Author Topic: How to value my business?  (Read 943 times)

firescape

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How to value my business?
« on: October 26, 2018, 07:39:35 PM »
Hello,
I'm looking for help in finding information about coming up with a value for my small service business. I know there is a lot of stuff online, but most of it seems to general. I thought here at MMM other small business owners that have sold their service businesses could offer more specific advise.
I've been considering this for some time and have been approached by some potentially interested buyers- some key employees. I've been asked 'what do you want for the business?' I'm not sure what to say.

My business grosses about 900k annually. Net Income is usually about 25% of gross, this year it will be about 250k. Owner salary about 100k. No inventory but equipment etc. is currently valued at 375k. No real estate would be part of the deal, company rents space. I have good accounting records going back nearly 20 years, and a large client list that would provide steady work for future owners. It's pretty much a turnkey operation.
Not sure at this point what other information to include.
Looking forward to hearing some feedback. What else do I factor in to determine value, or at least determine a range of value.
Thanks in advance.

MustachioedPistachio

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Re: How to value my business?
« Reply #1 on: October 26, 2018, 08:29:18 PM »
Congrats on being in a position to sell. Just spitballing here.

An extensive and on-going client list is a major asset. That and the turnkey nature of the deal warrant a premium. How much of a brand have you built? Do clients recognize "you" are the brand, or does the company really have its own brand and culture? Meaning, with you out of the picture, how would the company fare in regards to recognition, repeat clients, service etc?

Have there been any other sales of your type of service-business recently in your area or neighboring communities? Identifying comparables could get you in the general ball field, particularly if sales figures or net incomes are known for the comparables.

Something else to consider is how your prospective buyer will fund the purchase. If going with a traditional bank loan, the lender will likely have its own idea of valuation as far as assets to loan against and forecasted cash flow. Getting in touch with your banker could give you further insight on asking price.

There's always third-party valuation. Your CPA analyzes your business and puts it in context versus the industry, will probably run some discounted cash flow analyses as well, pay back periods, etc. The valuation will also depend on the certainty of the cash flows.

Good ol' fashioned negotiation? :)

clifp

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Re: How to value my business?
« Reply #2 on: October 26, 2018, 11:05:46 PM »
It is a really hard question. I primarily deal with startups (generally but not always in tech) 900K in revenue, with decent margins, would be valued at least 2x sales 4x wouldn't be out of the question, and I've seen plenty of companies ask for a lot more than that.  Hell if the product is hot enough (see Instagram and Facebook) you don't even need sales to get a $1 billion.  For a regular small business with low growth 1-2x sale or 5-8x EBIDTA would be common.

It is certainly worth talking to some professional evaluators, and for free advice call your local SCORE.org office.

Lately, I've been exploring revenue-based investment (Think of Kevin O'Leary's royalty deals on Shark Tank).  I think your business might be a good candidate especially if your key employee are interested in buying it, but probably would have a hard time coming up the cash.

Essentially you'd sell them the equipment at book value or replacement cost.  Then you get a percentage of the revenue for so many years, or until you got $Y back.  A further refinement would get say 10% of revenue from your existing customers but only 3% for a new customer to reflect the value of your name/brand. 10% of your revenue would replace the owners salary.

firescape

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Re: How to value my business?
« Reply #3 on: October 27, 2018, 07:09:39 PM »
Congrats on being in a position to sell. Just spitballing here.

An extensive and on-going client list is a major asset. That and the turnkey nature of the deal warrant a premium. How much of a brand have you built? Do clients recognize "you" are the brand, or does the company really have its own brand and culture? Meaning, with you out of the picture, how would the company fare in regards to recognition, repeat clients, service etc?

Have there been any other sales of your type of service-business recently in your area or neighboring communities? Identifying comparables could get you in the general ball field, particularly if sales figures or net incomes are known for the comparables.

Something else to consider is how your prospective buyer will fund the purchase. If going with a traditional bank loan, the lender will likely have its own idea of valuation as far as assets to loan against and forecasted cash flow. Getting in touch with your banker could give you further insight on asking price.

There's always third-party valuation. Your CPA analyzes your business and puts it in context versus the industry, will probably run some discounted cash flow analyses as well, pay back periods, etc. The valuation will also depend on the certainty of the cash flows.

