Page 1 of 2 12 LastLast
Results 1 to 10 of 16

Thread: Help me figure out what my Business is worth and what I should sell it for.

  1. #1

    Default Help me figure out what my Business is worth and what I should sell it for.

    I would like some advice from others on what they percieve the value of my retail website business to be based on the data I provide. I am trying to determine what to sell my business for: Your input is greatly appreciated!

    What it is: Online clothing retailer (no store front). I hold no inventory in a warehouse. my suppliers drop ship for me.
    My only method of advertising currently is facebook. I work roughly 25 hours per week. Profit margins are approximately 70%.

    years in business: 3.5

    Estimated Sales and Pre Tax Profits:

    2012: Gross Sales $127,000 Pre Tax Profit: $94,000
    2013: Gross Sales $147,000 Pre Tax Profit: $107,000
    2014: Gross Sales $175,000 Pre Tax Profit: $123,000
    2015: Gross Sales $250,000 Pre Tax Profit: $178,000 (estimated earnings)


    A little over 15% year over year growth. But in 2015 I have over 40% growth...

    Why a jump in growth in 2015? Only thing I can think of is that I changed the "style" of clothing I was selling. I switched up some products that seemed to be hotter trends.

    What multiple would be appropriate to value my business? 2-3?

  2. #2
    Registered User
    Array
    Freelancier's Avatar

    Join Date
    Sep 2012
    Location
    Georgia
    Posts
    2,113

    Default

    The "value" of a business and what someone will pay for it are often not the same number.

    If I were an existing retailer, I'd look at repeat business, the "quality" -- number of items per order, margin per order, etc. -- and geographic distribution of your orders, and also the market to figure out whether I could just come in and out-hustle you for the same customers before deciding to buy.

    If I were someone who just wants to buy the business to keep it going, I have a different set of criteria for judging how much I would pay for the business.

    Rough number for a sustaining book of business is 2-3x profits, as you surmised. But a lot of other ideas get into people's heads about "value" that is not just about the bottom line number at the end of a day.

    Have you consulted with a business broker in your area about what they think the market would be for someone to buy your business?

    Why are you looking to sell?
    Low-Cost Total Compensation Statements - No minimums, no setup costs.
    Going to Disney World for Vacation? Rent One Of Our Vacation Homes

  3. #3
    Registered User
    Array
    Join Date
    Feb 2013
    Location
    Ontario, Canada
    Posts
    1,329

    Default

    Freelancier made some good points and I want to ask:

    1) Given your numbers, am I correct in assuming that your salary is included in the gross profit?
    2) Are the drop shipping contracts transferable?

    If I were to buy your business, I would hire someone to run it for me. This means that I would value it as a going concern rather than an owner-operated business. This business will than need to support both the salary of the GM and the payments of the high LTV (loan to value) that I'm going to require that you carry as well as net me a positive cash flow monthly.
    Brad Miedema
    Fulcrum Saw & Tool

  4. #4

    Default

    good points freelancier. If you were looking at it as if you were someone who just wants to buy the business to keep it going, what would that set of criteria for judging how much you would pay for the business be?

  5. #5
    Registered User
    Array
    Freelancier's Avatar

    Join Date
    Sep 2012
    Location
    Georgia
    Posts
    2,113

    Default

    I think Brad has the right approach: what is the salary of the person who could run this and then what is my profit after that? Then multiply that by 2-3x to get the sales price. That's the price an investor might pay. And that may not seem like much.

    But if a competitor bought you and already has the people and infrastructure in place to run it without adding anyone, then you might get more. And that's where visiting with a business broker might be a good idea.
    Low-Cost Total Compensation Statements - No minimums, no setup costs.
    Going to Disney World for Vacation? Rent One Of Our Vacation Homes

  6. #6

    Default

    What everyone else said. Doing some quick math:

    Next year gross profit (15% growth): $204700
    Following year gross profit: $235405

    -$60k per year for a manager

    Next year gross profit: $144700
    Following year gross profit: $175405

    Discounted at 35% (to account for moderately high risk) and summed for a Net Present Value of: $237,114.80

  7. #7
    Registered User
    Array
    Join Date
    Feb 2013
    Location
    Ontario, Canada
    Posts
    1,329

    Default

    Quote Originally Posted by Tyson View Post
    What everyone else said. Doing some quick math:

    Next year gross profit (15% growth): $204700
    Following year gross profit: $235405

