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GotQuestionsNeedAnswers
04-09-2018, 04:22 PM
How would you come up with an approximate valuation of a 7-year-old U.S. music school business that has $224k gross revenue, made a small profit of $10k last year, and owes $120k in loans? The profits (after all expenses) were $5k, $3k, and $0 in the previous years. The business is well-known in the area and has a solid reputation.

turboguy
04-09-2018, 04:36 PM
Is that profit after a salary to the owner? If so how much salary?

GotQuestionsNeedAnswers
04-09-2018, 05:36 PM
Is that profit after a salary to the owner? If so how much salary?

No salaries

Fulcrum
04-09-2018, 06:26 PM
I don't see much value and I doubt many other buyers would given the information presented. The only real value would be in the fixed assets (real estate, instruments, faculty, etc).

Harold Mansfield
04-09-2018, 06:45 PM
I gotta agree. No salaries, no profit, and loans. Unless there are fixed assets, equipment, maybe some solid branding ( URL, toll free number and so on) I don't see how anyone can figure much positive value.

GotQuestionsNeedAnswers
04-09-2018, 06:46 PM
Yes, that does seem like a common view of this. Does the fact that the school has 150 regular clients, great reputation, and an awesome brand make any difference? It also has better teachers than the competitors in the area.

Harold Mansfield
04-09-2018, 07:04 PM
Yes, that does seem like a common view of this. Does the fact that the school has 150 regular clients, great reputation, and an awesome brand make any difference? It also has better teachers than the competitors in the area.

It may to someone looking to get into that specific business. They may give you the depreciated value of the assets, some value for the branding and existing customer base, but not the debt. Depends on how upside down you are and what potential they see. That's a very specific buyer though.

I'm just spit balling.

Fulcrum
04-09-2018, 09:05 PM
150 students and only $226,000 in annual revenue? In my area, $1500 per student is a losing proposition. Rep and brand really don't mean a whole lot right now as this school is still losing money. Will it turn around in the future? Maybe, but that won't have any bearing on today's value.

@ OP, where did the $120K debt come from and how much of your cash flow is being used to service the loan?

Paul
04-10-2018, 02:25 AM
@ OP, where did the $120K debt come from and how much of your cash flow is being used to service the loan?

That's one of the most important questions. At first glance the operation looks like it has no value, even potentially a negative value. However, that is only at first glance. Some additional info could change that calculation.

As Fulcrum asked, what about the debt?What part of expenses are allocated to it? Is that a balance from a start up loan, or a loan taken to cover negative cash flow? What are the assets and do they exceed the debt? Is the overhead (expenses) fixed or variable? What has the growth trajectory been historically and will it continue OR has it plateaued?

Buyers of course will want to calculate value based on today's conditions. That doesn't look too promising. However, with some of the above information available there could be a much better value than it looks. It would be based on anticipated R.O.I.

I'll make some assumptions to explain.

1) If assets exceed the debt, then at least your balance sheet is not negative.
2) If expenses are fixed, that is they won't increase with increased sales) then you have at least reached critical mass (not losing money/self sufficient).
3) If your growth trajectory has been consistent and you can project growth at the same rate, and overhead is fixed, you can extrapolate (project) future profitability.
4) With all of that being true, then you can calculate future value of an investment (purchase).

So, if you can project a 50% sales increase over the next 5 years, while maintain the fixed expenses you would end up like this;

At 5 years sales will be $ 339,000 less expenses of $ 216,000 = Profit of $ 123,000.

So after 5 years annual profit is $ 123,000. It would then have a value based on that cash flow , lets say maybe 3 times earnings for a total of approximately $ $ 350-$ 375,000. So, do some calculations from that. If sold for $ 100,000 today, and it will be worth $ 350,000 in 5 years that is a return of approximately $ 250,000, or $ 50,000 a year = 50% annual return. Not bad depending on the risk involved.

And of course, to Fulcrums question, whenever the debt is retired then those payments will become profit and unencumbered assets, if any, will increase the balance sheet and add to the overall value.

A little simplistic and obviously the assumptions would have to be true but you get the idea. If the assumptions are not true then forget everything I just wrote!









A few other considerations

Business Attorney
04-10-2018, 03:16 PM
3) If your growth trajectory has been consistent and you can project growth at the same rate, and overhead is fixed, you can extrapolate (project) future profitability.


That is a key driver to enterprise value. If there has been an upward trend of revenue and profitability, that means that there is something of value in the underlying business.

I have represented many buyers of businesses over the years and too often the seller is basing his valuation on changes the BUYER can make to cause the business profits to grow in future years. That is NOT a value that is inherent in the seller's business but is based on the buyer's own efforts after the closing. There may be some value to the baseline business but the seller is not entitled to be compensated for the efforts that the buyer is going to have to make. If the seller is so convinced that the growth is inevitable, he should hold on and improve the business and then sell it.

In my opinion, a trend of $10k, $5k, $3k and 0 still doesn't look very compelling. Assuming that this business takes your time to operate, it still means you would be projecting little or no salary for the next two years. Your foregone salary needs to be considered the same as a cash investment in the business in determining what the value of the business is today. In other words, if you thought that the long term value of the business today was $100,000 but you have to give up $40k a year for two years to reach the point where the value is $100k, then in simplistic terms the business is only worth $20,000 ($100,000 - $80,000) since you have to "invest" two years' worth of salary back into the business.

turboguy
04-12-2018, 02:11 PM
Surprisingly enough I saw the same question posted on Quora today. I would be interested to know if the poster is interested in buying this business or is the one who started it, borrowed the 120K to keep it going and would like to get out if he can get enough money for it to at least break even.

I don't think the business has any real value. It's real value is most likely negative. If it wasn't for the debt it might have a small value and if there are fixed assets that were paid for with the 120K that might give it some value but anything used doesn't have a lot of value.

tallen
04-12-2018, 03:57 PM
I am stuck on the "no salaries" (?) part. $224K gross but only $10K net -- So what are you spending $214K on if you are not paying salaries or wages? are all the teachers doing their thing for free? What about the person managing the business?

To raise the net, you either have to increase revenues faster than increases in expenses, or cut expenses without adverse impact on revenues. Are there untapped opportunities on the expense reduction side? One might need to study detailed expense reports from several years in order to assess that.

Paul
04-13-2018, 12:02 PM
I assume the expenses are primarily what the teachers are paid. He collects $ 224 from students and pays out $ 214 to teachers. He makes $ 10K as a broker of sorts. If it’s an automated system that’s not a completely terrible model. If it can be expanded 10x. Then he’d be making 100K.

The unanswered part pf the calculation is the debt and assets. Do they offset and what is the payment structure. I don’t know what assets he could own other than perhaps software. Maybe that is what the original loan was for. If the net is after payments, what are the payments. An important consideration. Is he paying 10K a year or 50K a year. Obviously when the debt is retired those payments stay in income.

Assuming the 10K net is after debt payments then there is some value depending on the effort required to operate. If it requires full time then its worthless. If it’s minimal part time then it has a bit of value basically as an investment. How much is a $ 10K annual return on a passive investment worth in todays market?
I have no idea how competitive his pricing is, but just a 5% price increase would double his net.

It could possibly have a premium value, over it's mathematical value, to certain strategic buyers. Maybe a competitor that wants to expand into his territory or a company with complimentary products or services that can benefit from piggybacking on the customer base. Or just a buyer who feels they can operate that kind of business but wants to avoid the time and expense of a startup. It has, at least, reached break even.

If the Op provided a bit more info we could all make a better analysis.

jae13
10-22-2018, 04:23 AM
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