How to value a business?

[Young Recruit]

Hi,

I am thinking of selling a website based business and would like to get your opinions about how to evaluate its worth. It is obviously worth only what someone is willing to pay for it, but I would like to get some feedback about a starting point for sale or any other options to monetise it.

The business:

• service based business that only requires labour and expertise to carry out the work
  
• has been managed and all work done by one person
  
• has been running for one year
• generated 46k worth of sales
• expenses around 3k for travel
  
• ranks first page of google for keywords related to the service it provides
  
• has no physical assets
• has had repeat customers and sales are growing
• good social media following

It has also taken my time to build the website and market it and would require some ongoing marketing to maintain or increase sales.

Anymore questions about the business are welcome, but because this forum gets exposed to google I don't feel comfortable being specific about the name and industry.

Thanks in advance,

JA

 

[IANL]

You don't mention any other expenses, I assume hosting is required, payment processing charges, bank charges, your time. All these will affect to the bottom line profit contribution. You then have to deduct the ongoing marketing costs you mention.

Don't confuse Wages and Profit. Profit is what is left with after all expenses, including what wages would reasonable be incurred to run the business.

When you have this "Profit" you have to see if it is sustainable and how many years it has been producing it. Then you have a potential future cash-flow which will aid in one formulae for valuation.

Be truthful to your self and see what you would pay. You then have to see how much it would cost for someone to come into the same market.

I had one business, I was interested in, asking £400k but it would only have cost me £100k to enter the market to get to the same position as that one. I

 

[stevesolo]

Hi JA,

There is no model that I know of for valuing small web based businesses. Purely a personal take - you have £46K of sales (over what period?) ignoring the future pipeline. If you closed the business down today, what cash would you get out of it? That is your asset, plus a realistic amount for any intellectual property and goodwill. As Ian says, what would you pay for it?

I am no expert on web based businesses. I am into good old-fashioned manufacturing, and believe me, this is a sector that is being seriously neglected or should I say, ignored..

 

[Socio South West]

One way to look at it is to assess how easily anyone could replicate what you have - You have done this in twelve months, and anyone with web design and SEO skill could replicate this without difficulty, so it will attract little historical or niche value: On the other hand, a buyer hasnt got to do that work, so the build and positioning of the site aspect of it has value.
On the down side, it is very difficult for your buyer to be protected from you going out in a couple of months time and doing exactly the same thing again: It would need to be a complex and expensive agreement to make it watertight from his side.
There are no physical assets - so the property is almost entirely intellectual and electronic - worthless if the business doesnt prove to be sustainable in the new owner's hands.
Relying on the two numbers you have given to assess its worth is very dangerous - you need to produce some accounts to be able to more accurately assess its value - but as ever, it comes down to what a buyer will pay against what a seller will sell for.

You have gained reward through earnings for your effort, but there is very little capital gain: A young business accrues minimal goodwill in Year 1, and I would caution against expecting a buyer to pay a premium price for this as it stands.

 

[Young Recruit]

You don't mention any other expenses, I assume hosting is required, payment processing charges, bank charges, your time. All these will affect to the bottom line profit contribution. You then have to deduct the ongoing marketing costs you mention.

Don't confuse Wages and Profit. Profit is what is left with after all expenses, including what wages would reasonable be incurred to run the business.

When you have this "Profit" you have to see if it is sustainable and how many years it has been producing it. Then you have a potential future cash-flow which will aid in one formulae for valuation.

Be truthful to your self and see what you would pay. You then have to see how much it would cost for someone to come into the same market.

I had one business, I was interested in, asking £400k but it would only have cost me £100k to enter the market to get to the same position as that one. I

Hi IANL,
I did not mention profit, only sales generated and expense.

The cost to host the site is less than £100 per year.

Payment is upfront or on completion of service so no cashflow problems. Bank charges are only for card payments.

I currently market the business, deal with customers then contract the work to one person who has earned around 30k.

There are lots of competitors but my website now has a large share of the market and over taken more established companies, this suggests many people have tried to compete but have not been as successful.

If market conditions and sales stay pretty stable then basically its a ready made 40k job for someone if they can replicate what I have been doing and perhaps do the work themselves. If sales were to continue to rise then other options would be available.

JA

 

[Young Recruit]

Hi JA,

There is no model that I know of for valuing small web based businesses. Purely a personal take - you have £46K of sales (over what period?) ignoring the future pipeline. If you closed the business down today, what cash would you get out of it? That is your asset, plus a realistic amount for any intellectual property and goodwill. As Ian says, what would you pay for it?

I am no expert on web based businesses. I am into good old-fashioned manufacturing, and believe me, this is a sector that is being seriously neglected or should I say, ignored..

