Valuation of private company - earnings multiple?
Discussion
Could someone please suggest a rough earnings multiple for valuing a privately owned mobile catering company that specialises in festivals, typical turnover of around £60k per year, book value of assets around £30k, 5 year trading record, good contacts in industry (guaranteed pitches at most prestigious events)?
Thanks.
Thanks.
Thanks for the replies. 
No contractual pitches, a lot of verbal agreements, but the owner has never failed to get into a festival for a second (and third etc) year. Owner does work in the business, with a small casual staff and will not continue in the business after hand over period. Knowing the business, I genuinely don't see this as a problem, as long as the buyer is reasonably competent.
Surely the whole point of an earnings multiple valuation is to find a comparable earnings multiple and value the business applying it to the NP? The multiple shouldn't be affected by the NP?
No contractual pitches, a lot of verbal agreements, but the owner has never failed to get into a festival for a second (and third etc) year. Owner does work in the business, with a small casual staff and will not continue in the business after hand over period. Knowing the business, I genuinely don't see this as a problem, as long as the buyer is reasonably competent.
Surely the whole point of an earnings multiple valuation is to find a comparable earnings multiple and value the business applying it to the NP? The multiple shouldn't be affected by the NP?
anonymous said:
[redacted]
So, if earnings multiple isn't a valid valuation method, what is?I can value the nuts and bolts, what I can't value is the owner's relationships and contacts.
Surely the only true valuation of these is how much profit they can generate, so if I know the true profit, what should I multiply that figure by to get the valuation?
Surely if this is anything more than a VERY part time bit of work for the owner - the business is worth zero??
Obviously you could buy the nuts and bolts at below market for the nuts and bolts but as a business - is he really making any money if you had to replace the owner with a paid employee?
That and the risk on the "guaranteed" pitches obviously...
Obviously you could buy the nuts and bolts at below market for the nuts and bolts but as a business - is he really making any money if you had to replace the owner with a paid employee?
That and the risk on the "guaranteed" pitches obviously...
youngsyr said:
Could someone please suggest a rough earnings multiple for valuing a privately owned mobile catering company that specialises in festivals, typical turnover of around £60k per year, book value of assets around £30k, 5 year trading record, good contacts in industry (guaranteed pitches at most prestigious events)?
Thanks.
That turnover has got to be wrong. Thanks.
A pitch at any half decent festival will take many thousands in a weekend.
Very difficult business to value. Very difficult industry in general.
walm said:
Surely if this is anything more than a VERY part time bit of work for the owner - the business is worth zero??
Obviously you could buy the nuts and bolts at below market for the nuts and bolts but as a business - is he really making any money if you had to replace the owner with a paid employee?
That and the risk on the "guaranteed" pitches obviously...
Obviously the business is seasonal, as the festivals and events typically are too, but the owner is currently limiting the amount of events he does for VAT/personal reasons. Obviously you could buy the nuts and bolts at below market for the nuts and bolts but as a business - is he really making any money if you had to replace the owner with a paid employee?
That and the risk on the "guaranteed" pitches obviously...
The owner will be using the proceeds to buy another business and his time will be fully taken up by that, so no chance of competition, at least in the short term.
jeff m2 said:
I'll have a go
5x earnings
assets at 50%
Deduct something for sellers experience (assuming it is not a perfect fit for the buyer)
Seller could offer some of his time in the deal, maybe 100hrs.
Great, thanks.5x earnings
assets at 50%
Deduct something for sellers experience (assuming it is not a perfect fit for the buyer)
Seller could offer some of his time in the deal, maybe 100hrs.
I went with 3-5x a hypothetical year's NP, substituting reasonable wage for owner's remuneration, plus 100% asset value, with reasonable handover period.
I am on the selling side though.
I am not sure exactly what it is that you're selling? The business has no contracts going forward and presumably the assets are some sort of ice-cream van/hot dog stall. If i wanted to do something similar what would prevent me from buying some equipment and starting afresh? All it seems that you have is some (possible) good-will. Thus the value would be your assets plus a small sum for potential future business/list of contacts etc - certainly not a multiple of profits. Or am I missing something?
My job is to value bigger companies so feel free to ignore if it is different at the smaller end BUT...
I would NEVER value the earnings (net profit) AND then add some more for the PP&E (plant property & equipment).
To my mind, that is double counting.
The PP&E is the business!
You wouldn't say: TVR makes £10m a year in profit so pay 10x for that PLUS they have a big factory that makes cars - that's worth £20m so add it in.
Because you need the factory to make the profits!
Heathrow makes £100m a year so is worth say £1bn but it's got loads of land too so add that in - NO! It needs the property to land aircraft on!
Now - inventory is another matter but for the capital equipment - you should either value the business as a "wrap up" i.e. sell the equipment for the best price to someone else OR as an ongoing business in which case the only relevant metric is the profits that equipment can generate.
I would NEVER value the earnings (net profit) AND then add some more for the PP&E (plant property & equipment).
