Valuing a business?

[MrsV]

Hi

I’ve got an e-commerce brand that sells products we manufacture in-house with our own formulas (no white labelling).

It went from years of around $450,000 in sales with me drawing around $120,000 to, for the past two years, sales around $180,000 and me drawing around 50k a year but only working in it around ten hours a week.

Part of the decline is the economy, but a bigger part is simply due to me not working on the business as I did. It’s very much become my side gig.

Somebody that wanted to discuss buying it when things were at a high has reached out and wants to reignite this conversation.

I’m interested as I think they could maximise the potential and that they have the passion I once had, but no longer do.

However, I have no idea how to value a business in this situation? I believe that the inventory on hand would have its own wholesale/cost price that’s separate … bus the business itself?

I realise that with such a huge decline in sales it means that I’m selling a depreciating asset, yet only working part time on it leaves so much potential with what is a brand (with prestigious global awards/recognition, modern updated website on latest shoplift version, decent SEO with some key products and pages on the first page of google, a Klaviyo email list with very healthy send reputation, and a strong base of repeat  58% - customers - all to say a huge investment of time and money over the years the get the foundations strong).

Where do I start when figuring out what this business could be worth? I asked something similar some time ago, and got some great feedback from members, but my revenue has decreased since then and the economy in Australia is very, very flat … both issues I’m thinking could have a bearing now?

Thank you in advance for any tips!

[GilesMM]

The business is worth a multiple of the forecast annual income. The multiple depends on the risk to that income - higher risk, lower multiple. The forecast will also be based on the actuals and whatever potential the buyer sees to improve income.  If you could convince them it has potential for $120k income and it is low risk to maintain that, they might pay 6-8x 120k. Around $1 million.  They will argue the current economy supports $50k/yr and it would get worse, so they may be at $250k.

[Metalcat]

It's really hard to say.

In my old industry, you would get a substantial premium for an underperforming business with a lot of room to grow. So a clinic that used to gross 2M, but now grosses only 1M because the owner has health problems would be worth much more than an optimized clinic grossing 1M with no growth potential without substantial investment.

But that's an industry with massive overhead costs where expansion takes an enormous amount of infrastructure. So existing infrastructure that can be grown into is worth quite a bit.

It all depends on how provable it is that the income potential is much higher than the current income reality AND how much of what you've already developed is responsible for that potential vs someone just buying a less profitable business and expanding it themselves.

As a buyer, I'm not going to pay a premium for potential that I could just generate myself.

So does the previous performance hold any residual value?? Basically, what makes your business different from an identical business that has only ever performed at the current profit level? Would I be getting more from buying your business at its current profit level vs an identical business at that current profit level that never had more profit in the past??

Did the business make more because you fundamentally did something better that persists within the business or just because you were working more hours in the past?

Meaning, are you leaving behind anything of value that will make it much easier for a new owner to ramp back up to that level, or will it just depend on them working harder, which they were probably going to do anyway??

[MrsV]

Thanks @GilesMM  and @Metalcat - very helpful as I initially had $50,000 plus the stock sold at cost in my head which sounds like I’m giving it away! This person worked with me as a consultant in the early days so I think is very convinced of the potential. They also know I took on waayyy too much the past 18 months and am probably burned out (and have been for a while) and that this business was pretty much put on autopilot.

Maybe I take my drawings/profit for the past three years, average it for an annual figure (off my head that is around $120,000) and start the conversation there.

[dandarc]

Are you paying yourself a salary before arriving at your drawings / profit?

If buyer would need to hire someone to do what you do or pick that part up themselves, that would reduce the purchase price, generally speaking.

[MrsV]

Yes and no - I didn’t set the business up to sell and would run the books differently had this been my plan.

Basically, I’ve paid myself a very generous salary for what I’ve done that past year of around $100 an hour for work that I could have outsourced for $$20-30 an hour - a few customer service replies each week, a weekly customer email, and checking in with various freelancers such as the girl who does our organic socials and the odd job for our website developer.

The business has very much been on autopilot, relying heavily on a bunch of customers who love the products and return every 60-90 days. I think the renewable aspect of our product and the thousands of genuine five star reviews are another aspect that has made this party interested enough to reach out about an acquisition again …

Had I planned to sell it, I would have paid myself an hourly wage that reflected that ‘work’ and taken the rest as a dividend.

When I was paying myself $120,000 a year I did work in the business much more actively, but all the jobs I did could have been outsourced for much less than I paid myself. Basically I was doing similar tasks as now, but more of them due to the volume.

You are right though, and this is part of why I am finding it hard to come up with the price the interested party has asked me to come back with!

[GilesMM]

...

You are right though, and this is part of why I am finding it hard to come up with the price the interested party has asked me to come back with!

Tell them you need to hear an interesting offer from them first.  Don't show your cards!

[Metalcat]

...

You are right though, and this is part of why I am finding it hard to come up with the price the interested party has asked me to come back with!

Tell them you need to hear an interesting offer from them first.  Don't show your cards!

Ths is what I would do too. If this person knows the height of the business and is the one coming in with interest, let them make the offer.

[MrsV]

Thanks guys - I think you are right. I’ve run it through an e-commerce valuation calculator ~ all my figures for the past twelve months plugged in, so based on twelve crappy months instead of an average of three years (two of which were more than double - each year - than the past year). It’s showing a valuation of between 200-300k which is much more than I expected.

This calculator did ask for many things outside of figures - age of business, social followers, email list etc., which confirmed in some ways my suspicion that all the work building a real brand, as opposed to, say, drop-shipping, means something.

They’ve asked me to come back with a figure. I think I’ll show them the report and reverse it, asking them to let me know what it is worth to them. Thanks again - I do agree this is the smartest way forward.

[Metalcat]

Thanks guys - I think you are right. I’ve run it through an e-commerce valuation calculator ~ all my figures for the past twelve months plugged in, so based on twelve crappy months instead of an average of three years (two of which were more than double - each year - than the past year). It’s showing a valuation of between 200-300k which is much more than I expected.

This calculator did ask for many things outside of figures - age of business, social followers, email list etc., which confirmed in some ways my suspicion that all the work building a real brand, as opposed to, say, drop-shipping, means something.

They’ve asked me to come back with a figure. I think I’ll show them the report and reverse it, asking them to let me know what it is worth to them. Thanks again - I do agree this is the smartest way forward.

This is precisely the kind of thing I was asking about.

What does your business have built in that would make it easier to ramp up than an identical business that no one had every built up to the level yours was at?

I once walked into a very well established business that was severely under producing because the owner had serious health issues for 2 years and just wasn't focused on it. But the client base was there, the demand existed, I just had to be present and tap into it. Within just a few months I had the place ramped up to its previous heights. There was so much value in that business, it was insane.

Had I walked into an identical looking business that had just managed to build up to the low profit level that the previous one had dropped to, building up would have taken at least a year or two, and a lot of marketing, training staff, building best practices, etc.

In my industry, the first business would be worth a few times what the second would be.

The effort you put in before to build up the business has a lot of value if that former effort can still capture market share. Goodwill has real value.

[Mustache ride]

This doesn’t answer your question, but it sounds like you could also ramp the business back up and outsource the additional work while still generating a healthy margin. Perhaps that is something to consider as well.

[MrsV]

@Metalcat yes I know how hard it is to get those first 100 or so five star reviews and we’ve got thousands. And the awards won are global and very respected with some big well known brands from our industry entering. And the fact we aren’t just buying something off Ali baba and reselling it. And our trademarks … I think this all plays into the fact that I’d be selling them an established brand as much as a business. This person has been honest and says they want a business to scale globally - they’ve got a huge head start by buying my brand instead of starting from scratch.

@Mustache ride this was my plan to be honest. But at 50, my husband and I have become very risk adverse and it would take borrowing significant money to market again (cost of acquisition is much higher in this economy to the years previous where we were doing really well without a huge effort with marketing). We are also trying to cut back and travel more and I’ve been working on another business that is very location neutral. 

It’s still plan b - actually it was my plan a (come July this year if planned to jump back into this business full time for three months and see how it pulled up with my time dedicated to it again), but this person has come back to me unsolicited, so it’s reignited the thoughts around passing it on to somebody willing to invest significant time and money. But, while I’m happy to let it go to somebody who could take it to the next level for a fair price, I’m also not willing to ‘give it away’.

Thanks guys!

[Christof]

I've bought a few businesses and had many more being offered over time. Every time the valuation of the owner was higher than what I considered to be a fair price.

Small business owners have a lot of knowledge in their head, but never wrote it down. I can only pay for what I get, I don't get your head. Someone who is buying a business wants to buy a business, not a job. Everything you do needs to be paid for. What's left is the actual benefit.

Automated businesses are a red flag. They indicate that you found a way to currently exploit a market but do not provide a proof that your company can handle a change in strategy. This goes with the previous point. If you made money because you knew at the right time when to switch your strategy, how is that possible without you? What you do is not worth anything when selling a company.

If somebody is willing to buy that knows the business, maybe consider a model where they give you small fixed amount plus an ever decreasing amount of what they make in the next few years.

[MrsV]

Thanks @Christof  - good points. It’s funny you mentioned the knowledge in heads - I’ve started working on notes and plan to build a google site with everything from where we get stickers printed to everybfreelancer we’ve used over the years and contacts for manufacturing possible products I would have liked to launch if I’d kept the business (with notes around any r&d I’ve already done over the years around these products and why I think they complement the current line).

I guess at the end of the day brokers can give ballparks - and their estimates are wide, from 240 k- 460 k each broker because, I’m guessing, ultimately the business is worth what somebody is willing to pay.

[Michael in ABQ]

I bought an ecommerce business a few years ago and have stayed tapped into the market. In general, you're looking at around a 2.5x - 3x multiple of profit + inventory. So, $125 - $150k + inventory would be a starting point. It could be as low as 2x and as high as 4x, but certainly no higher than that unless you had strong growth, patents, etc.