Hi Steve, 46k over one year, the total amount of estimates was much more but conversion of quotes to orders was good even though the business is positioned at the higher end of the markets pricing.

 

[Nathanael Jones]

I'll start the bidding at £5...

 

[Nathanael Jones]

Seriously though - its worth what someone will pay for it, simple as! Advertise it at what YOU think its worth and see what happens,.. if you get no bites then you're over pricing!

If I was buying I'd expect to pay 30k or so,...

 

[Young Recruit]

One way to look at it is to assess how easily anyone could replicate what you have - You have done this in twelve months, and anyone with web design and SEO skill could replicate this without difficulty, so it will attract little historical or niche value: On the other hand, a buyer hasnt got to do that work, so the build and positioning of the site aspect of it has value.
On the down side, it is very difficult for your buyer to be protected from you going out in a couple of months time and doing exactly the same thing again: It would need to be a complex and expensive agreement to make it watertight from his side.
There are no physical assets - so the property is almost entirely intellectual and electronic - worthless if the business doesnt prove to be sustainable in the new owner's hands.
Relying on the two numbers you have given to assess its worth is very dangerous - you need to produce some accounts to be able to more accurately assess its value - but as ever, it comes down to what a buyer will pay against what a seller will sell for.

You have gained reward through earnings for your effort, but there is very little capital gain: A young business accrues minimal goodwill in Year 1, and I would caution against expecting a buyer to pay a premium price for this as it stands.

Hi Socio,

What kind of figure do you think is a premium?

 

[Young Recruit]

I'll start the bidding at £5...

£10..

 

[Nathanael Jones]

£10..

Too rich for me - I'm out.

 

[Young Recruit]

Seriously though - its worth what someone will pay for it, simple as! Advertise it at what YOU think its worth and see what happens,.. if you get no bites then you're over pricing!

If I was buying I'd expect to pay 30k or so,...

Seriously though - its worth what someone will pay for it, simple as! Advertise it at what YOU think its worth and see what happens,.. if you get no bites then you're over pricing!

If I was buying I'd expect to pay 30k or so,...

30K seriously? Or am I underestimating...

 

[Nathanael Jones]

I've seen plenty of small business sell for between 9 and 12 months profit - - most were service based businesses in the contract cleaning sector though.

 

[Billmccallum]

without knowing the sector or the skill set required to provide the service its impossible to hazard a guess.

 

[benb]

I have seen a few purely web based businesses (mainly ecom sites rather than service) selling for around 1 years net profit

 

[Socio South West]

I currently market the business, deal with customers then contract the work to one person who has earned around 30k.

There are lots of competitors but my website now has a large share of the market and over taken more established companies, this suggests many people have tried to compete but have not been as successful.

OK - so the picture is clearer - you are just acting as a middle man: You have paid the contractor £30k of the £46k.... less the £3k for travel etc... and we are down to £13k before we have paid for website hosting etc.... and then we have to think about rewarding ourselves for enterprise, and thus there isn't going to be a lot to be earned without putting a lot more work in and developing the sales.
The business is fragile too - relying on one contractor, although it's possible to find others who can do the work I presume.
You say there are lots of competitors, yet the site with the largest market share is only generating £46k in sales.... this suggests the overall market is not that great, so some diversification will be required to make this a stand alone source of income for someone.

Based on the information available, at present I would not value the business at a much more than the cost of setting up and SEOing a decent website - it's just not mature enough, and not generating enough income yet to have gathered enough integrity.

To make it of value you need to trade it on, and develop it until it is bringing in serious revenue with good accounts demonstrating this, and then you can start thinking about £30k - and maybe more...

 

[Young Recruit]

OK - so the picture is clearer - you are just acting as a middle man: You have paid the contractor £30k of the £46k.... less the £3k for travel etc... and we are down to £13k before we have paid for website hosting etc.... and then we have to think about rewarding ourselves for enterprise, and thus there isn't going to be a lot to be earned without putting a lot more work in and developing the sales.
The business is fragile too - relying on one contractor, although it's possible to find others who can do the work I presume.
You say there are lots of competitors, yet the site with the largest market share is only generating £46k in sales.... this suggests the overall market is not that great, so some diversification will be required to make this a stand alone source of income for someone.

Middleman: I suppose kind of a middle man, but then any person who builds a business could be seen as a middle man.

Contractor: Finding a contractor was fairly easy.

Market share: We do not have the largest share but fairly large and the market is growing, part of the objective was to grow the market too.

Question: So what figure would put on creating a revenue generating website from scratch and maintaining it?

 

[Socio South West]

Question: So what figure would put on creating a revenue generating website from scratch and maintaining it?

