"Valuing Your Business"
By George Matyjewicz, C,M.O,
GAP Enterprises, Ltd.
Since we didn't get any more answers to valuing a business, I thought I would summarize some of the common approaches. There are many different ways to value a business, i.e.Cost-based approaches (book value, liquidation value), market approaches using comparables (price to earnings, price to cash flow, price to book value) and income approaches (capitalization of earnings, excess earnings methods, discounted future earnings, discounted future cash flow).
Most importantly ASK YOUR TAX ADVISOR as to which is the best way for you to value your business. It is not uncommon to get more for your business, only to pay more taxes and end up with less in your pocket. And let's face it, gross sales is meaningless - it's what's in your pocket that counts!
Let's look at some valuation methods (also see links at end of digest):
1. Multiple of Earnings
Earnings before interest and taxes is the standard earnings component to which multiples are applied in determining business sale prices. If there are no earnings, a multiple is sometimes applied to cash flow and even to gross margin.
The going rate for sale of businesses is 5-7 times earnings. Consumer product companies are selling for 8 to 10 times cash flow. Here's some sample valuation guidelines:
A very well-established and steady business with a solid market position, and known brand, whose continued earnings will not be dependent upon a strong management team. A multiple of eight to ten times current profits.
An established business with a good market position, with some competitive pressures and some swings in earnings, requiring continual management attention. A multiple of five to seven times current profits.
An established business with no significant competitive advantages, stiff competition, few hard assets, and heavy dependency upon management’s skills for success. A multiple of two to four times current profits.
2. Book Value
Book value, a multiple of book value, or a premium to book value is also a method used to value businesses. Book value is total assets minus total liabilities and is commonly known as net worth.
For companies with sales under $20 million, this is often the preferred method of sales, because of the departing owners’ many close relationships with the company’s suppliers and customers. These relationships are tenuous because they are usually non contractual and nontransferable. Such companies usually sell at their book value plus a modest premium.
The buyer must also determine that all the assets are actually earning money for the business. If they are not, he or she should request an adjustment in the purchase price to reflect this condition.
The typical multiple is 5-6 times book value.
3. Discounted Cash Flow
Discounted cash flow is what someone is willing to pay today in order to receive the anticipated cash flow in future years. The discount rate is based on the level of risk of the business and the opportunity cost of capital. In other words, it is the return you can earn by investing your money elsewhere.
The appropriate rate for discounting the company’s cash flow stream is the weighted average of the costs of debt and equity capital. What is the rate of return of your business and what am I willing to pay for future business based on current performance?
Specifically Barry's stated his business has 67 separate domain names, some of which could be spun off, incoming mail order business of 1 million a year and profits of a little over $100,000. So, using some of these guidelines, we would find the value would appear to be:
1. Multiple of earnings - $800,000 to $1 million
2. Book value - we don't know the equity, so can't determine the value here.
3. Discounted Cash Flow - again, we don't know the factors that make this calculation.
As far as the domain names are concerned, they probably have very little value. In an article in Ecommerce Times author Jon Swartz notes that domain names don't seem to have much value now-a-days. He noted that when market leader Wine.com approached rival eVineyard about a merger in the summer of 2000, eVineyard balked. It wasn't as well known as Wine.com, the biggest seller of wine on the Internet. But Wine.com was running out of money and needed a buyer. "We waited until it withered away and then got a better deal," says Brett Lauter, chief marketing officer of eVineyard. EVineyard paid $9 million in bankruptcy court last spring for Wine.com's key assets. It got the Wine.com name, its Web site, a list of 450,000 customers and an estimated $10 million in new revenue.
Not only did it get rid of its main rival, but eVineyard replaced Wine.com as the biggest wine seller online. Revenue catapulted 450% to more than $15 million in 2001, eVineyard says.
So Barry, I would suggest you contact your accountant, apply some numbers to calculations and determine a potential value. Then toss that in the trash and determine what you want to get for the business. Then throw that number out and negotiate. As with anything, it's a give and take thing - negotiation.
George Matyjewicz, C.S.M.O.
GAP Enterprises, Ltd. http://www.gapent.com/
Moderator of E-Tailer's Digest http://www.etailersdigest.com/
Board Member AIB #34 http://www.aib-world.org/
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