Valuing a business
 

Hi All, is there a simple calculation for valuing a business? Basically my other half is thinking of buying her boss's company. currently turning over £2m per year, but that was a record for last year, previous years has been more like £1m. someone said the other week its roughly 3 times of what the annual turn over is, but that seems a little too basic, and the company didn't make a carrot for about 6 years, just about breaking even. surely you have to take in to account what profit the company makes:wonder:

http://www.forbes.com/2009/09/23/sma...zwilling.html:)

Don't worry about turnover
 

A business's value has very little to do with its turnover. Its value is all in its profits. Depending on the nature of the business and risks to its future performance, its value will be somewhere between 5 to 15 times its profits.

It depends on the nature of the business as well, though. If the business is selling cups of coffee, then yes, its value will be related to its profitability, its tangible assets and its liabilities.

If, however, it's (say) a technology business with significant intellectual property, then you have to take into account other factors such as the future value of the products which might incorporate that IPR, the potential for patenting and licensing technology, the skills of the people employed by the firm and so on. A company could consist of three nerds and a handful of computers working out of a shed and still be worth millions.

Thanks for the advice chaps. The comany in question is a garment printers/embroiderers. They don't hold any stock, but do have quite a bit of machinery that's worth a few quid, and the building which is owned, not rented - but I suppose you could sell the building and move in to rented space. Anyway, its given us some food for thought...

The most basic value you can do is the bottom line on the balance sheet + goodwill.

If the "company didn't make a carrot for about 6 years, just about breaking even" what makes you think you can do any better??

On the face of it it can't be worth a lot unless there are obvious ways to make it more profitable or the books have been ahem "adjusted".

dl

"just about breaking even" can be because thats what the owners/directors want to show in order not to pay corporation tax - they might take money out in the form of cars or bonuses or pensions etc

3x the turnover is way off. Loads of factors need to be considered.

I work for a company that has a regular turnover of £1,200 million but it's valued at between £700-£900 million or that is what someone is currently considering buying us for.

For me the value is somewhere between what the sellar wants and what the buyer will pay.

Accounts can be so easily fixed to avoid corporation tax that a very profitable company can look like it is just 'breaking even'. Conversely someone looking to sell a company can make it artificially profitable in the short term.

Always remember being asked my opinion on a b&b for a friend a few years back, the books showed about 11k of income a year but the owner said he was taking at least 30k a year cash and not declaring it. He wasnt so pleased with his con of HMRC when i told him no buyer has a cat in hells chance of borrowing money against the business as it doesnt make a return anywhere near what a bank would expect.

You cant have your cake and eat; declare profits pay tax and one day someone may buy you as you have a proven track record of being a profitable business. Dont pay tax and your company is difficult to value and impossible to substantiate.

Chop

Cost per sale is a good one.

nothings been adjusted, was carrying a lot of debt, which has now been cleared. She's turned this place around in the space of 2 years, bringing in more than £2m in sales alone last year. The company is now running like it should, and the future of the place is looking very healthy. Her boss has given up on the place, saying he 'fcuking hates coming to work' and it just doesn't excite him when they get big orders in etc... He's a bit of a c0ck to be honest, and I honestly don't know what's going through his mind. This is why we are thinking of putting an offer in. He can go and focus on something different that will give him that buzz, and we can really make a stamp on the place...

A (lowish) multiple of EBITDA based on current & next years projection...

The other question is, how are you going to fund it? Say you agreed £250k, you're going to have to stump that up unless you agree on some form of extended earn out. Any loan you're really going to have to pay out of the Company, so you need to ensure that you can remain solvent as the Company and still afford to pay off the loan.

In terms of valuation, one way of looking at it is how much would the boss walk away with if he were to stop trading today and pay all his creditors off, inc staff commitments, HMRC, VAT etc and then sell all the assets? If it is nothing much, then you're making a goodwill offer of however much you think it is worth but if a reasonable amount, then you would need to offer that at least plus an amount for goodwill as its not worth it otherwise.

The best answer here is that a business is worth somewhere between what the seller wants and what the buyer offers.

There are a multitude of valuation models for businesses, key factors are: -

- value of assets
- customer satisfaction
- quality of revenue (longevity of contracts)
- earnings (profits)
- balance sheet
- industry sector
- history
- projected earnings
- IPR
- revenue (some sales are multiple of revenue)
- goodwill (nefarious and usually overstated)

A company can be valued at a multiple of 0.1 to 1,000 times earnings or more.

To truly value a company you need to assess similar companies in the sector for a typical revenue or earnings multiple.

This company sounds like it has assets (plant and building) - if it is not making a profit the best offer is something close to asset value.

And the best way to buy a business is in installments from the current owners :)

There is great business model by a guy called Keith Cunningham who has made well over $100m by buy small businesses on intalments and selling them on. One thing he wouldn't do however is buy a business that was not making a profit. He is a business turnaround specialist - but he wouldn't put his own money into a turnaround.

I used to sit next to a guy at the football called john who owned a company called HFS loans. He built the company up and sold it to capital1 when it was making plenty. Capital 1 paid 65 million for goodwill, they ended up with **** all.
This is one of many examples of the danger of purchasing based on goodwill value, keep you valuation to proper assets and agreed contracts for future revenue if there are any.

I took a career change about 5 years ago now. I bought an existing company and went through the whole process over the last 5 years. If you want to know how I went about it then PM me, I cant give much advice as everything will be different but there are lot of things to consider which are similar.