I have a question that my business partner and I are trying to figure out. I am offering to buy his 50% share of the company and we are trying to come up with a fair price for both of us. We have been in business for almost two years now. We both make a small weekly salary but we are not turning a profit. I have heard you figure 3-5 times your Net Profit for a general rule of thumb on the business worth. Would we deduct our salaries from this so that we can show a profit? Both of us are working owners (he is full-time and I am part-time since I have another full-time job already), so we would have to be replaced with an employee if we were not there, but with our salaries included into the payroll, we are not turning a profit. We are in a very small town and this summer has been brutally slow, but I feel that it will pick back up once schools start back up and everyone in town isn’t on vacation.
Ok…Just a question. Are you taking the small salary to show a break-even on the books? Otherwise where is the loss being shown? If you are taking salaries out… I would guess neither one is adding funds into the store? Right? All that being said… if that is the case… I would ask a few more questions. First, lease or own/buying the building? How much did you both invest in the startup? What are your current assets worth…free & clear? Like you stated… you both work and would need replaced if one of you left. Being only 2 years old… you either have a good size loan out there or each have invested $xx dollars into this venture. Sounds like you are slow but breaking even right now. If your partner wants out at this early stage there is not a lot of value in the business. You both took a risk to start this business and now want to walk away in different directions. If you have a loan for the startup costs and lease the building, then his half of the business is not really worth much at all. He is leaving before the business has had a chance to gain value. If he invested cash into the startup, then maybe an offer of a buyout equal to that investment to take 100% control of the company. I would find it hard to offer more than that if even that much. Sorry I know I am rambling on a little…but I am trying to think of a situation where it would be worth more in a sale. I cannot. If you would…fill in the blanks a little and maybe that will lead somewhere new…but for right now…if he is wanting out this early… you can either buy out his investment and that is only if you both have cash into it. If it is all loans and leases…there is no value as of yet. He can walk away if you feel comfortable with taking over the entire financial responsibility by yourself. Let us know and we can try to help a little better.
We are taking the salaries out to help with personal bills. He is there Full-Time and I am there part-time as I have another Full-Time job. Because of this, his salary is twice as much as mine.
I have purchased a few pieces of equipment and just wrote it down as money owed to me when we start making a profit. He has no extra money at all and the little salary that he draws now doesn’t even pay his bills.
We are leasing.
Assets/Equipment come out to about $11,000
He invested the startup money. I partnered with him about 3 months after he started with more capital to purchase more equipment and helped him catch up on a few bills. We have no loans at all. However, I will have a loan if I purchase his 50% share.
The common approach to valuation that you are referring to is discretionary cash flow. A couple of key points:
The typical range of multiples for a business like yours would be 1-3X seller’s discretionary cash flow. MOST sell for less than 2X but there are examples of sales between 3X and 4X… but for the most part, these are the locations that produce a six figure income for an owner. SDE would most often be earnings before interest, taxes, depreciation and amortization plus owner’s wages. If there are non-essential expenses paid by the business such as spouses cell phones etc many valuators would add those back in to income.
The amount you would “add back” for owners wages would be the income earned by ONE OWNER. Not both of you.
Another approach to valuation would be replacement cost. What would it cost someone who wanted to be in the business to “replace” the business… location, improvements, equipment etc.
It is by no means a sure thing that the current value of 50% of the business is as much as you have into it.
A business that produces no income above an owners wage (assuming the wage is what it would cost to replace the responsibilities) is rarely worth more than 1.5X SDE. Whether you regard this as good news or bad news depends which side you are looking at it from I guess… You might consider contacting a business valuation professional for assistance. I would be happy to refer you to one in your area if that would help.
Thanks for that info. I would appreciate a referral. How much does that kind of service normally cost? since we are both making a salary, would I add his back in or mine? (He makes twice as much as me since he is there Full-Time.) Also for the SDE, is that his annual income times 1.5?
Ordinarily, you would add back the full time salary.
In order to do a referral, I need to know where you are located. If you wish to keep that confidential, PM me rather than posting it here.
As to cost, every appraisor sets his own rates. If you are having a full appraisal done, I would expect it to cost a few thousand. You may be able to find someone that will do a consulting project on a more limited basis. I do them locally on an hourly basis and provide a report on the industry and value trends but not an actual opinion value for the business itself.