Valuing a business

[aip08]

Hello,
this is my first post :)

Can anyone help with some indication of how you would value a business please, I've looked all over the internet & not found anything partiularly helpful.

Many Thanks,
Dave

[aip08]

PS - its an internet business, 95% of our business is via ecommerce which is why I posted this here.

[Kwackers]

Depends what somebody was willing to pay.

As a guideline around 3/4 x net profit, but that is just from what i've seen, what people actually pay may be completely different.

[www.t6c.co.uk]

I think it is very specific to the individual business, age, running costs, profit/loss, customer base ect.

I think e-commmerce based business is worth less as its so easily re created unless you are a large brand.

And of course its only worth what someone will pay for it.

I think you need to give more specific information for people to give you accurate guidance.

Regards.

[IridiumCorp]

Valuing companies is tricky business and there is no one formula for every business type. I have been involved in the purchase and sale of a number of IT companies whos key value was in their intellectual property and customer base.

When valuing an IT company you would take the contracted value (ie the value in signed contracts held ) apply a factor for the current growth, ie if the company is growing 10% month on month. The Net profit margin is established and this is then put to an agree profit exponent known as the PE. So if the profit each year was 10k and a PE factor of 10 was agreed the value of the company would be 100k.

This is a very rough illustration. It is far more complex than that. Most selling companies will have more than one appraisal done by independent firms. The process is time consuming on the executive staff of the company so many will ask for a bond to be put up that if the sale does not go through that the bond will be used to inject cash into the company to get the company back to where it would have been if the senior staff had not been distracted with the sale.

My advise is get some decent help.

[Steve Roberts]

A company is worth what anyone is prepared to pay for it – so there’s no ‘correct price’ and three things effect what anyone’s going to pay for it:

1) Return on investment (ie, profit) - Mr Buyer wants his money back! It’s also worth noting that the buyer is only going to get their return from future profits not historic profits. So future projections will be a major factor in a buyer’s valuation.

2) Commercial risk (or perceived risk, in fact). High risk = low price and low risk = high price. If, for example, a company is reliant on the owner or has one big client, etc..., then clearly this will increase the risk to the buyer – thus reducing value. Net assets also effect valuation because if a company has a high net worth (property, stock, IPR, etc,..) this may reduce the commercial risk to the buyer (ie, if the whole things goes belly-up they’re at least left with some assets.)

3) Bidder competition. If you can locate several buyers and get them bidding against each other then you’ll sell for a great deal more than having just one tyre kicker - market forces will always dictate any company’s true value.

Of the above issues, two of them (points 2 & 3) are highly subjective. The third (point 1, profit) is totally objective as far as historic results go but quite subjective in terms of future projections. So two and a half out of three factors are subjective. Regarding the (now one sixth) objective issue of historic profits, an accountant will look at the "adjusted" (real) EBITDA (profit) of a company and apply a multiple (5 is often quoted). However, after all that, it's worth what anyone's prepared to pay for it.

[aip08]

WOW - that was fast - many thanks.

To give you a better idea, we are selling 3 of our own products, one published book & 2 ebooks that we obviously own the copyright for. Thats all we sell. I keep thinking we could sell more related products & that would dramatically increase the turnover & profit, but I don't really want to get involved in holding stock, etc, etc. Most of our turnover is online, although we have managed to get the book into Waterstones but we haven't pushed the bookshop angle any further than that because its too time consuming.

Turnover this year will be around £45K, but having had the website redesigned recently sales have increased quite a bit so I reckon next year will be £50-£55K.

Profit this year will be around £14K (roughly) before accountants fees & Corporation tax. That figure is after paying the wife a wage of £425 per month, and after spending a couple of thousand pounds this year on software & other bits & pieces that we wouldn't normally have to spend money on. I reckon next year the profit will be c.£20-22K before accountant & tax.

There is also a possibility that demand will grow from the US (its been mainly UK until now).

I'm torn between either really making a go of it & starting to stock other products, etc because I think we could have a business with a good turnover & profitability, but I also want to move onto other things. Looking at how much it would be valued at is just to see whether selling it might be an option, but I suspect it might be too much of a niche for most people, & obviously as it stands now with turnover coming from just 3 books theres going to be a point where they exceed their shelf life.

Cheers,
Dave