Good ol' fashioned negotiation? :)

For a small service business I think we've created a good brand for ourselves. Enough name recognition over the years to sustain increased sales each year without advertising. I think this would continue without me, considering most of our customers know many of the employees, and the key employees would carry on our commitment to customer service.  I'm not aware of any comparable sales in my area, I could do more checking.
I'm not sure about funding the purchase, we haven't gotten that far in the conversation. I was hoping other small service business owners could chime in on how they did this. I do mean to check with our CPA about valuation.
Thanks for the input.

firescape

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Re: How to value my business?
« Reply #4 on: October 27, 2018, 07:25:31 PM »
It is a really hard question. I primarily deal with startups (generally but not always in tech) 900K in revenue, with decent margins, would be valued at least 2x sales 4x wouldn't be out of the question, and I've seen plenty of companies ask for a lot more than that.  Hell if the product is hot enough (see Instagram and Facebook) you don't even need sales to get a $1 billion.  For a regular small business with low growth 1-2x sale or 5-8x EBIDTA would be common.

It is certainly worth talking to some professional evaluators, and for free advice call your local SCORE.org office.

Lately, I've been exploring revenue-based investment (Think of Kevin O'Leary's royalty deals on Shark Tank).  I think your business might be a good candidate especially if your key employee are interested in buying it, but probably would have a hard time coming up the cash.

Essentially you'd sell them the equipment at book value or replacement cost.  Then you get a percentage of the revenue for so many years, or until you got $Y back.  A further refinement would get say 10% of revenue from your existing customers but only 3% for a new customer to reflect the value of your name/brand. 10% of your revenue would replace the owners salary.
Man, I'd love to get a valuation/sale in the range of 1- 2x sales. I have looked at other businesses like mine for sale (in the back of trade mags) and have noticed over the years they usually ask for about 1/2 annual sales, but not sure what all that includes. I've called on these but haven't gotten any useful information. Not even sure if or how many of these listed business have sold.
I'll look into SCORE, we've used them in the past and was a big help
Not sure I understand the advantage of a revenue based investment vs. selling the equipment at cash value. If I continue to get a percentage after the equipment is paid off, then yes it's better for me.
Getting paid down the road based on revenues after new owners take over could get tricky too; not sure they would continue at the level of sales and profit the company now has. Maybe they would, but not sure that I'd want to bank on it.

TFT

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Re: How to value my business?
« Reply #5 on: October 27, 2018, 07:51:08 PM »
For a business your size, you're a prime target for a search fund acquisition (usually a younger MBA grad looking to acquire a small business). They typically pay 4-6x EBITDA but it depends on the business. Just google "what is a search fund" to learn more. Think about it like a private equity deal at a micro level. To get a better idea for potential valuation, there's a ton of small business brokers that you can reach out to. Good luck with your sale.

FYI reaching out to the search fund clubs of top business schools (Harvard, Stanford, Wharton, etc.) could potentially be good to get leads for potential acquirers.

twe

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Re: How to value my business?
« Reply #6 on: October 27, 2018, 07:52:24 PM »
I'm someone on the other side of this-looking for the right small business to purchase. At your size, about 2X cash flow, plus the value of assets (minus 10-15%) would be about right. Of course, this will vary some depending on location, market, etc but not much. Look at it this way-to finance a purchase like that, there would be something like $125k a year (if not more) for about 10 years in debt servicing costs. That doesn't leave nearly as much for the new owner as the current one.
You value business based on cash flow-Warren Buffett does, so should you. I think ~$1 million is close. $350k yearly cash flow to owner, plus a realistic value of equipment. I wouldn't value it for me to purchase at anything over about $800k based off this description though and it goes back to the debt servicing cost.
Hope this helps.

clifp

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Re: How to value my business?
« Reply #7 on: October 27, 2018, 10:03:37 PM »
]
Man, I'd love to get a valuation/sale in the range of 1- 2x sales.  dI have looked at other businesses like mine for sale (in the back of trade mags) and have noticed over the years they usually ask for about 1/2 annual sales, but not sure what all that includes. I've called on these but haven't gotten any useful information. Not even sure if or how many of these listed business have sold.
I'll look into SCORE, we've used them in the past and was a big help
Not sure I understand the advantage of a revenue based investment vs. selling the equipment at cash value. If I continue to get a percentage after the equipment is paid off, then yes it's better for me.
Getting paid down the road based on revenues after new owners take over could get tricky too; not sure they would continue at the level of sales and profit the company now has. Maybe they would, but not sure that I'd want to bank on it.

