Online business valuation

[Lynn10]

Hi,

Some advice please. I am trying to put a value on a small online business. There is approximately £5000 in stock and a few hundred in used storage, shelving, boxes etc. The business has a good e-commerce website, FB with 4k followers, marketing lists etc. It has never paid the owner a wage. What value would you put on it?

Thanks

 

[DontAsk]

Anything from £0, depending how the stock was valued.

Selling or buying?

 

[Clinton]

@Lynn10 you're one of the few newcomers who actually takes advice, so I'll provide some.

Forget about value. There is no way to value a small business like that.

First time buyers / sellers struggle to grasp this "no valuation" concept.

But everything has "a value"! How can I do a deal if I don't know the real value?

There isn't a real value. It's whatever you can get away with. Seriously. If there are no other buyers and the seller is desperate to get out, they'll give it to you for £1.

Then the value is £1.

If there is just one other buyer and he's willing to pay £1,000 but you're willing to pay £10,000, then the value is £10,000. The moment you pull out, the value drops to £1,000.

So £1, £1,000 and £10,000 are all fair value for this business. Just like £100K or £10m.

There is no valuing this kind of business, there is not even an approximate value!

For a micro business, the deal, the price, the final agreement depend 100% on the negotiation and 0% on accountancy formulae.

I'm not saying this because I don't know how to value businesses. It's because I have experience in the field.

 

[Mr D]

Hi,

Some advice please. I am trying to put a value on a small online business. There is approximately £5000 in stock and a few hundred in used storage, shelving, boxes etc. The business has a good e-commerce website, FB with 4k followers, marketing lists etc. It has never paid the owner a wage. What value would you put on it?

Thanks

Offhand I'd suggest around £500. Which would be resale value of stock.
That's presuming stock is valued at wholesale value. Otherwise £100.


Great if someone wants to buy themselves a hobby. One day it may be a job.

The thing to do is look at accounts. If the business has produced £x for its current owner then it could conceivably with good management produce similar for a new owner.

Not paying a wage is the owners decision. Means the money can instead pay other bills or be used to increase sales.

 

[Lynn10]

Offhand I'd suggest around £500. Which would be resale value of stock.
That's presuming stock is valued at wholesale value. Otherwise £100.


Great if someone wants to buy themselves a hobby. One day it may be a job.

The thing to do is look at accounts. If the business has produced £x for its current owner then it could conceivably with good management produce similar for a new owner.

Not paying a wage is the owners decision. Means the money can instead pay other bills or be used to increase sales.

Can I ask why the resale value of the stock is only £500?

 

[Lynn10]

@Lynn10 you're one of the few newcomers who actually takes advice, so I'll provide some.

Forget about value. There is no way to value a small business like that.

First time buyers / sellers struggle to grasp this "no valuation" concept.

But everything has "a value"! How can I do a deal if I don't know the real value?

There isn't a real value. It's whatever you can get away with. Seriously. If there are no other buyers and the seller is desperate to get out, they'll give it to you for £1.

Then the value is £1.

If there is just one other buyer and he's willing to pay £1,000 but you're willing to pay £10,000, then the value is £10,000. The moment you pull out, the value drops to £1,000.

So £1, £1,000 and £10,000 are all fair value for this business. Just like £100K or £10m.

There is no valuing this kind of business, there is not even an approximate value!

For a micro business, the deal, the price, the final agreement depend 100% on the negotiation and 0% on accountancy formulae.

I'm not saying this because I don't know how to value businesses. It's because I have experience in the field.

Thanks, I do take your advice even if you scare me a bit

 

[Lynn10]

Anything from £0, depending how the stock was valued.

Selling or buying?

The stock value is the cost price paid for it.

 

[DontAsk]

The stock value is the cost price paid for it.

That's a standard method, but is it still worth that? Have you seen the condition of it?

 

[Clinton]

Thanks, I do take your advice even if you scare me a bit

LOL, and here's me trying not to be scary! You should see some of the other replies I've made for newbies!

OK, listen, I don't normally get involved in small deals but I'll help you out. I'll do it here in public so it may be of use to others looking to buy a small business.

As previously explained, there is no value. But that's not something you say to the vendor. In his head it's got value. You can't change his mind on that.

It's like trying to convince a new mum that her baby is ugly. It. Just. Doesn't. Work.

So you've got to go along with it. If I were looking to buy a small business, I start by saying, "That sounds like a reasonable price".

There's some psychology behind that, but I don't know what it is.

"That sounds like a reasonable price."

But then you drop hints that at some point you'd want to get some external opinion on price if that's okay. You know, like some neutral party. "Would that be okay?"

You've already demonstrated that you're a reasonable person. How could he say no?