That multiple could go up because of the reoccurring nature of the sales - if it was an actual subscription with recurring revenue, it would definitely push it higher. The existing reviews, customer list, etc. are all positives as well - but buyers are going to see a declining business and aren't going to pay for future growth that is uncertain.

It's a relatively low profit amount that is basically buying a mediocre job so that would push down the price. The higher the profit, the higher the multiple. That's why publicly traded companies making tens or hundreds of millions in profit effectively trade at 10, 15, 20x+ their annual profit. Larger businesses are less risky, so buyers are willing to accept a lower return. Also, investing in those publicly traded companies is completely passive whereas your business would require an owner-operator to work in the business since it's far too small to hire someone to run it (and still have any profit left over for the owner).

You mentioned being in Australia so a US buyer with a loan backed by the SBA (Small Business Administration) is off the table. The business is also too small for any bank to actually make a loan. Most have a lower limit of $350-500k. That lack of financing is another negative as the kind of buyer who can come up with $150-200k could potentially leverage that to buy a business making $200-300k in profit. You will almost certainly have to provide some seller financing, and not just a token amount of 10% but probably 50%+. On the other hand, that can have tax benefits assuming the Australian tax code is similar to the US where the loan payments you're getting in future years would presumably be at a lower marginal tax rate compared to getting a single lump sum in one year that could be at a higher tax bracket.


If you're looking for a broker, Quiet Light is the best in the industry. They won't blow smoke and tell you they can get $400k just to get you to sign a listing contract that entitles them to 10% of the sale price even if you later end up taking an offer for half that. Brokers are incentivized to get the listing and get you to sell - NOT to get you the highest possible price. An easy deal at half price that gets done in a month is way better for them than a hard deal that takes 6 months to close at a higher price. Some others you may have come across are Website Closers, FE International, and Empire Flippers. Here is a listing aggregation website where you can see dozens of businesses listed for sale and get an idea of where the market is: https://app.centurica.com/marketwatch

[MrsV]

Thank you @Michael in ABQ - wow that was helpful! So many great points.

If I had half the passion I had the first few years of this business, I’m sure I could take it back to the good old days, but I really am so burned out. My plan when I last asked about valuing a business here was to do that - build it, automate it further, and sell for a higher price. Unfortunately between the changes in digital marketing, the economy in Australia and me taking on too much with another business, I’ve let it fall further. I don’t think I’ve ever been as emotionally and physically tired and unhealthy as I am now, so it feels the right time to let it go.

We are talking around the mark you mentioned, coincidentally, because I figured brokers cam be like real estate agents and talk the price up for a listing, and also because I prefer a fast and cleaner transition. I’ve had some dealings with this person and feel the handover would be smoother because of this.

They asked about vendor finance last time, so I’ll see if it comes up again but I’m more open to it. I’ve not brought it up.

My husband and I want to travel more - life looks really different now after some health scares with us and close friends. And, whilst I travel and work my ten hours a week remotely now, I still have to be ‘on’ for freelancers and customers.  Ive never known what it is like to travel and truly switch off, as I’ve always had a small business. So, a sale now is preferable where as before I was still thinking I’d work on it more to build it up.

Thanks again - the discussion has only just started so all of these tips are super helpful.

[Christof]

Not sure if it's helpful... One time I bought a business at around 5x of profit. It was run by a single person and he was working some time on my project as a freelancer and some time on his own business. Making this basically a part time business. For me the reason to buy the business wasn't to get the business, but to get control over how much time he spends on my project vs. his projects.

In the end I made a small profit on his business, but not much. I ended up selling it after seven years for 25% of what I paid. That was after I I lost the project for which I hired him and couldn't make his business work as a full time business. My profit wasn't in the business I purchased, but in the resources (him) that came with the business.

One of the values I keep track of with my businesses is what it costs me to shut it down without filing for bankruptcy. Instead of setting the bottom value of my business at zero, as most people seem to do, I set it as minus that amount. This includes any contracts I have signed plus any tax and accounting liabilities.

Because in the end, if you don't want to or can't continue a business you have to weigh the cost of shutting it down against the risks of filing for bankruptcy. That's the baseline. This depends on your legal form (incorporated or not) and what your country does in case of a bankruptcy.

[MrsV]

Thanks @Christof - we are at the stage of now talking hard figures, but at the same time this person is in the same business group I’m in on Facebook where there are a few threads around how tough things have been since January this year (we are in Australia). A lot of small businesses are struggling with sales being down. We’ve all been waiting for a rate cut to being back some optimism for consumers, but that is looking increasingly unlikely this year.

Knowing they are also reading these same threads (it is a huge small business group), I have a feeling they will try to low-ball me. My thinking right now is, although I am definitely burned out and lost the passion I had, the work in building a brand - not just a business - was massive. If the offer is too low, I may just take a good holiday and return prepared to invest time and money to build the business back up t9 sell - so I’d run it differently and outsource more.

I do have days where I contemplate closing it and walking away, but I also know that is the overwhelm talking. At the same time, if their offer turns out even okay, I’m ready to walk away and take the attitude of ‘bird in the hand’.

Thanks again!