My 2x sales is optimistic unless there is very high growth, I have to switch gears from startups to established.  My friends business with just over $10 million was valued at under $5 million, which seemed crazy cheap to me considering how profitable it is.  There does seem to be a consensus in 4-7x EBITDA range. 

The reasons for revenue based is because it may be a good/only way to let your employees take over year business.  I suspect there are only handful of people on the planet that think they could take over your business and make more money than you do. Your current employees are many of those people. They know what you do and while they understand your value, they probably have ideas about how they could grow the business that for whatever reason you haven't implemented.

I'm purely guessing here, but it is unlikely the current employees have 400K-800K you'd like in cash.  I'm certainly no expert on the subject but seems unlikely a bank would loan much more than book value on business with new owners.  So that leaves you selling to an outside investor, who I imagine is going to look at your numbers and think.  This guy is young why does he want to sell a profitable business, there has to be a catch. I'm going to discount his sales and profit numbers by a big percentage say 25-75%, which I think is how we get .5x sales for small businesses.

So yes if you can get $X in cash vs $X in royalty revenue over a few years. You should take the cash and run.  But it is likely to be $X in cash vs a range of $Y-$Z in revenue with $ Y > $X
Anyway, it is just a thought.

« Last Edit: October 27, 2018, 10:10:22 PM by clifp »

twe

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Re: How to value my business?
« Reply #8 on: October 28, 2018, 05:26:29 PM »

My 2x sales is optimistic unless there is very high growth, I have to switch gears from startups to established.  My friends business with just over $10 million was valued at under $5 million, which seemed crazy cheap to me considering how profitable it is.  There does seem to be a consensus in 4-7x EBITDA range. 

The reasons for revenue based is because it may be a good/only way to let your employees take over year business.  I suspect there are only handful of people on the planet that think they could take over your business and make more money than you do. Your current employees are many of those people. They know what you do and while they understand your value, they probably have ideas about how they could grow the business that for whatever reason you haven't implemented.

I'm purely guessing here, but it is unlikely the current employees have 400K-800K you'd like in cash.  I'm certainly no expert on the subject but seems unlikely a bank would loan much more than book value on business with new owners.  So that leaves you selling to an outside investor, who I imagine is going to look at your numbers and think.  This guy is young why does he want to sell a profitable business, there has to be a catch. I'm going to discount his sales and profit numbers by a big percentage say 25-75%, which I think is how we get .5x sales for small businesses.

So yes if you can get $X in cash vs $X in royalty revenue over a few years. You should take the cash and run.  But it is likely to be $X in cash vs a range of $Y-$Z in revenue with $ Y > $X
Anyway, it is just a thought.

4-7X EBITDA is for much larger businesses than this-there is just too much risk at this size. The earlier comment about MBA search funds-those folks are generally targeting businesses in the 4-7X range, but that would be somewhere in the $5million+ revenue, $1 million+ earnings for 4X and scaling up from there. Again, just my experience (but I am one of those MBA's). The smaller you go, the harder it is to value and the greater uncertainty, thus the lower valuation. This would most likely have to be an SBA loan purchase as it's really hard to find financing for this size of business, but that loan comes with some fairly stringent requirements.

One other thing that may help (like clifp laid out above)-if you are willing to do some sort of owner financing, then smart investors will generally go higher. The benefit is 2 fold-keeps you involved if necessary to steer during the transition (especially valuable if it's an outsider buying) and keep your network of contacts flowing to the business, and lowers the upfront financing cost. For example, it could be $400k up front cash, then 25% of cash flow for the next 5-7 years. Total cash payout would be higher, but that's because your risk would be as well. Research shows that having the owner stay involved at the right level and right way helps the business succeed in the 2-3 years after transition which are the most risky ones.

plantingourpennies

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Re: How to value my business?
« Reply #9 on: October 29, 2018, 09:59:34 AM »
My business grosses about 900k annually. Net Income is usually about 25% of gross, this year it will be about 250k. Owner salary about 100k. No inventory but equipment etc. is currently valued at 375k. No real estate would be part of the deal, company rents space. I have good accounting records going back nearly 20 years, and a large client list that would provide steady work for future owners. It's pretty much a turnkey operation.
Not sure at this point what other information to include.
Looking forward to hearing some feedback. What else do I factor in to determine value, or at least determine a range of value.
Thanks in advance.