He'll be thinking, of course, that he's not bound by any external valuation you get so ...what the hell, let her go pay money.

But you don't get a valuation just yet.

You request documents, proofs, tax records, stock records, whatever. You collect all the information.

Then you become even more reasonable. Suggest to him that instead of getting some external expert to do the valuation, perhaps his own accountant would back up his valuation and provide some basis for his calculation.

You can't be more reasonable than that. Heck, you're using his own accountant, someone who's on his side!

Of course, you won't commit to paying the figure his accountant comes up with, but you've put the monkey on the seller's back, so to speak.

Now he's got to get his accountant to do a valuation. And accountants are very wary about backing up random numbers invented by vendors!

You emphasise that you're happy to go with any professional valuation, subject to due diligence.

Subject to due diligence is your get out clause if you don't like the valuation.

He will struggle to get a professional valuation to back his numbers up. In the meanwhile make sure you get all his data, raise all your questions, do whatever investigations you are going to be doing.

It's a long game.

In my next post, I'll tell you two ways you can get his price expectations down.

I've got to go have dinner now.

 

[MikeJ]

I don't think it's clear if the OP is buying or selling here?

 

[Lynn10]

That's a standard method, but is it still worth that? Have you seen the condition of it?

Yes, the condition is new.

 

[Lynn10]

I don't think it's clear if the OP is buying or selling here?

Sorry for not making it clear, I'm trying to sell it.

 

[Lynn10]

LOL, and here's me trying not to be scary! You should see some of the other replies I've made for newbies!

OK, listen, I don't normally get involved in small deals but I'll help you out. I'll do it here in public so it may be of use to others looking to buy a small business.

As previously explained, there is no value. But that's not something you say to the vendor. In his head it's got value. You can't change his mind on that.

It's like trying to convince a new mum that her baby is ugly. It. Just. Doesn't. Work.

So you've got to go along with it. If I were looking to buy a small business, I start by saying, "That sounds like a reasonable price".

There's some psychology behind that, but I don't know what it is.

"That sounds like a reasonable price."

But then you drop hints that at some point you'd want to get some external opinion on price if that's okay. You know, like some neutral party. "Would that be okay?"

You've already demonstrated that you're a reasonable person. How could he say no?

He'll be thinking, of course, that he's not bound by any external valuation you get so ...what the hell, let her go pay money.

But you don't get a valuation just yet.

You request documents, proofs, tax records, stock records, whatever. You collect all the information.

Then you become even more reasonable. Suggest to him that instead of getting some external expert to do the valuation, perhaps his own accountant would back up his valuation and provide some basis for his calculation.

You can't be more reasonable than that. Heck, you're using his own accountant, someone who's on his side!

Of course, you won't commit to paying the figure his accountant comes up with, but you've put the monkey on the seller's back, so to speak.

Now he's got to get his accountant to do a valuation. And accountants are very wary about backing up random numbers invented by vendors!

You emphasise that you're happy to go with any professional valuation, subject to due diligence.

Subject to due diligence is your get out clause if you don't like the valuation.

He will struggle to get a professional valuation to back his numbers up. In the meanwhile make sure you get all his data, raise all your questions, do whatever investigations you are going to be doing.

It's a long game.

In my next post, I'll tell you two ways you can get his price expectations down.

I've got to go have dinner now.

Please don't be cross, I appreciate your time but I'm selling not buying.

 

[Lynn10]

Anything from £0, depending how the stock was valued.

Selling or buying?

Selling

 

[Mr D]

Can I ask why the resale value of the stock is only £500?

That's what would be got if sold to someone who will sell it on to another retailer.

Using 10% valuation.
Maybe the stock is rare and will fetch 20% valuation but if its stuff that others sell then not great wholesale value.

Been there - had considerably more than £5k of stock valued at 10%.

 

[DontAsk]

Please don't be cross, I appreciate your time but I'm selling not buying.

LOL Now you know them mind games a prospective purchaser might be using.

 

[Clinton]

Please don't be cross, I appreciate your time but I'm selling not buying.

Ah, my mistake. Your last thread was about buying a business a few days ago!

If you're selling then it's a different story. Take whatever you can get.

My points on valuation still hold. It's worth whatever you can get someone to offer for it.

And, unfortunately, there aren't a lot of buyers for small businesses. There are two articles on my site that you should read:

Why small is the problem
The realities of selling a small business

LOL Now you know them mind games a prospective purchaser might be using.

That ain't the half of it. Once you move up to the £1m+ market there are a million other games that go on! My clients tend to be businesses in the £5m - £50m t/o range and that's a very, very scary market.

 

[Porky]

@Clinton - would you be so kind as to revert regarding your earlier post on two ways to get his price expectations down - I’m keen to learn if you can afford the time to reply.
Thanks

 

[Scottishgifts4u]

Just by posting on here you may get a couple of enquires.... I know I did although they didn’t come to anything.

I was in the same position as you around about Christmas as I was retiring from my main job and wanted rid of the website as well.

I hit it lucky as a local shop offered me a bit of space in her shop window (bit of space literally meant a pasting table). She soon noticed my stuff was outselling her stuff, although to be fair we were selling it cheap. So she bought all stock off of us. She got it dirt cheap but more importantly she took every last thing.

I don’t know what you sell but it might be worth trying to sell your stock outside the website.

I think I’d forget any perceived value in the website itself.

 

[Darren_Ssc]

I think I’d forget any perceived value in the website itself.

Doe the website have any unique content other than product listings, any decent back links and/or a generic domain name? If no then not worth anything.

Facebook followers are not worth anything other than what it would cost to get the same from scratch.

Stock and fittings, as above, whatever you can get for it.

 

[Clinton]

@Clinton - would you be so kind as to revert regarding your earlier post on two ways to get his price expectations down - I’m keen to learn if you can afford the time to reply.
Thanks

1. The Patience Game

95% of small businesses that go to market will not succeed in selling. But the owners do not know this, they think their business is great and will be eagerly snapped up by rich investors. So you've got to let realisation sink in, you've got to let the market slap them in the face.

You say: "I can't afford that price, but I wish you good luck with the sale. I'm sure you'll sell, but I'll contact you in a few months if my financial situation improves."

Then you get back in 3 months, then 6 months, then 12 months. Just a quick "hi" to see how it's going and to show that you are still interested.

There's a lot more to this method, but that's the summary. One of my first buys was a £450K business that I managed to acquire for £30K using this method. It took me two years!

Just by posting on here you may get a couple of enquires.... I know I did although they didn’t come to anything.

That's what typically happens - enquiries that don't lead anywhere. There's nothing that saps a vendor's spirits like enquiry after enquiry that doesn't lead to a sale. Tyre kickers are good news! In fact, some buyers create fake identities to make tyre kicker approaches!


2. The Put Your Money Where Your Mouth Is.

I won't go into details on how to pull it off but essentially you get the vendor to provide projections. Then you tie payments to the delivery of those numbers ie. you're making payments in the future and they are contingent on certain impossible targets being hit.

Vendors will always provide ridiculously optimistic projections. If those numbers don't get delivered, you don't pay the asking price. (It's not something I've ever done, but some investors put poison pills in the SPA / contract to ensure those targets never get achieved!)

There are many other ways to skin this cat and get price expectations down.
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Just for the record, I'm neither pro buyer, nor pro seller. I'm pro deals being done, I'm pro both sides reaching a sensible compromise, I'm pro an expert helping them find a happy medium (or "bridging the valuation gap" as it's known in the industry). This is done via creating a deal structure that works for both parties.

BTW, and just for the record again, my job is not advising buyers / sellers of micro businesses. Or even small businesses! So any future readers of this thread, please don't contact me to help (unless you've got shed loads of money you want to send my way). But if you've got a couple of million in turnover, or a few hundred thousand in pre-tax, it may be worth booking a free call with me to pick my brain. The clients I take on are, in the main, businesses with t/o of £5m+.

 

[Alison Moore]

So difficult to sell stock for the same price as you bought it. The avenues for you to sell stock are limited unless you can find a buyer who is going to pay cost price for it - but that's unlikely as they might as well buy it at cost price from their resellers rather than you. In my experience of having had to recently close down a company and sell all our stock, you'll be lucky if you get a third of the cost back. Some great advice from Clinton there and the comment about ugly babies made me laugh out loud!

 

[Financial-Modeller]

Hi,

Some advice please. I am trying to put a value on a small online business. There is approximately £5000 in stock and a few hundred in used storage, shelving, boxes etc. The business has a good e-commerce website, FB with 4k followers, marketing lists etc. It has never paid the owner a wage. What value would you put on it?

Thanks

Is it trading profitably?

 

[fisicx]

It has never paid the owner a wage.

How much did it pay them?

 

[bodgitt&scarperLTD]

Great posts from Clinton as ever. Lyn, you just got a few £100 of advice for free.

Your best best is to cross your fingers and hope for an idiot to come along, perhaps with a wodge of cash from recently being made redundant. Without that luck, it's close to worthless especially in the current climate.

 

[Lynn10]

Thank you all for your advice, very much appreciated. I've had an offer for my little business which although less than I hoped, I've accepted and after reading the replies I think I'm probably lucky.

 

[luke.d]

What is the business?