Help valuing a business

[pudbwmsc]

I am looking at buying a 10 year old, 3 staff, owner run and managed web design business . Here are the figures from the accounts;

Net assets are in the region of £3k, just computers and other little bits.

The net profit of the main client includes client specific expenses related directly to their account but NOT their share staff costs, rent or any general costs. I was working from the angle, if the main client left what would net profit be without them. Looking at the historical data without this client the business would have made significant losses, assuming all the same costs.

Here is the percentage of t/o the main client provides;

FY15 - 39%
FY14 - 35%
FY13 - 25%
FY12 - 18%

Staff costs charged to COS are;

FY15 - c£77k (no director salary)
FY14 - c£88k (includes director salary of c£10k)
FY13 - c£88k (includes director salary of c£9k)
FY12 - c£76k (includes director salary of c£8k)

There is some outsourced work in the COS too. It's a Ltd company and the director/owner is paid a salary which is topped up by dividends that aren't included in the above P&L. DLA owes the director c£9k.

The business is owner dependant at the moment, I'd need to run in the short to medium term and would look to grow enough to employ someone to run for me

What is the best valuation method to use for this kind of business?

 

[bovine]

Out of interest, what does the current owner value the company at?
Not a method of valuation, but just my feeling.....it doesnt look to be worth v much, if anything to buy in my view. If the director had taken a reasonable salary each year, it would always be at running at a significant loss. If the main customer leaves, then the company is running at a massive loss (as you quite sensibly noted). I suppose the key questions to ask are what can you do to make if more profitable? Are you able to significantly reduce overhead or cost of sales in any way?
It would appear that you are basically taking on the directors liabilities. I suspect they would be relieved to walk away and see their company keep going. So a low offer is in order. Probably at most, if I really wanted the company, then I would cover the dla and the cost of the hardware. But more realistically, I think you would be doing them a favour taking it off their hands for a £1.

 

[The Byre]

When a company has just three staff and depends on one customer, then the owner IS the company.

 

[Socio South West]

I would be interested to hear @KeithGreen 's opinion on the value of this business: There is significant risk with the customer portfolio, minimal rapidly depreciating assets, staff issues if the major client goes elsewhere (assuming they are employed), no directors salary this year - it all looks very bleak for it being of value.

 

[Bestnes]

There is no real way valuate a new business and there are no real formulas, despite what goes on on the show. You’re really pricing a commodity based on potential, which includes the potential of the entrepreneur as much as the product.

 

[Bestnes]

directors grab too much,in my opinion. Before making any buying decision, make a potentially profitable contract or sale. ..To talk abut it, need at least to see the market...product potential ...business strategy...

 

[colour24]

If the main client deals mainly with the current owner rather than a prominent member of staff, I would worry that the client would look elsewhere after the owner stands down. Also, one or two members of staff may leave which often happens following a sale. This would leave nothing. Looks like you would be buying a lease to put around your neck.
One other point - Why has the business not grown in the last four years? It looks like the main client has consumed the efforts of all involved. Have they not tried to gain new clients, or is the market saturated with web designers? I would need to feel very confident indeed that I could grow the company in the short term before taking it on.

 

[Christine Hough]

Why is he selling?

 

[NickGrogan]

Worthless, walk away quickly.

 

[Breaking Good]

Maybe I'm being stupid and reading this wrong however am I correct in saying...in 2015 for e.g the main client =

Turnover - £82,232
COS - £25,623
Margin - £56,609

If that's the case then all other clients (excluding the main client) =

Turnover - £131,183
COS - £130,752
Margin - £431

Why is the margin that low? Why are they taking on all these clients for such a poor margin? Surely they'd be better off not doing this work. I think in 2014 you'd get a negative margin, so why didn't they decide to drop all these loss making clients? Just seems a bit odd to me!

EDIT - I just saw the net profit of the main client doesn't include staff costs from COS - my bad!

 

[pudbwmsc]

Out of interest, what does the current owner value the company at?

At the moment I've just expressed an interest and am looking at the books to get an understanding of what the business is worth and its potential.

Why is he selling?

The owner's taking early retirement.

EDIT - I just saw the net profit of the main client doesn't include staff costs from COS - my bad!

That's right, other than specific client related expenses COS aren't allocated to individual client accounts. What I tried to do by breaking out the main client t/o and net profit to show that should the main client leave the business would have made significant losses, assuming all the same costs.

 

[pudbwmsc]

Hi guys, I just wanted to give you an update.

I've been looking in more detail at the book and there may be £2k a month of CoS that I could reduce to near zero if not eliminate altogether.

