How do you value a business?

[simon field]

Hi all

Been doing some work for a small company with a turnover in the region of £330K.

Now we have potentially got the chance to buy it due to the owner retiring soon and his kids not being particularly interested in it.

We still have to look at his books for the previous years, and have a meeting next week along with his accountant.

We're expecting the sale to take place over a period of time, so I thought I'd ask on here if there are any formulas or calculations you good folk use - rather than just googling it!:|

Any input appreciated.

Simon

 

[Psl]

I would suspect the good folk on here would need a little more detail before posting any replies.

 

[JessicaAutumn]

What is the company all about?

 

[wlzls]

and profit......

 

[Talay]

Different price if it makes £15k or £150k. Way too little information here.

 

[simon field]

We've worked out that at his current levels (the last 3 years) there's a net profit of £50k per annum.

That's taking into account our overheads, including materials, workshop, transport, a sub-contractor, and a wage for my business partner and myself in the region of £40k.

I can't say what the product is, but we know he hasn't pushed it as hard as he could due to a previous supplier who was unreliable.

There's no patent on the product which is a little worrying.

There are also virtually no orders, which from asking around seems to be the norm for this industry (ie most orders are slow-burners).

So for sale is goodwill, a contacts list, and a limited amount of tooling.

Simon

 

[iBusiness Forums]

For what its worth, revenue generating websites are normally sold for 10-20 times monthly earnings. But offline, wasn't 6 x annual profit a broad rule of thumb?

 

[KidsBeeHappy]

Start with how much would you have to pay to create an business that had an equal asset, supplier contracts, customer base, revenues, profits or marketshare. - select which ever is the important bit to you.

How much would it cost you to replicate?

So, if for example, product is bog standard off the shelf, where the customers are transient and one-off buyers, and where getting supplier contracts is easy - there there is virtually no value despite having high revenues.

Or, if it's website with virtually no revenues, but number 1 position on google through genuine white hat, with an aged domain, some very good back links etc - then even though there are no revenues, you would have to invest thousands of pounds to acheive the same level with a new domain.

You can't value simply on earnings multiple, or profits multiple, or asset values etc - that's why there is this thing called "goodwill" and why its called an "intangible" asset. And the definition of goodwill is really simple - its the valuation of that effort.

 

[thebiznizdotcom]

First thing I'd do is ask him what "he" thinks its worth. You might be suprised.

After that you've got to balance the risk, you see if he had definite orders for the next three years its worth allot more than if the orders are drying up.
If you can try to call a few of his existing customers and get their feedback on how they find dealing with the business.
Although the past three years are important it going forward that you need to be interested in and never put a value on it that goes on what "extra" business you can bring to the table.
Just look at it as the bare bones and always try to offer him low also if you do come to a deal make sure that you're warranties are cast iron. What I mean by this is..
1. Make sure that if in the first 6 months you lose any of his contracts then he has to pay you back the profit lost.
2. Make sure that if any of his customers don't pay or require credits that too comes off his money.
3. Make sure that in the event it goes all pear shaped it goes to a forensic accountant to decide who get's what and not the court. (Your risk on getting your cash back from him will be better)

Best tip of all is don't get "in love" with the business when you're negotiating. Try to be really relaxed about it, don't go to bed thinking your buying something you can turn into the next Apple because there's very few people in the world that can do that.
At the end of the day it will be your money you're risking so keep your head.
I know people that have bought many businesses..some won but more importantly some lost.
I don't want you to be one of the ones that lost so keep your cool and try to spend as little as you can because if you stretch yourself and it goes a little bit wrong you'll have no room for movement.
Best of luck though and hope this helps.
If you need any further help P.M. me.
Cheers
Graham

 

[iBusiness Forums]

My take on it is that its irrelevant how much it costs you to get there. Its only what it is worth that counts. That is where multiples of existing revenue come into the equation. You could spend a fortune to get a #1 rank only to find that either traffic is lower than you thought or it doesn't convert well for your business.

 

[amac]

If you can read a balance sheet, start here. Otherwise, I'd consult with someone like your accountant or financial adviser to review their balance sheet. Usually, businesses are valued on earnings and other assets both physical and otherwise.

 

[Talay]

So you can copy his non patented Rubik's cube and replicate his business all for the cost of a few tools and a contacts book.

On the back of that, his business is not worth much at all as there are virtually no barriers to entry and with no orders, there is no continuity.

Why not look into registering the patent yourself or negotiate for it and a couple of quid for his tools and address book.

Then perhaps look at owner financing with get outs if it folds or whatever.

 

[printnstyle]

What kind of formula are you talking about Simon? Your question is not really so specific, which makes it a bit confusing for people to understand.