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Thread: How would you come up with an approximate valuation for this business?

  1. #11
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    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.
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    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.

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    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.

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