Valuing a small home-based business – your guesses!?
I’m interested in buying a community magazine which is 2 years old. It is a franchise & the original setup costs (and costs if the business is unsold & closes) were £250 + £125 a month, now just £25 a month ongoing fee. Profits seem to be about £4k per year and there are no business assets. There is a network of distribution points, contacts for printing etc. & booked advertising of £2k for the next 2 issues of the magazine. The owner doesn’t pay himself a wage so the profit excludes wage costs.
What would seem a fair valuation, given the above? In theory, turnover for the magazine could be £40k per annum according to the parent company but turnover has been only £12k pa so far.
This is a home-based business and I would be buying the name & the reputation – it’s a free magazine.
Any help greatly appreciated!
Be over cautious. Franchisees usually have a hard time of it whilst the franchisor takes the lions share. Remember you are tied to their products, strategies etc. Is it a good franchise. The business would only semm to be worth a nominal amount. Could you not do this outside of the franchise? What benefits is the franchisor giving? Assume you are not running the business. How much would you make as profit if you had to employ someone to run it? Don’t throw your self-employment in for nothing.
Is it a distress sale? Could you take the business on for free, or a nominal sum and then pay a percentage of your first one/two year profits?
Sorry if I sound too negative; if you think you can make a good go of it, do so. Be ruled by your head, not your heart!
about 15-25k
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there are some very complicated and drawn out ways of vauing a business by projecting income and expenditure etc into infinity and then dividing by certain factors but these formulae although well recognised by the accounting community are very expensive to produce.
The best way to value anything is to ask yourself the question if i had the funds what would i pay? whatever figure you comeup with is the value to you. The seller will almost certainly have a different value in mind so then it comes down to negotiation.
Based on the information listed above the value of this "business" is not very high. I would be prepared to pay probably a max of about £500 depending on the security of the existing contracts for advertisers.
Take care that this isnt just a scam by the parent company. The questions I would ask are What is the fee of £25 for? ( I would guess a franchise fee) Could you set this operation up on your own? What time and effort are you willing to put into building the business? How long before you have to renew the licence? What criteria are applied to the determine the fee? ( If thats what the £25 is?)
You maybe better buying into something a bit more substantial depending on the funds available
David
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I presume your buying this business would, by infusing cash, improve the business?
When a company floats, it is usually valued at 20 times its profit. However, the basis upon which this is calculated, takes into account the benefit that a company receives by injection extra capital into it.
This, based on 4k profit, would make it worth 80k if it floated.
Say that if you were buying it and simply doing the same as the previous owner, this would reduce the possible benefit 3/4, the company would actually be worth 20k.
The last calculation of course, is purely conceptual so you would have to assess whether you feel this is fair.
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A business is worth exactly the amount a buyer is willing to pay and the seller to accept.
There are many ways to value a business and even an independent valuation is nothing more than a starting point from which to negotiate. A buyer and seller often apply different methods which work in their respective favours, providing the former with a low purchase price and the later with a higher asking price.
Most valuations work by applying a factor to turnover profit, asset sale value, asset replacement cost, discounted cash flow or any combination of these or other criteria, depending on the requirements and intent of the two parties.
Given the business is small, lacks capital and your intention is to run it as a going concern you’ll be buying purely goodwill and the potential of future earnings and need to arrive at a price which would provide you with Return On Investment.
I’d suggest a basic EBITDA (essentially operating profit) x 3 wouldn’t be entirely unreasonable so £12K as a ceiling, anything over might be overvalued and below £6K would be undervalued. Expect to pay somewhere in between.
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Be over cautious. Franchisees usually have a hard time of it whilst the franchisor takes the lions share. Remember you are tied to their products, strategies etc. Is it a good franchise. The business would only semm to be worth a nominal amount. Could you not do this outside of the franchise? What benefits is the franchisor giving? Assume you are not running the business. How much would you make as profit if you had to employ someone to run it? Don’t throw your self-employment in for nothing.
Is it a distress sale? Could you take the business on for free, or a nominal sum and then pay a percentage of your first one/two year profits?
Sorry if I sound too negative; if you think you can make a good go of it, do so. Be ruled by your head, not your heart!
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