    -$60k per year for a manager

    Next year gross profit: $144700
    Following year gross profit: $175405

    Discounted at 35% (to account for moderately high risk) and summed for a Net Present Value of: $237,114.80
    The problem I see with this type of valuation is that the seller is getting paid for work that the buyer will do. Future growth should not be included to get any kind of reasonable current value. $240K for this business is, in my opinion, high.
    Brad Miedema
    Fulcrum Saw & Tool

  8. #8
    Registered User
    Array
    Freelancier's Avatar

    Join Date
    Sep 2012
    Location
    Georgia
    Posts
    2,113

    Default

    I agree with Brad... my number would have been around $100K total. That leaves money for a manager, gives the next year's profits back to the previous owner and leaves me free and clear in year 2 to reap the rewards of my hard work in year 1.
    Low-Cost Total Compensation Statements - No minimums, no setup costs.
    Going to Disney World for Vacation? Rent One Of Our Vacation Homes

  9. #9
    Registered User
    Array
    Join Date
    Feb 2013
    Location
    Ontario, Canada
    Posts
    1,329

    Default

    I gave this some thought today (gotta love those long run, monotonous jobs that let the mind wander) about how I would approach this sort of scenario. I have no idea how the numbers are going to look at the end so they might contradict what I said in an earlier post.

    My offer would be based on how I decide to manage the business. I know nothing about fashion (jeans and t-shirts guy) nor web sales and I don't have the time to dedicate to learning how to run this. This leaves me with the only 2 options:

    1) Hire someone to manage it.
    2) Walk away

    Assuming then that the numbers are valid for the previous 3 years, I don't think walking away would be a good idea.

    Knowing my limitations, I would pursue this idea on the assumption that I would be hiring someone to run this business. I would probably look for a college student with education in fashion and marketing. I would assume that this manager would need $40K/year to start. I also need to plan for this manager being good and if I don't want to lose him (or her) than the best way to keep them long term in this venture would probably be to allow him to work towards a minority ownership position. Let's assume 15% after 3 years and another 5% in both years 4 and 5 for a total of 25%.

    Next I need to look at barriers to entry for possible competitors. I have to rate this as low so I'm going to do the following:

    1) Discount my offer
    2) Reduce the amount of a cash down payment
    3) A combination of 1 & 2

    Now I get to the numbers.

    With a pretax profit in the final year of $178,000 and subtracting the managers salary from above, I am left with a net pretax profit of $134,800 (178,000 - 40,000 salary - 3,200 employment insurance and 4% vacation pay). Assuming again that the cash flow is stable over the course of the year, this means that I should have $11,233 per month to work with.

    Given the low barriers for competition to enter the market, I'm only willing to let my cash down payment to sit exposed for no longer than 12 months What this means is that I need to have any cash outlay returned back to me inside of 1 year. The seller will also have to finance at least 80% of the purchase price over 3 years (I set the term based upon minority ownership going to the manager after 3 years) with an interest rate of no more than 15% (10% preferred) , I will need retain the right to prepay without penalty at any time, and if the seller decides to sell the note in the future I will also need to retain the right of first refusal to buy payoff the note at the lowest acceptable offer. In addition to these clauses, I also need to make a minimum of $2,000/month profit with the remaining cash staying in the business for expansion and diversification.

    After running many iterations, I came up with the following numbers for an offer (a few rounding safeguards are included):

    Maximum Purchase Price - $200,000
    Maximum Down Payment - $40,000
    Maximum Interest Rate – 15%
    Maximum Term – 36 months fully amortizing, no balloon
    Maximum Monthly payment - $6,889.23

    I will also set a lower limit that, if the seller comes in at or below this value, the deal will be done that day. Using the restrictions outlined above I will set this at $111,000 ([$11,233 - $2,000]*12).

    I didn't realize I'd be writing a book when I started this post. I must say I had fun doing this as I hadn't done this in probably 5 or 6 years.
    Brad Miedema
    Fulcrum Saw & Tool

  10. #10
    Registered User
    Array
    Freelancier's Avatar

    Join Date
    Sep 2012
    Location
    Georgia
    Posts
    2,113

    Default

    I'd adjust one of your assumptions, Brad. $40K is just the start of the number when you hire someone. Figure another 8% in taxes on them, plus you'll need to get them at least a basic healthcare policy (not because it's required, but because you don't want them to jump so easily after you teach them enough to run the business). So figure that $40K is really more like $50K at the end of a year. And maybe you'll also give them targets to hit and a bonus based on that, so maybe it might be as much as $60K if they hit a reasonable target.
    Low-Cost Total Compensation Statements - No minimums, no setup costs.
    Going to Disney World for Vacation? Rent One Of Our Vacation Homes

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •