile of buyer I imagine will impact their valuation - for example someone may just want the traffic and customer base, whereas another buyer mayh want the whole lot (tech platform included)..

Where to start...

For a start, you've only quoted gross profit. GPM is a useful indicator, but tells you little about the actual profitability of the business. What is NPM and what contributes to the bottom line figure?

How is the business marketed? What does the owner contribute in terms of day-to-day running, know-how, skill, etc.? What will it cost to replace that person?

Ultimately a business like this will be valued on faith more than anything else - faith that the model can continue, faith that nobody well-financed will simply set up in competition tomorrow, etc.

I'd also be keen to understand the trading terms in great detail. If the tech platform screws up, a punter believes they've bought what turns out to be a winning ticket, and yet the ticket wasn't purchased, what happens?

My (limited) understanding of these set-ups is that they act as "lottery concierges" or "lottery messenger services" - purchasing tickets on behalf of the player. But if that's the case, very little of the cash is actually "turnover" since it is simply handling money on behalf of others?

Alternatively I guess one could in essence be placing a bet on the outcome of the lottery, with the site hedging the risk by buying the actual tickets and charging a margin of some sort. But in that case is one not actually running a gaming site and, if so, isn't there a legal framework to comply with?

I think I'd be inclined to tread very carefully here...

[matjk]

I bet this company is already in some way in breach of the rules . Camelot probably don’t care as long as people are not wining big , but I wonder what happens IF (and it’s a big if) someone wins a few million.
No way to test it till it happens ,
Plus be very tempting to just steal the winnings , fold the company and disappear into the sunset .

[HaroldB]

I’d start with these two
1. DCF with a high discount factor 20%, seems like there’s some level of risk.
2. Take the bottom line and find some multiples for similar businesses, I’d imagine x5~8 unless there’s a huge potential that hasn’t been realised yet.

Wouldn’t base on Revenue or Margin, use a post tax profit.

See where they come out, ultimately any buyer will negotiate but will give you some good starting points.

[Caddyshack]

Something like this would be better as an earn out for the buyer to lessen the risk.

[abzmike]

So are these guys taking money from overseas players, buying a few tickets to cover the odds of small wins, and hoping that no one wins 5 balls or more? What’s the plan if someone’s numbers come up with a jackpot - false passport and first flight to South America?

[Caddyshack]

abzmike said:

So are these guys taking money from overseas players, buying a few tickets to cover the odds of small wins, and hoping that no one wins 5 balls or more? What’s the plan if someone’s numbers come up with a jackpot - false passport and first flight to South America?

With a 10+million win you would worry about the morals of anyone.

[C350Akra]

I would value the 'business' at zero. The lottery only pays out to the named individual of the winning ticket, they will not pay out to a company. Check with them if you do not believe me.