Are there any basic guidelines on how you value a business based on turnover and gross profit?

A bit of a curveball opportunity has come my way, it turnsover about £63,000 and has a gross profit of about £33,000.

Well established, low risk and good cashflow. However, not much scope for increasing revenue.

I know it’s very subjective but any suggestions?

I have googled it and have only info about much bigger businesses.

It’s fairly subjective. You’d be best seeking professional advice rather than hear say.

Also if you want a loan to buy that business I believe the value will have to be agreed by the lender too that it is a fair assessment of risk.

Without knowing anything useful I’d be surprised if it was worth less than 3 years profits.

3 x profit I’ve heard. I think.

Best ask an accountant?

You’d be best seeking professional advice rather than hear say.

I intend to. It’s very early on in the process.

Just wanting to get an idea.

Go on Dragons Den , offer 5% for 75k .you’ll get a free valuation in about 2 minutes flat .

i’d be very surprised if that’s a true £33k gross profit.

The price of stock plus a small amount for goodwill would be a starting point

i’d be very surprised if that’s a true £33k gross profit.

Well that’s what the last 3 years accounts say.

£33,000 gross profit sounds good to you but that doesn’t include rent, rates, insurance and staff wages if not treated as a direct cost. You need to look at the last three years accounts and the variances between them. You’ve already stated not much scope to increase turnover which only leaves you to reduce purchases through buying power which will be hard to do without increased turnover otherwise you’ll be over stocked whilst is a sure fire way ruin a business. That only leaves your overheads which tend increase slightly annually and savings from shopping around will be minimal. Remember it’s net profits that keep you in business.

It is somewhat subjective, and like everything it is worth what someone is prepared to pay for it. As does how desperate the owner is to sell. Does the business have any fixed assets (including cash)? Does it have meaningful intangible assets (e.g. a well known brand name)? Are other people likely to be interested in the buying it too (competition inflates prices).

It is not Gross Profit that usually matters in valuations but EBITDA (which is not quite the same as Operating Profit!). If the existing owner has been taking more out than you would you can correct for that. Without knowing the sector its difficult to guess the appropriate multiple, 5x EBITDA is probably a good starting point, but the vendor might think it should be 10x.

As very rough guide, 1-2x turnover is also a very crude estimate – if you are “just buying turnover” e.g. if they are doing exactly the same as you already do.

Now if you think thats all a bit vague – you should try doing it for businesses which are predicting significant growth!

One is basically buying ‘goodwill’ and poss some stock/kit. So what’s that ‘goodwill’ worth to you? If you started that biz now from scratch, what would be the start up costs? Time and costs to make a profit? For this one – How much hard work is it? Would you do same job for someone else for less or more etc..? I work on the basis of a value of ‘if had that money (a figure you are estimating, x3 years a good place to start) in a good investment, (fund or rented property) what would it give me? I also consider if it needs borrowing to buy it, cost of that, the risks involved, could you sell it on etc..

One finds a figure pretty quick of what it’s worth to you, it’s just then wether they will sell at that price or will other pay more.

And ask an accountant, though mine overvalues everyone else’s and undervalues ours!

Not knocking Poly but EBITDA

£33,000 gross profit sounds good to you but that doesn’t include rent, rates, insurance and staff wages if not treated as a direct cost.

By gross profit, I mean excess of income over expenditure. It includes all of the above but is pre-tax.

The flip side to all the “guessing-what-its-worth-type-estimates” is to think what you could make from it.

That of depends on you and any chance of flexibility in the business.

I’m guessing it’s not any form of retail and has no staff with a turnover £63k and profits before tax of £33k. This would have me guessing at some kind of service/skill supplied in which case can you continue to provide that service and level of turnaround.

If its a service will the last person take any (work/trade) away and can you pick up the work and relationships, it’s not just value but also will it work for you…intrigued about business area…?

Is that profit before or after you’ve taken an appropriate wage?

If not that £33k is actually minus what you could earn doing similar work, then you’re going to have all the admin hours on top of that, and lack of job security.

Just check you’re not just buying a job, especially if it’s one requiring some technical skill or the goodwill will evaporate the first time someone call’s and ask’s to speak to the previous owner because it’s their expertise they were paying for, not the signwriting on the van.

.intrigued about business area…?

I’d rather not say.

It’s a funny one because it will actually be Mrs Gob doing most of the work, I will continue working and earning a salary.

In the future, it will be possible for us to continue to own the business and take an income without doing the work. I’m looking at it to act as a pension in the future.

I’d nick the idea and set up in competition! 😀

It’s nearly impossible to value a business of that size as they’re generally one man bands. Once the owner has gone so could the business.

If it’s that long term then why not just start from scratch?

I used to do estimates to determine whether engineering ideas made economic sense (i.e. buy X piece of kit and will it pay for itself plus interest within a defined timescale). So I don’t have experience of valuing goodwill, but from my POV a business is worth not a lot more than it’s stock unless you can walk away and it keep making money. Otherwise it’s just a job.

Mathematically:

33k (the stated net profit)
-a persons wages to do that job
= profit.

Say you want a 3 year return on investment. Then the value of the business is how much cash you would need today to generate that much income over 3 years. e.g a profit of £4k would make a value of £10k with and interest rate of 12%.

i’d be very surprised if that’s a true £33k gross profit.

The price of stock/equipment plus a small amount for goodwill would be a starting point

Would the biz come with contact info/customer he already got?
Surly that be worth something? if they keep a good record of past customers etc, help with repeat biz etc.

I’d nick the idea and set up in competition

Worth considering this. How much would it cost you to start a similar business from scratch today? The other business is obviously worth more that, but it might be a lot less than X times Net Profit.

Some businesses can get off the ground with very little startup cash.

But there is also value in reputation, location (if that’s a part of the business), an existing customer base, and the fact it’s a business that is already functioning with employees, systems in place etc

Also what are the long term risks?

Just thinking about all the things that would affect the value of my business! (Not for sale 😀 )

Thisisnotaspoon is correct.

7x net profit
3x gp

Add them up divide by 2

Also depends on intangibles, which might not be appropriate here but worth putting on record.

eg: In the past we bought a company that had got itself into cashflow issues but essentially had a good technology; just not the liquidity to exploit it, and post-bank crash the banks wouldn’t lend any further money despite the good projections.

The value of the business was well in excess of the multiples of earnings, based on future potential. And before anyone says that if the company can’t exploit it then it’s circling sharks waiting for it to fold, they had 3 potential buyers so it achieved an appropriate valuation because 3 bidders helps it find that level.

Same if there is IP, notoriously hard to value based on potential.

Subjective to a degree but there is a reasonably well established 7 step formula to determine value (both tangible and intangibles) that ramps the price … from memory along the lines of: revenue; client base; distribution; processes; brand value; assets (staff, fixed OH etc) etc. Each factor ramps the value by a varying degree depending on their importance. Can root it out if of interest