As anyone who has explored website building will know, the sums quoted will vary widely - If you put this on a Freelance site you would probably get (sensible!) bids around £500 to set up a fairly simple e-commerce site: To do it through a professional website specialist they would probably be starting at about three times that with hosting included, plus a monthly or annual retainer to cover SEO, social media etc, depending on how aggressive you want to be in that area.

 

[Young Recruit]

I have seen a few purely web based businesses (mainly ecom sites rather than service) selling for around 1 years net profit

I have seen a few purely web based businesses (mainly ecom sites rather than service) selling for around 1 years net profit

This business is a fairly simple service that could be managed completely by one person as it stands.

I would be more than happy with selling for that, although I do think it needs at least another year of nurturing.

 

[Young Recruit]

As anyone who has explored website building will know, the sums quoted will vary widely - If you put this on a Freelance site you would probably get (sensible!) bids around £500 to set up a fairly simple e-commerce site: To do it through a professional website specialist they would probably be starting at about three times that with hosting included, plus a monthly or annual retainer to cover SEO, social media etc, depending on how aggressive you want to be in that area.

Thanks Socio,

So I have estimates from £500 to 30k so far.
I think £500 would be a bargain for a ready made income of 30k - 50k (if conditions stay as they are), but 30k seems to much of a risk for someone at this stage.

 

[beasty]

As it stands, it sounds like you are selling a job

How much would you pay for a job?

A lot of the perceived value may depend on what the potential buyer thinks they can improve on, how it can be improved and made more profitable, can it be bought and then tidied up so that the new owner did not even need to spend time on it

Otherwise, JOB for sale.

Accountants have various ways of quickly putting a ball park on a business, using turnover, assets, debt, age of the business, business sector, profit and some other factors.. I am sure if you posted in the Accountancy section, they could throw ball park figures at you based on this.

 

[Socio South West]

Thanks Socio,
So I have estimates from £500 to 30k so far.
I think £500 would be a bargain for a ready made income of 30k - 50k (if conditions stay as they are), but 30k seems to much of a risk for someone at this stage.

Please be careful with the figures
£500 is the price you might expect to pay a freelancer to build you a basic site without hosting or maintenance and SEO, which as you know takes time - you need to factor that in to get somewhere around the cost of the site as it stands, before you think about the relatively small value of the goodwill currently attached to the site.

The 'ready made income' may be £30-50k - you quote £46k, but then you say you are paying a contractor £30k, so the net income before any other expenses is actually £16k.
The site is potentially of considerable value to the Contractor - and he would be your best customer and should be prepared to pay considerably above the framework I have described for the open market if he wishes to retain £30k's worth of work. Have you offered it to him?

 

[IANL]

I've seen plenty of small business sell for between 9 and 12 months profit - - most were service based businesses in the contract cleaning sector though.

This is what I mean. Profit is what you are left with after wages have been paid to the person running the business, let alone the expenses. It looks like there is very little 'profit'.

Young recruit "I did not mention profit, only sales generated and expense." That's right you didn't That can only be deduced from your income less your expenses that you outlines. Valuing a business needs to be based on profitability or the likelihood of profitability.

There is now way a business can be valued in a forum as there are so many variables. As mentioned. This looks like someone is buying a job. There may well be a viable business behind this that can be developed and exploited but you need to have a full unbiased review by an accountant that has experience in buying and selling businesses and they will come up with a range of numbers, depending on who the buyer might be.

i.e I knew of a business that was offered for sale that turned over about £1.4m with a net profit of
£ 150k The offer for this business ranged from £ 400k to £ 7m!!! It eventually sold for £ 1m. The variance came from keeping the directors on with serious growth targets to achieve the 7m to the lower ones where the directors left the business (thereby increasing the retained profit by reducing directors fees)

The £1m came from a company that wanted a quick move into the market, they had other products and services they wanted to offer the client base

 

[10032012]

Is this an SEO backlinks/articles or buy social media likes/followers/hits type venture?

If so, £500 is a good figure. Why? For £25 anyone can compete with similar revenue projections... fiverr, ebay, freelancer sites etc.

 

[CKG]

Business valuation is a bit of a pet subject of mine since I sold out of my own business and started out investing in and buying other businesses. So I like to chime in where I can.

As a rough rule of thumb I start thinking around annual net cash position X 5 that's including consideration of assets. This represents a 20% return on the capital employed - which is an above average investment return. All I am really are doing is buying the cash output of the business

For it to be worth x 5 net cash to me I need to see net cash growing year on year. The business needs to have a robust competitive advantage and not require on going significant capital expenditure to stay competitive. The people already involved are very important too.

How I'd look at your business.

Could I integrate it's operations within my current admin department at out HQ. If yes it's gonna cost me someone's time to run. I'd work that out that cost

I'd want to keep labour in house. The cost of one full time contractor + all expenses.

If i'm having to do any of the 'doing' work myself i'm just buying a job. I can get one of those for free.