Lots of accounting terms being tossed around in this thread. If your salary is 100k, where does the other 150k of the profit go?

1. I usually see businesses like this sell for 2x owner benefit plus wholesale value for the equipment (heavily dependent on industry!). I'm not clear if your owner benefit is 100k or 350k...

2. Businesses with strong managers and processes in place and  operate independently of ownership sell at a premium. If you can show that the business will continue to thrive even if the owner doens't show up for weeks at a time, the business is worth more.

Not an expert, just my take based on surfing business for sale...

EDIT=======================

Search fund-hadn't heard of this before-https://www.forbes.com/sites/vanessaloder/2014/08/07/the-search-fund-model-how-to-become-a-twenty-six-year-old-ceo-if-youre-willing-to-kiss-frogs/#21d25f6a1190

firescape

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Re: How to value my business?
« Reply #10 on: October 29, 2018, 06:08:55 PM »
]
Man, I'd love to get a valuation/sale in the range of 1- 2x sales.  dI have looked at other businesses like mine for sale (in the back of trade mags) and have noticed over the years they usually ask for about 1/2 annual sales, but not sure what all that includes. I've called on these but haven't gotten any useful information. Not even sure if or how many of these listed business have sold.
I'll look into SCORE, we've used them in the past and was a big help
Not sure I understand the advantage of a revenue based investment vs. selling the equipment at cash value. If I continue to get a percentage after the equipment is paid off, then yes it's better for me.
Getting paid down the road based on revenues after new owners take over could get tricky too; not sure they would continue at the level of sales and profit the company now has. Maybe they would, but not sure that I'd want to bank on it.

My 2x sales is optimistic unless there is very high growth, I have to switch gears from startups to established.  My friends business with just over $10 million was valued at under $5 million, which seemed crazy cheap to me considering how profitable it is.  There does seem to be a consensus in 4-7x EBITDA range. 

The reasons for revenue based is because it may be a good/only way to let your employees take over year business.  I suspect there are only handful of people on the planet that think they could take over your business and make more money than you do. Your current employees are many of those people. They know what you do and while they understand your value, they probably have ideas about how they could grow the business that for whatever reason you haven't implemented.

I'm purely guessing here, but it is unlikely the current employees have 400K-800K you'd like in cash.  I'm certainly no expert on the subject but seems unlikely a bank would loan much more than book value on business with new owners.  So that leaves you selling to an outside investor, who I imagine is going to look at your numbers and think.  This guy is young why does he want to sell a profitable business, there has to be a catch. I'm going to discount his sales and profit numbers by a big percentage say 25-75%, which I think is how we get .5x sales for small businesses.

So yes if you can get $X in cash vs $X in royalty revenue over a few years. You should take the cash and run.  But it is likely to be $X in cash vs a range of $Y-$Z in revenue with $ Y > $X
Anyway, it is just a thought.



I think you're right about the bank being leery of lending for this. I could be wrong, but selling to an outside investor seems unlikely. I think in our industry what usually happens is new owners transition in over a few years, then get payments for some time. I think that could work, but not sure how to structure it. I've heard in one other case where new owners deferred salary which was used, more or less, as a downpayment, then made payments over some time.
« Last Edit: October 29, 2018, 06:25:03 PM by firescape »

firescape

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Re: How to value my business?
« Reply #11 on: October 29, 2018, 06:21:48 PM »
I'm someone on the other side of this-looking for the right small business to purchase. At your size, about 2X cash flow, plus the value of assets (minus 10-15%) would be about right. Of course, this will vary some depending on location, market, etc but not much. Look at it this way-to finance a purchase like that, there would be something like $125k a year (if not more) for about 10 years in debt servicing costs. That doesn't leave nearly as much for the new owner as the current one.
You value business based on cash flow-Warren Buffett does, so should you. I think ~$1 million is close. $350k yearly cash flow to owner, plus a realistic value of equipment. I wouldn't value it for me to purchase at anything over about $800k based off this description though and it goes back to the debt servicing cost.
Hope this helps.
Would you consider any value for the client list, name recognition, goodwill etc.? Or just the cash flow annually plus value of equipment?
I get your point about new owners financing a deal like this over 10 years with the debt servicing costs. I'm not sure if that's realistic to expect. I'd like to get that deal but not sure if I'd take it.

