Author Topic: How Do I Determine the Value of a Business?  (Read 3090 times)

Mike2

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How Do I Determine the Value of a Business?
« on: May 09, 2016, 09:23:49 AM »
I'm trying to determine how much a very small business that I am a part of is worth.  I have access to all the financial details but have no idea how to come up with a price if I were to offer to buy out the other person or be bought out myself.  Any tips would be greatly appreciated.

patchyfacialhair

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Re: How Do I Determine the Value of a Business?
« Reply #1 on: May 09, 2016, 09:37:49 AM »
Depends on the industry. Some use a multiple of revenue, a multiple of profit, or some wildly speculative number based on expected future earnings. See if you can find any other info by googling the industry and what most folks seem to do.

Axecleaver

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Re: How Do I Determine the Value of a Business?
« Reply #2 on: May 09, 2016, 02:17:07 PM »
Service businesses tend to start around 2.5x revenue. But like Patchy said, it really depends on the business type. You can google "business valuation x" where x is the type of business we're talking about. In the type of business you're describing, where it's two guys who do some activity, it's usually a multiple of profit, where one partner will no longer be part of the business. If there are business assets - like lawnmowers for a lawn mowing business - also add in the fair market value of the business assets.

Some folks also provide a percentage of profits for some period of time. This lets the exiting partner benefit from the sweat equity already invested without seeing things through. It can lead to problems if there is not an accepted method for calculating profits - for example, if you take lots of three martini lunches on the corporate dime.

Jim2001

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Re: How Do I Determine the Value of a Business?
« Reply #3 on: May 09, 2016, 07:58:21 PM »
If it is more than just a passing curiosity, consult a business broker.  There are folks who can run the numbers and tell you what it's worth and a good one can tell you where the weaknesses are. 

I know a person who was trying to sell their business and was getting offers, but couldn't get the price she wanted.  The broker pointed out that since she was the CEO, buyers were concerned that her talent wouldn't come with the business.  Also, they were operating in a location with a rather short lease with no room for expansion.  So, she pulled back to hire and train a CEO.  She also moved the offices to a building with a longer lease.  A bit more than a year later she got almost five times the price she had been offered previously.

There are times it pays to engage an expert.

clarkfan1979

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Re: How Do I Determine the Value of a Business?
« Reply #4 on: May 10, 2016, 05:01:33 PM »
shark tank

GrOW

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Re: How Do I Determine the Value of a Business?
« Reply #5 on: May 10, 2016, 05:34:53 PM »
Agreed that a multiple of cash flow compared to industry averages is a great place to start. Next, determine why the multiple should be higher or lower than average. Be. Ruthlessly. Honest.

gooki

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Re: How Do I Determine the Value of a Business?
« Reply #6 on: May 12, 2016, 03:49:59 AM »
10x net profit.

Fishindude

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Re: How Do I Determine the Value of a Business?
« Reply #7 on: May 12, 2016, 05:14:50 AM »
If you have good financial records that give a true picture of after tax profits for several years, it should be pretty easy.
I would expect at least a 20% annual return on my investment, on just about any kind of small business.

Trouble is, many small businesses are treated like the owners personal check book, they steal money tax free, etc. so there is no real way of telling what the bottom line is.

Rufus.T.Firefly

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Re: How Do I Determine the Value of a Business?
« Reply #8 on: May 12, 2016, 05:25:19 AM »
I'm a business broker by profession. (the "PowerBroker" name is intended ironically).

I'd be happy to take a look at it for you. Do you have the financial information in a non-identifying format?

k-vette

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Re: How Do I Determine the Value of a Business?
« Reply #9 on: May 12, 2016, 07:08:00 AM »
I'm a business broker by profession. (the "PowerBroker" name is intended ironically).

I'm interested in this too!  I've been wondering the same question.  I'm primarily online in a sporting goods/hobby niche.  I started about 9 months ago with nothing.  I used $250 to get a business license, etc.  Now revenue is just about to crack $100k in revenue.  I've been using about 100 square ft of inventory.  My partner overseas ships most things for me.  Business is turning a profit,  probably around 25% net after a year is my guess, I'm not there yet.  The amount of work has been probably about 10hrs/week.  The growth has been rapid.  :)  I'm only a drop in the Amazon river at this point.

« Last Edit: May 12, 2016, 07:09:47 AM by k-vette »

larmando

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Re: How Do I Determine the Value of a Business?
« Reply #10 on: May 15, 2016, 01:10:34 AM »
If you're interested in learning it yourself this coursera specialization (completely free to take, except your time) will be very helpful:
https://www.coursera.org/specializations/valuation-investment

The key in general is to figure out the expected rate of return of the industry/comparables and discount the future free cash flows by it.

Rufus.T.Firefly

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Re: How Do I Determine the Value of a Business?
« Reply #11 on: May 15, 2016, 05:25:16 AM »
I'm a business broker by profession. (the "PowerBroker" name is intended ironically).

I'm interested in this too!  I've been wondering the same question.  I'm primarily online in a sporting goods/hobby niche.  I started about 9 months ago with nothing.  I used $250 to get a business license, etc.  Now revenue is just about to crack $100k in revenue.  I've been using about 100 square ft of inventory.  My partner overseas ships most things for me.  Business is turning a profit,  probably around 25% net after a year is my guess, I'm not there yet.  The amount of work has been probably about 10hrs/week.  The growth has been rapid.  :)  I'm only a drop in the Amazon river at this point.

This is great! Congratulations on your successful start. At this point, don't even worry about valuations. Your company is in its nascent stage and your focus should be on growth. A just-started business has a large discount for lack of marketability. It would be very difficult to sell until you've got at least a few years of track record to show a buyer.

The most important thing you can do right now is keep the pedal to the metal. The second most important thing is to create a system of operations for your company so that you have the ability to remain a passive owner for periods of time (2-4 weeks) and the business can still run smoothly. This will demonstrate that your income has the ability to transfer to a new owner.

k-vette

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Re: How Do I Determine the Value of a Business?
« Reply #12 on: May 15, 2016, 09:53:54 PM »
Thanks for the tips.  At this point I'd say there's a big chance if I left the ship would sink.  I do have some things coming that could alleviate that in a few months.

I have a TON of business ideas.  This is the first time I've taken the idea and ran with it.  With the experience I've had, I feel comfortable I could set up another business and have it generating a decent income in a short time period.  My initial idea was that if I could creat a business from scratch and flip it that would make for an interesting "hobby".  The problem is I have no idea how to value it, or where I would find a buyer.  I don't have any extra time to pursue other ideas as I'm basically working 3 jobs now.  There's too much potential in this one for me to let it go, but for the right price I would!