Already I can see that off the bat on £46K sales there is nothing in it for me yet so it's has no intrinsic value as a business yet. It's not even really a business yet.

I guess it's worth the cost of developing the website.

All in theory of course as we are only working on assumptions.

 

[Alan]

I agree that £30k is at the top end. In your original post you said "It is obviously worth only what someone is willing to pay for it", and someone might be will to pay £30K or more, but it would be lucky (for you) if you found one.

You 'competition' for ready made 'sole trader' businesses is the franchise market. In that market the 'buy in' it seems the range is £6k to £20k, with many at £12-15k. I'd take a lead from this as the price of franchises are designed to be enough to engender commitment but not so high to be an untenable risk.

As for building a website business from scratch, £500 is a totally unrealistic figure. Of course you can build a website for £500 - but a website is not a website business. If I was actually considering buying your business (I'm not) the value I would probably put on the website technology component (subject to actually looking at it in any detail) could be £0 or a negative amount.

 

[Young Recruit]

Is this an SEO backlinks/articles or buy social media likes/followers/hits type venture?

If so, £500 is a good figure. Why? For £25 anyone can compete with similar revenue projections... fiverr, ebay, freelancer sites etc.

No the venture offers a niche service that is carried out in the physical world.

At the moment the online marketing of the business, repeat custom, and referrals by customers to others, is generating sales for the service offered.

At the current level of sales there is enough work generated for a decent income for one person.

 

[10032012]

No the venture offers a niche service that is carried out in the physical world.

At the moment the online marketing of the business, repeat custom, and referrals by customers to others, is generating sales for the service offered.

At the current level of sales there is enough work generated for a decent income for one person.

Yeah I since noticed the travel costs, somehow I overlooked that lol

 

[David1962]

No the venture offers a niche service that is carried out in the physical world.

So your not selling a web based business at all. The website is just one possible advertising medium for a business.

If the website closed tomorrow the contractor (or anyone with the skill set) could still find work by many other means. So essentially you are trying to sell a advertising platform that currently provides work for one person. Value will be pretty much nil I would imagine, the contractor is the only person who may be interested in it. But even they may not be interested as they are obviously getting work from elsewhere as well.

So I would suggest you re-asses what it is you actually have to sell and go from there.

 

[Young Recruit]

So your not selling a web based business at all. The website is just one possible advertising medium for a business.

If the website closed tomorrow the contractor (or anyone with the skill set) could still find work by many other means. So essentially you are trying to sell a advertising platform that currently provides work for one person. Value will be pretty much nil I would imagine, the contractor is the only person who may be interested in it. But even they may not be interested as they are obviously getting work from elsewhere as well.

So I would suggest you re-asses what it is you actually have to sell and go from there.

Hi David,

Maybe!

 

[Young Recruit]

I agree that £30k is at the top end. In your original post you said "It is obviously worth only what someone is willing to pay for it", and someone might be will to pay £30K or more, but it would be lucky (for you) if you found one.

You 'competition' for ready made 'sole trader' businesses is the franchise market. In that market the 'buy in' it seems the range is £6k to £20k, with many at £12-15k. I'd take a lead from this as the price of franchises are designed to be enough to engender commitment but not so high to be an untenable risk.

As for building a website business from scratch, £500 is a totally unrealistic figure. Of course you can build a website for £500 - but a website is not a website business. If I was actually considering buying your business (I'm not) the value I would probably put on the website technology component (subject to actually looking at it in any detail) could be £0 or a negative amount.

I think the franchise route is a great idea.

 

[10032012]

Thanks Socio,

So I have estimates from £500 to 30k so far.
I think £500 would be a bargain for a ready made income of 30k - 50k (if conditions stay as they are), but 30k seems to much of a risk for someone at this stage.

Doesn't matter. Its not £500 for £46k in your back pocket... its just the turnover figure. Some people will take that into consideration when valuing a business but its a very bad indicator of worth. No one is going to pay £30k...

It will never be a "ready made income" as that person needs to work to get that money even if part time and giving the work to a subcontractor.

You say the business has no tangible assets and also has high risk.

W = WebGW + BusGW + (NetProfit * ConSec)

I would assume the value of your business is like the above basic attempt at an equation...

Your business worth is basically the Good Will within your website, domain and google position; your business good will (if any) - you would argue about repeat customers and whether you have any Contractor Security... if there is security (i.e. a contract between the contractor and the business) then the boolean value will allow add on your net profit, otherwise none at all.

Of course, it depends what a buyer wants to pay for it.

Its difficult to suggest without seeing the website and business name etc.

£1000 + £400 + (£2000?) = between £1400 ~ £3400 - If you were to list it for sale you would probably list it at around £8000~10000 and accept offers.