The main client have just been budgeting for their new financial year starting July. The marketing budget has taken a hit, this means the web company is going to be down £20k t/o and around £16k gross profit. The main client is redirecting money to new prod. dev. from July for 1 year. After that the marketing budget should be back to the previous level, if not significantly higher. Who knows what happens in the future though!

I'm sure these updates don't change any of the advice but wanted to update you all as a thanks for the earlier advice

Have a nice weekend

 

[Kay]

"What is the best valuation method to use for this kind of business?"

There's a chapter about small business valuation in my book, "The Buyer's Quest", which just happens to be on special offer this weekend - only 99p. The chapter covers various different methods of valuation, which ones are most appropriate in different circumstances, and how the calculations are done.

Hope this helps.

 

[pudbwmsc]

"What is the best valuation method to use for this kind of business?"

There's a chapter about small business valuation in my book, "The Buyer's Quest", which just happens to be on special offer this weekend - only 99p. The chapter covers various different methods of valuation, which ones are most appropriate in different circumstances, and how the calculations are done.

Hope this helps.

Is it possible to get this in non-Kindle epub or PDF?

 

[cjd]

It's not really worth much. Valuations take many forms but a common one is a multiple of the average of the net profit over 3 years. I don't know what the multiple is for web developers - i'd be surprised if it's more than 3 or so. But then you have to discount the result because unquoted companies are not easily traded - say 25%.

It's also not really going anywhere or even paying anything like a decent salary. If you added in a realistic salary for yourself, it'd be in a loss.

A existing web development company would base it on the value of the customer revenue to them using their own margin caculations. They'd also need to tie in the price to the acquisition of the customers, there's nothing much stopping them walking away once the guy they know leaves.

Before you do anything, have a word with a local accountant.

 

[KeithGreen]

I would be interested to hear @KeithGreen 's opinion on the value of this business: There is significant risk with the customer portfolio, minimal rapidly depreciating assets, staff issues if the major client goes elsewhere (assuming they are employed), no directors salary this year - it all looks very bleak for it being of value.

Thanks SSW. I missed this post earlier and would normally have posted an opinion. The OP has now emailed me direct and I'm going to reply to him in the next day or so.

 

[pudbwmsc]

Hi all, thought I would give you an update on how this is progressing.

The seller is negotiating with another 3rd party, he has a web agency with T/O of £1.5m and is in talks to buy another £1.5m T/O agency. Once that completes he'll be at £3m T/O and this business would be a small bolt-on for him. He'd be able to strip out a most, if not all cost, using existing resource to work the accounts. No formal offer has been made but I've been told he will be lodging a cash free debt free offer of around £200-250k (the business has £75k of outstanding AR). I have been working on, and am on the verge of submitting, my own cash free debt free offer of £97-103k. Clearly a lot lower but I'm OK with that, I've done plenty of due dil. and starting a new business would likely be better financially that making any higher offer. I'm just finalising the terms of my offer and will submit early next week.

 

[NickGrogan]

You are considering £97-103K for a business which made less than £5,000 when you put directors salaries back in (at silly low levels)?

A multiplier that high would suggest strong projected growth, but they have 1 profit making client who is cutting back.

I'm really interested to know how you arrived at that valuation, perhaps I'm missing something?

 

[pudbwmsc]

You are considering £97-103K for a business which made less than £5,000 when you put directors salaries back in (at silly low levels)?

A multiplier that high would suggest strong projected growth, but they have 1 profit making client who is cutting back.

I'm really interested to know how you arrived at that valuation, perhaps I'm missing something?

I ended up offering £107k, of which £75k was for the AR, so cash free debt free was actually more like £32k. The offer was rejected. Last week the main client reduced their budget further (T/O down 79% on FY15 spend) so worked out OK.

 

[NickGrogan]

A lucky escape.

 

[Chris Ashdown]

Did you take into account possible TUPE regulations on the three employees, you would have been responsible for their continuing employment and previous years employment would have continued into your employment

Your offer was way over any worth and far cheaper to start up afresh,, The old company was stagnant and probably had no name outside a couple of users

 

[NickGrogan]

I ended up offering £107k, of which £75k was for the AR, so cash free debt free was actually more like £32k. The offer was rejected. Last week the main client reduced their budget further (T/O down 79% on FY15 spend) so worked out OK.

Still don't see how you arrived at anything like that valuation.

They have one worthwhile client, who is cutting back heavily. You could "buy" a client like that for a lot less, so what were you actually buying?

 

[Jon Neale]

Unless you have the structure and skills to integrate this straight into another business then it is worthless. It may be worth taking on for the clients as a strategic move but certainly not on a commercial basis.