Potential Value of a business

[obiwonkeyblokey]

Asssuming a business with the following ( recruitment)

whats would peoples estimates ( piece of string i know) be of the value

Year End - - - Turnover - - - profit before tax - - - value
..........................................................................
March 2008 - - - 5m - - - - - - 1m - - - - - - - - - - - ?
March 2009 - - - 7m - - - - - - 1.4m - - - - - - - - - - ?
March 2010 - - - 10m - - - - - 2m - - - - - - - - - - - ?

I am just trying to do some back of fag packet calcuations for someone and wanted to see if my guesswork may be in the same ballpark. ( not my company I hasten to add)

I am aware that it is worth what someone would pay for it, but based on track record for well run and established companies ( assume prime for takeover by a larger competitor)

Many Thanks

O

Edited by obiwonkeyblokey on Tuesday 27th March 13:00

[wattsm666]

You shouldn't pay for the projected results, except through the use of an earnout they are often over inflated or subject to restrictions that you may not be aware of. For example, have you got the office space to sit the consultants to give you this rapid increase in turnover etc etc.....

[obiwonkeyblokey]

yes. - or at least they have.

as well as the people already in place and a 3 year track record of significant growth

Edited by obiwonkeyblokey on Tuesday 27th March 13:11

[wattsm666]

You probably would apply a multiple of 3 to 8 times post tax profit, i.e. 2008 £1m less 30% tax = £700k. Value in the range of £2.1m to £5.6m, with a mid value of £3.5m being realistic on the information given. You would also need to adjust the profit figure to ensure an appropriate level of remuneration etc etc. You may then want to add an earnout, however, there a number of factors not taken into account:

Is there undue reliance on a particular customer
Is there one particular consultant who is key
Is there a contract in place, which is due to expire
Is the management team key and are they staying
Who is leaving post transaction
What is the value of the asset/liabilties on the balance sheet
Will the new legislation on managed service companies affect the margin and therefore the profits?
etc etc.........

[obiwonkeyblokey]

wattsm666 said:

You probably would apply a multiple of 3 to 8 times post tax profit, i.e. 2008 £1m less 30% tax = £700k. Value in the range of £2.1m to £5.6m, with a mid value of £3.5m being realistic on the information given. You would also need to adjust the profit figure to ensure an appropriate level of remuneration etc etc. You may then want to add an earnout, however, there a number of factors not taken into account:

Is there undue reliance on a particular customer
Is there one particular consultant who is key
Is there a contract in place, which is due to expire
Is the management team key and are they staying
Who is leaving post transaction
What is the value of the asset/liabilties on the balance sheet
Will the new legislation on managed service companies affect the margin and therefore the profits?
etc etc.........

assume prime for takeover by a larger competitor

existing management staying ( golden handcuffs), directors leaving, 15-20 consultants with no mainstay, stable profitable contracts, nil assets ( property rented etc) nil liabilites ( tax, salaries, debtors)

HOwever your figures so far are pretty much in line with what I thought too.

Edited by obiwonkeyblokey on Tuesday 27th March 13:40

[justinp1]

obiwonkeyblokey said:

wattsm666 said:

You probably would apply a multiple of 3 to 8 times post tax profit, i.e. 2008 £1m less 30% tax = £700k. Value in the range of £2.1m to £5.6m, with a mid value of £3.5m being realistic on the information given. You would also need to adjust the profit figure to ensure an appropriate level of remuneration etc etc. You may then want to add an earnout, however, there a number of factors not taken into account:

Is there undue reliance on a particular customer
Is there one particular consultant who is key
Is there a contract in place, which is due to expire
Is the management team key and are they staying
Who is leaving post transaction
What is the value of the asset/liabilties on the balance sheet
Will the new legislation on managed service companies affect the margin and therefore the profits?
etc etc.........

assume prime for takeover by a larger competitor

existing management staying ( golden handcuffs), directors leaving, 15-20 consultants with no mainstay, stable profitable contracts, nil assets ( property rented etc) nil liabilites ( tax, salaries, debtors)

HOwever your figures so far are pretty much in line with what I thought too.

Edited by obiwonkeyblokey on Tuesday 27th March 13:40

I agree with the figures, however...

On the other hand, with zero assets the value of the business is in its client base or staff. A 'ballsy' larger competitor can poach the client base and staff a lot more easily and cheaply than paying out a large sum to in effect 'buy contracts'.

I feel that that would devalue the company on the negotiating table. A seemingly good position for the owners where they are asking for their top figure for the business could very easily be retorted with a 'fire sale' type offer on the basis that it is the larger companies aim to put them out of business if they dont buy the company anyway!

[obiwonkeyblokey]

As the market they are operating in is pretty competitive anyway, if they have ( at that stage ) 6 years of solid growth behind them in competitive market, I dont think the " beating the chest" type threat would oevrly concern them.

Bearing in mind the business would have a number of contractors working for them its more than good will alone. 1.2m of the 2.0m profit in the 09/10 year could be attributed to contract runnners in the business.

Edited by obiwonkeyblokey on Tuesday 27th March 14:13

[justinp1]

obiwonkeyblokey said:

As the market they are operating in is pretty competitive anyway, if they have ( at that stage ) 6 years of solid growth behind them in competitive market, I dont think the " beating the chest" type threat would oevrly concern them.

Bearing in mind the business would have a number of contractors working for them its more than good will alone. 1.2m of the profit in the 09/10 year could be attributed to contract runnners in the business.

Hmm...

Possibly... but we need to look at the value *today* for a sale *today*. The value to the larger competitor may not be to let the smaller company they now own grow bigger, it may be to buy it out and shut it down and transfer the contracts to the parent company. Thus the potential for profit in three years time may be of no relevance to them.

In this situation more than most, that the intrinsic value of the company is hard to define - and the actual price of the company will be what the competitor want to pay for it - which will of course be entirely dependant on what they want to do with it.

[tinman0]

obiwonkeyblokey said:

As the market they are operating in is pretty competitive anyway, if they have ( at that stage ) 6 years of solid growth behind them in competitive market, I dont think the " beating the chest" type threat would oevrly concern them.

Bearing in mind the business would have a number of contractors working for them its more than good will alone. 1.2m of the 2.0m profit in the 09/10 year could be attributed to contract runnners in the business.

i have some magic beans you can buy.

[Leftie]

SREEB64 is your man.

He did a post not long ago giving some detail on this issue which greatly enlightened me. AIRC he pointed out the net calculations and included such things as the probable need for a buyer to put a salaried manager in to replace the owner who might have worked for peanuts/dividends, the need for proper premises (not the ofice over the garage some small businesses run from) and any liabilities to HMRC.