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

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

    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.


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    Is that profit after a salary to the owner? If so how much salary?
    Ray Badger, Turbo Technologies, Inc.
    www.TurboTurf.com www.IceControlSprayers.com

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    Quote Originally Posted by turboguy View Post
    Is that profit after a salary to the owner? If so how much salary?
    No salaries

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    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).
    Brad Miedema
    Fulcrum Saw & Tool

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    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.

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    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.

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    Quote Originally Posted by GotQuestionsNeedAnswers View Post
    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.

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    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?
    Brad Miedema
    Fulcrum Saw & Tool

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    Quote Originally Posted by Fulcrum View Post
    @ 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

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    Quote Originally Posted by Paul View Post
    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.

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