Business Valuation?

[jonnyfingers]

Hey guys,

Looking for some advice as to the value of my business. I own 2 websites both under the same company. They are retail websites, so how do i calculate what the business is worth right now? Business started in 2005, made approx 260k last year (pre-tax) but this year turnover has more than doubled and a safe estimate for profit would be 500k (pre-tax). We have no loans (never have, grew business from about £2k investment) and own all stock (approx 300k+) and have money in the bank (100k+).

Any advice/pointers as to getting an approx valuation would be great!

[INDIZINE]

if you could clarify on turnover and profit figures you quoted?

You said the business made £260k last year but turnover has more than doubled this year, so lets say that's at least £520k turnover - how does that then relate to £500k profit?

[jonnyfingers]

Thanks for the reply. Turnover was approx £1.3m in 2008 (hence we made 260k - 20% net). In 2009 based on current sales figures (not even factoring any natural growth) we will turnover £3m.

If anything we will make a higher percentage pre tax profit in 2009 as our overheads will not be increasing significantly whatsoever, net profit should be a minimum of £500k, but nearer to £600k all being well.

Thanks!

[Ray Stewart]

Assuming you are considering selling, and assuming your company is a Ltd co, I am afraid you cannot use estimates for a hard valuation - only known facts - especially when there is such a difference in the figures.

I would start at a maximum of 10 years profits i.e. £2.6M and be negotiated down from that assuming you are selling the company - but the short life of the business so far will doubtless go against this type of valuation.

Stock is always at original cost, or net realizable value if less than cost, on the day of hand over - cash you keep normally.

Will you be selling the shares, or just the "business"? This may affect how a potential purchaser will be able to get tax relief on the investment.

How you expect to be paid will also affect the valuation. Less if all expected up front, more if delayed over a period.

There are many factors involved in a valuation as you can see so a lot more info will be needed if you want anything specific.

[Paul Simister]

Fantastic performance for such a young company.

Think of any buyer buying a stream of profit and cash. If you have grown so much in two years, are there opportunities to keep growing or are things likely to level out or even go down?

Any buying will be wondering why you want to sell a little gold mine.

With this size of business you can afford to take proper advice on corporate finance. I want look to one of the Top 20 accountancy firms excluding the big 4.

After all a one times profit multiple difference in what could be achieved will cost or save you £500k depending on which way you look at it. That pays for a lot of professional advice and still plenty left over.

Unless there are still big growth opportunities, I would see Ray's ten times multiple as optimistic.

Is there a public company that does anything similar?

A standard benchmark is to take the price earnings ratio for a public company and divide it in half to give you an indication of multiples for private companies.

[Ray Stewart]

Not optimistic - achievable reality for a solid business.

I have had reactions like that from professional business agents but we stuck it out and achieved it, despite their protestations of gloom and doom and you should stick to 1.5 time annual profit and like it.

The whole sale needs to be structured around the return on investment, which 10% in these times is pretty darn good, and a view of the business over the next ten years or so. If, as our friend predicts, annual profits are likely to be £500k in the current year, £2.6M is a good price.

In this case though it smacks of the old .com bubble. I doubt any serious offers will emerge without a serious due diligence investigation and a lot of soul searching about future prospects.

I for one would be wondering why it was being sold so early in life when growth is still exponential. Why not wait 5 years and then really go for the kill.

As far as the top accountancy firms are concerned - I wouldn't trust them with a barge pole. Who do you think audits the banks and building societies, who do you think presumes to advice the government on fiscal policy and investigates serious financial breaches in government and civil service...

oh yes, the big accountancy firms - still want to trust their advice???

[YODspica]

agree entirely, fantastic performance for such young company.

[jonnyfingers]

Thanks for the feedback guys, i have a few options i am exploring.

I don't really want to sell, and 99% won't, mainly as the income over the next 5-10 years at least will be very good, and i have made a massive amount of sacrifices to get where we are.

I think we can easily achieve sales of £5m in 2010, £10m in 2011, with the max potential being approx £20 in say 2013. This is all well and good, but working 100 hour weeks for the last 4-5 years, with only 1 weeks holiday is what puts me off! You are only young once and i feel like my life is slipping away too fast! I'm 26 right now and feel like work has dominated my life since i left university. The idea of selling up, paying off the mortgage etc and living a 'normal' life seems very appealing sometimes!

To be honest we aren't in a position to sell right now, as myself and the other shareholder 'are the business' as such, if we left then i could see it crumbling. In this respect we have decided that we need to make ourselves 'disposable' before we can even consider selling, but by then the company will hopefuly be worth a lot more anyway!

Thanks for the input again, its been much appreciated.

[BigFish]

26 year old and profit 500k, you are an inspiration! Can't you get somebody to work for you?? I'm sure it'd be better than selling up!