Valuing a Business

[tee]

Hi guys, I started an import business this time last year, predominantly online based. 2 of us put in £5k each. Profit has now grown to £40k within first year. If for instance I wanted to sell this business, how would I go about putting a realistic price on it?

 

[jim_gold]

The valuation issues here, as with all micro businesses, centre around [1] how/whether the business would run under a new owner without the two of you around; and [2] what constitutes a real 'profit'.

You say the profits are £40k, but is meaningless without consideration of owners' time.

To value a business that is not a lifestyle business, you need to assume that the professional acquirer will want to have the business being run for him/her, and the costs that this entails be removed from the bottom line profit before calculating a purchase figure.

If he/she is to do some of the running of the business, then this time needs to be accounted for generously and again, deducted from 'profits'.

You say 'if.. I wanted to sell the business...'. This brings up another common issue, namely consensus between owners. Have you set out in your articles or elsewhere, whether owner B gets first option on a sale if owner A decides to divest? If not is there anything else in place i.e. independent arbitrators?

 

[Psl]

Hi guys, I started an import business this time last year, predominantly online based. 2 of us put in £5k each. Profit has now grown to £40k within first year. If for instance I wanted to sell this business, how would I go about putting a realistic price on it?

Some potential purchasers may see the fact that you have only trading a year as bad, others, and these are the people you want to attract, may see the potential of the business based on your stated profit for year one.

Some people may say you haven't been trading long enough to sell the business for a realistic price, those people aren't the ones that can spot an opportunity and you don't want to waste time with.

If you have a set of accounts for a year showing the stated profit of £40k then my initial calculation to achieve a sale price would be 3.5 x GP = £120k. If there is only you and your partner working in the business and drawing salary from the business, then add these figures back in.So if collectively the salaries equal £50k, add this back in, now you have as sale price of £170k.
I will stress that this a starting point and my way of valuing a business without knowing exactly what your business is, plus any buyer will only pay what they think the business is worth to them.

There are other variables to factor in as well, fixed assets, value of contracts, value of the ecommerce site and you and your partners value to the business based on your relationships with your suppliers.

You could get a business transfer agent to 'value' your business but my experience is that they can only talk the talk!! I stress that is just my experience and possibly not true of all of them.
If you do intend on selling the business handle it yourself from start to finish as that will save thousands in fee's for business transfer agents, accountants and lawyers. Although you will need a lawyer to finalise the deal but don't let them get 'giddy' or you will end up with a disproportionate bill.

 

[DateinaDash]

I would suggest for an online business with £40,000 profits you'd be looking at 18 months profits together with any assets would give you a rough ball park figure.

 

[KateCB]

And that depends on whether it is Net profit, or gross profit.....

 

[Truemanbrown]

And another question you will need to ask is whether your profits are sustainable?

I give you an example, a few years ago that lovely man, Cuddly Ken Livingstone, made London a low emission zone. As a result, thousands of trucks had to have new catalytic converters fitted at a cost of thousands of pounds.

Garages made a sizeable profit fitting the new converters around this point in time, but once the rush was off their profits fell back.

Any such 'unsustainable' profits have to be taken out of the valuation computation.

 

[christian_d]

If you import everything from a sole supplier - your business may be worth less.

If a large % of your 40k comes from a small amount of clients - even less still.

Unless you're desperate, selling a business in this economic climate is 'nuts'.

Why can't you stick another 10k in, carry on for 12 months, come out the back end with 80k profits after 2 yrs and sell when it picks up?

 

[GraemeL]

Hi guys, I started an import business this time last year, predominantly online based. 2 of us put in £5k each. Profit has now grown to £40k within first year. If for instance I wanted to sell this business, how would I go about putting a realistic price on it?

Tell me more!

To achieve a 40k profit in year one is terrific. I am assuming that you were all paid above average salaries before you arrive at the net profit of £40k?

Have you any assets (What does your balance sheet say?)? You could say that a valuation of your business is the net asset value. Profits wont count much yet, without a consistent pattern.

 

[Rhodes100]

You dont say whether the £40k is before or after your and your partners salary.

I would guess that you have forgotten the cost of your input in your calculation. You also dont state how many hours a week you worked to build this business up, if you were both working 70 hours a week and started to employ someone else to take your place your profits might be nothing, so your business is not worth a lot.

Historical figures are irrelevant what is important is the future cash flow arising from this business and someone elses ability to continue with that cash flow in the future.

I would suggest that Jim Gold is the only answer on here that is likely to be closer to the truth.

I would guess that this is another "how rich am I question", the fact is that the value of your business can only be ascertained when it is sold, the rest of it is conjecture based on limited information.

 

And that depends on whether it is Net profit, or gross profit.....

And whether that is profit after wages have been paid.

Earl

 

[KeithGreen]

I agree with what Rhodes100 and Jim Gold are saying on here.

Small online businesses are selling better than most micro-businesses at the moment and you should certainly see a profit on your initial £10k investment. However as stated the overall price and value depends whether your £40k profit is your "wages" or is that the profit left after you and your partner have taken salaries. Also, how sustainable are your profits year-on-year?

There are ways and means and methods and multiples used in valuing businesses. Most agents will provide you with a free valuation - some realistic and some not.

Please feel free to send me a PM if you want a more detailed response.