To my mind, that is double counting.
The PP&E is the business!
You wouldn't say: TVR makes £10m a year in profit so pay 10x for that PLUS they have a big factory that makes cars - that's worth £20m so add it in.
Because you need the factory to make the profits!
Heathrow makes £100m a year so is worth say £1bn but it's got loads of land too so add that in - NO! It needs the property to land aircraft on!
Now - inventory is another matter but for the capital equipment - you should either value the business as a "wrap up" i.e. sell the equipment for the best price to someone else OR as an ongoing business in which case the only relevant metric is the profits that equipment can generate.
Beggarall said:
I am not sure exactly what it is that you're selling? The business has no contracts going forward and presumably the assets are some sort of ice-cream van/hot dog stall. If i wanted to do something similar what would prevent me from buying some equipment and starting afresh? All it seems that you have is some (possible) good-will. Thus the value would be your assets plus a small sum for potential future business/list of contacts etc - certainly not a multiple of profits. Or am I missing something?
Well if you add up the value of the assets and put in some goodwill that will be a certain number.Divide that number by the profits the business generates and you have a multiple!
Don't ignore the barriers to entry though.
BeggarallCo could happily buy lots of hot dog stands and have precisely nowhere to put them because the festival management want to go with guys they have used before.
walm said:
Beggarall said:
I am not sure exactly what it is that you're selling? The business has no contracts going forward and presumably the assets are some sort of ice-cream van/hot dog stall. If i wanted to do something similar what would prevent me from buying some equipment and starting afresh? All it seems that you have is some (possible) good-will. Thus the value would be your assets plus a small sum for potential future business/list of contacts etc - certainly not a multiple of profits. Or am I missing something?
Well if you add up the value of the assets and put in some goodwill that will be a certain number.Divide that number by the profits the business generates and you have a multiple!
Don't ignore the barriers to entry though.
BeggarallCo could happily buy lots of hot dog stands and have precisely nowhere to put them because the festival management want to go with guys they have used before.
I suggested that if the buyer baulked at the no contracts issue, the seller should offer a warranty on gaining access to the key festivals.
The valuation is pretty much a gut feeling, so I told him to go with market value of assets as absolute minimum value and multiple of hypothetical profits plus asset value as the maximum.
No doubt he'll negotiate somewhere in between the two.
youngsyr said:
The seller believes he can guarantee entry into certain key (and lucrative) festivals which would not otherwise be available to the buyer.
I suggested that if the buyer baulked at the no contracts issue, the seller should offer a warranty on gaining access to the key festivals.
The valuation is pretty much a gut feeling, so I told him to go with market value of assets as absolute minimum value and multiple of hypothetical profits plus asset value as the maximum.
No doubt he'll negotiate somewhere in between the two.
If I was the buyer I'd pay market value for the assets and a % of takings/profits for the first year. I suggested that if the buyer baulked at the no contracts issue, the seller should offer a warranty on gaining access to the key festivals.
The valuation is pretty much a gut feeling, so I told him to go with market value of assets as absolute minimum value and multiple of hypothetical profits plus asset value as the maximum.
No doubt he'll negotiate somewhere in between the two.
That way the seller is on the hook for making sure that access to the festivals does happen and the buyer will be able to build up and take over the relationships during that first year.
It's a classic problem for a sole trader when they want to exit a business. What's that address book/list of contacts worth and can a buyer monetise it.
I can think of potentially at least 3 different ways to value a business - earnings multiple, asset values and cashflow payback (ie, how much cash would be generated in 2.5 years, for example). Picking the right one is the key.
Looking at earnings multiple I would say 3.5 x net profit is bang on for a "traditional" business - and that includes the asset necessary for the trade. If it was a particularly sexy business in a growing market area then 5x profit may be more appropriate.
Looking at earnings multiple I would say 3.5 x net profit is bang on for a "traditional" business - and that includes the asset necessary for the trade. If it was a particularly sexy business in a growing market area then 5x profit may be more appropriate.
£60k turnover and full time hours from the owner...I would assume the business is going to be hard to value....
I was once involved in a business that had a turnover £250k plus, made a profit of circa £60k (before tax)
Howver there were two owners that worked in the business pretty much full time for close to zero salary.
The adjusted net profits therefore in reality were closer to £10k ( it would have cost around 50k a year to hire two similar capable people)
We sold the business in the end for about £15k plus stock at value.
The £15k in the main covered the web site dev/URL, in store fixtures and fittings and a tiny bit of goodwill.
I was once involved in a business that had a turnover £250k plus, made a profit of circa £60k (before tax)
Howver there were two owners that worked in the business pretty much full time for close to zero salary.
The adjusted net profits therefore in reality were closer to £10k ( it would have cost around 50k a year to hire two similar capable people)
We sold the business in the end for about £15k plus stock at value.
The £15k in the main covered the web site dev/URL, in store fixtures and fittings and a tiny bit of goodwill.
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