How much is a customer base worth?

[Dagenitedog]

I'm a 50% shareholder and director of a small company, and the other 50% shareholder/director wants out.
We can obviously value the machinery to the penny, but how do you value a customer base?
We have approx £200k of customers per year, spread over a wide amount, so no customer is more than 5% of total turnover.
And most customers are again neither loyal to me nor him.
I've agreed to pay him his half of the customers over time, but am unsure as to where to start negotiations on the value of his £100k.
Is there a 'generic formula' or percentage over time etc?

any help appreciated,

thanks

[KevinCamaroSS]

For me the start point would be 50% of BS value, with an adjustment for the 'goodwill' of the customer base. Base this goodwill on a factor multiplication of annual profit and get your value that way. In other words what is the business worth on the open market? Then take 50% as his share.

[akirk]

what do you mean by having £200K of customers a year?
turnover / profit / ???

[matjk]

Obviously be careful about paying to much and having a non compete clause (which can be useless in many cases).
For example what stops him taking the money, buying new machinery and setting up a new business, (or maybe his wife or son will). You can never own customers as they are free to go where ever they like. Its not uncommon for a director that's wants out, to suddenly have a re-think after hes had a payout. As you say stage payments is the best method, and stretch this out as long as possible to protect against this happening

[Dagenitedog]

thanks for the answers.

200k is turnover. No contracted customers.

Thinking best way is to ask him what he wants. And go from there.

[Christmassss]

Dagenitedog said:

thanks for the answers.

200k is turnover. No contracted customers.

Thinking best way is to ask him what he wants. And go from there.

Does he want out to start his own competing business?

[akirk]

If turnover is £200K I assume you have some overheads?
in which case you don't start a discussion about his '£100k' because he doesn't hold that value in the business...

what does the business actually make in terms of cold hard cash at the end of the day - i.e. if he walked away but kept his shares, how much would you have to pay him each year in dividends

rarely in a business like this is there the value someone leaving expects

[Steve57]

Having not long ago had our company valued due to my father passing away. we have a turnover of around 400k, im not sure on the in's/outs of it all as the accountant did it but between the three brothers/sister we were expected to pay £45k to buy the shares from his estate (to the step mother as stupidly no will).

[srebbe64]

It'll come down to two things:

1) What you're prepared to offer
2) What he's prepared to accept

The advantage you have is that apart from you he has no other buyers. Any other prospective buyer wouldn't buy 50% of the equity without the full support of the remaining shareholder (you). Also, regarding a non-compete clause, these are a grey area as you can't force someone not to trade in their profession. I would, from a legal perspective, simply focus on ensuring that he doesn't attempt to 'pass off' as your current business after the deal - which is far less ambiguous from a legal perspective.

[AyBee]

Dagenitedog said:

thanks for the answers.

200k is turnover. No contracted customers.

Thinking best way is to ask him what he wants. And go from there.

I'd attach very little value if they're not contracted - they could leave tomorrow. Is it not worth having the business valued by a couple of places?

[MadProfessor]

The simplest methodology for valuing the business is some multiple of either revenue or earnings. When looking at one business in isolation then free cash flow is probably the best measure, otherwise EBITDA is a fairly common measure.

The difficulty is deciding on the multiple which depends upon numerous factors. A competitor may be willing to pay a higher multiple, for example, because they may get synergies or economies of scale, or could push up prices. You would probably pay a higher multiple for a business with a subscriber base paying almost guaranteed revenues.

You have provided no details about the business or industry so it's difficult to say anything further about the appropriate multiple. And in the absence of another buyer then you have a stronger position. I would agree a value you're happy with and pay it out as earn out over say 36 months. If your partner is insistent on an up-front payment then (i) I would want to know why and (ii) discount heavily accordingly as you are in the stronger position. In this case you need to know how you will finance this payment and the costs and risks involved in that.