firescape

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Re: How to value my business?
« Reply #12 on: October 29, 2018, 06:35:49 PM »
For a business your size, you're a prime target for a search fund acquisition (usually a younger MBA grad looking to acquire a small business). They typically pay 4-6x EBITDA but it depends on the business. Just google "what is a search fund" to learn more. Think about it like a private equity deal at a micro level. To get a better idea for potential valuation, there's a ton of small business brokers that you can reach out to. Good luck with your sale.

FYI reaching out to the search fund clubs of top business schools (Harvard, Stanford, Wharton, etc.) could potentially be good to get leads for potential acquirers.
I'm not familiar with a search fund, I'll look into it. I have looked into small business brokers, trying to find someone and set up a meeting soon. Thanks.

SeattleCPA

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Re: How to value my business?
« Reply #13 on: October 31, 2018, 05:02:43 PM »
Given the dollars you might want to splurge, buy a copy of bizcomps, and see what comparables their database shows.

BTW, the comps in that database are way way lower than some of the numbers given above. The average multiple is roughly 2.5 times seller's discretionary cash flow...

twe

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Re: How to value my business?
« Reply #14 on: October 31, 2018, 07:02:55 PM »
Would you consider any value for the client list, name recognition, goodwill etc.? Or just the cash flow annually plus value of equipment?
I get your point about new owners financing a deal like this over 10 years with the debt servicing costs. I'm not sure if that's realistic to expect. I'd like to get that deal but not sure if I'd take it.
I would not, because the client list and name recognition is tied to the current owner. Unless s/he stays involved somehow (like I referenced in a previous comment), then the answer is no. If yes, then there is a value, but then it becomes an ongoing relationship with seller financing in some form.
The value really is just cash flow plus true inventory / equipment value at the right multiple. I know selling a business you've built is a very personal decision (realized that after my first serious offer and the response), buy buying one isn't. The math has to win.

twe

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Re: How to value my business?
« Reply #15 on: October 31, 2018, 07:04:13 PM »
You could also try listing yourself on bizbuysell.com. Pretty reputable site for selling small businesses.

stevewisc

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Re: How to value my business?
« Reply #16 on: November 08, 2018, 10:00:20 PM »
Iíve bought a few businesses and sold one - a few thoughts. 
1) A good/bigger accounting firm will have a copy of Bizcopms and other data sources to get comps from. As noted above this a good starting point.  However lots of deals that are very small like that have details that you wonít see on bizcomps.

2) Service business valuations at generally less then average as the business can be less sticky. One day one all the costumers leave because they were there because they liked the old owner of the hair salon and the new owner isnít in their number two spot.   Poof the business is losing money.

3) When looking at an investment in this size business I determine what I have to pay for someone to run it - maybe $100k in this case?  Plus bonuses to give a sense of ownership maybe.  That leaves $150 in free cash flow from the business.   2-3x that isnít a bad buy. ($300-$450k) For that small of a business with slow growth it would be surprising to get more then that. (I generally donít do much for inventory add on either. If the inventory is cost $2million if the business earns $50k a year it should probably be shut down. If it needs $2mil in inventory should generate $200k min. Just from inventory holding cost)

4) There maybe adjustments to the $150 number too - how clean are your books?  Do you have a few customers that makeup 25-35% of the business? Are current employees close to retirement?

5) What do you want for terms? All cash? Earn out? Seller note?   The more cash the lower the multiple and the less likely the deal closes.  Of course if you finance it what are the odds they mess it up and canít pay you?

6) Given the multiple is so low can you hire a person to replace you and another to help manage it?

7) If someone tells you it should sell for some big multiple like 4x EBITDA or better yet 4x revenue hire them today and pay them based on getting at least 90% of their valuation.  I had a vendor whoís expensive accountant said his business was worth $200k. I told him to have the accountant sell it now. He didnít and a few months later I bought his equipment from bankruptcy for $22k.  It was sad.   

Good luck with the sale.