Valuing a company

[Moosie]

A little history and then the question. (What is a company worth ?) I see there is a couple general topics on this but I figured I'd throw out more specific scenario with more accurate numbers).

I started a Camo Apparel business idea 3 years ago. Just an idea and not much thought behind it (Yah, typical me). Last summer I added Fishing Apparel because believe it or not, Camo didn't sell well in Summer Fishing apparel I think will. I had no money, which is par for me as well. I figured I'd need about $50k to start this idea. I thought that would be plenty. (I laugh at that idea now that I'm actually doing it). Had a few buddies tell me $250k-$350k min. When I got started I realized $50k was a drop in the bucket and I'd need $100k min. 3 different people offered me $50k for 50% of the companyon just the idea. Like most guys, I figured it would be worth more in short order and the owner always thinks it's a Million dollar idea, right ? So right or wrong I turned them all down. I thought, and still do, that if I could make it the first couple years that it would be worth a lot more.

I borrowed my own money, it quickly went from $50k to $100k to borrowing just over $200k. The first year with no real products and marketing there was no money made. The 2nd year I went to my first show season, hit the road and the Hunting Expos brought in more money and got me in front of people. Gross numbers did about $65k. this year, in 2nd years sales, we will do just over $100k. Despite Covid shutdowns. I should settle around $250k in sales a year. It won't be more unless I expand into stores and do the next level. Time will tell, it's only my 2nd yer of sales.

I don't really want to sell ownership of the company. I want my ideas, my pricing and my designs. That said, 9% interest on $200k eats into money. It's doable and I haven't had issues paying it but it slows down the growth and ideas. Maybe that's a good thing for a guy like me.

So now my question : If you put a Value to a company, whats your method ? I have $400k in sale value in product in the shop, this year I'll bring in $100k, only 2 years in Bizz. and just over $200k in debt.

A quick Value assessment to me would be assets minus debt, basic math.
I could use the 2 times Sales approach.

Thoughts ?

 

[Big Fin]

So now my question : If you put a Value to a company, whats your method ? I have $400k in sale value in product in the shop, this year I'll bring in $100k, only 2 years in Bizz. and just over $200k in debt.

A quick Value assessment to me would be assets minus debt, basic math.
I could use the 2 times Sales approach.

Thoughts ?

This is from the CPA part of me, not the knucklehead who bought your money-losing operation called Hunt Talk.

The value will be dependent upon the net profit of the business, adjusted/normalized for the value or replacement cost of the owners' time and effort. In other words, what would the business make if it had to pay wages for the Moosie family effort.

Small businesses do not sell for a gross sale multiple. They sell based on cash flow of the business after adjusting for the value of the owner's labor. Without adjusting for the replacement cost of the owner's labor, one is merely buying themselves a job. Why buy a job when there are thousands of them out there for free?

Let's follow your numbers a bit further. You sell $400K. Net margin on that is $100K. The value of your time or to hire your replacement is $40K. An outside buyer is going to look at it as a business that provides adjusted cash flow of $60K.

What will they pay for that?

They will go through a series of risk factors to determine what multiple to use. The higher the risk, the lower the multiple on net earnings.

Industry risk - Are you in an industry that can be impacted by political or social events?
Competitive risk - Are you the big fish in the pond or a small fish? Can others come in and compete against you easily? Can the big players stomp you into the mud if they want?
Regulatory risk - Are you in an industry subject to regulatory oversight that would be impacted by changes in regulations?
Brand risk - Is your brand built on something that is a fad, a quick flash, or is it sustainable?
Key person risk - Is the company dependent upon the activity of a key person(s) for its profitability and sustainability?
Longevity risk - How long has the business been in place? Is there a track record that can be sustained?
Accounting risk - Are the books and records kept in a manner that they can be relied upon for determining the cash flow and financial picture of the business?
Capital risk - Does the business require significant working capital? If so, can that capital be maintained/sustained and are there risks to internal returns on that capital?
Risk of alternatives - Could a potential buyer find a competitor at a lower risk/return than yours or could they start their own for the same price (or less) than you are asking?


There are even more than what I've listed. If those risks are rated high, buyers might be uninterested due to lower risk alternatives when investing their energy into a self-employment activity. Or, a few might have a passion for selling clothing, so they will accept the risks and their advisors will suggest a very low multiplier on a small business with significant business risks, probably resulting in a sales price below what you would need to retire your debt. And some might be interested once the business has a longer track record of cash flow.

Very few small businesses sell with only a two or three year track record. Once you get over five years, then a small business starts having the sustainability to lower a lot of the risk factors mentioned above and actually have some sort of multiplier applied to the adjusted cash flow of the business.

The last safety net is commonly referred to as "The Greater Fool Theory." Summarized that you might find someone who disregards all risks and thinks they can buy your business and sell it at a profit. In other words, they think there is a greater fool out there than they are. And, that the greater fool will pay them much more for your business than they pay you. Seldom happens this way, but in my 30+ years as a CPA, I've seen it enough to know there are plenty of fools out there and even a few who are "greater fools."

 

[Texaz]

Moosie, you should send Big Fin a check for all the great free information he provided. i have been involved in many successful and many unsuccessful and sale/divestiture transactions. All companies were much larger but the considerations above apply to all transactions as well as other considerations specific to each company or industry. In larger transactions, adjusted EBITDA is determined and a multiple is determined based upon similar transactions and the parties work from there. I doubt that exact approach is used for small businesses. Your best option may be finding someone that buys on emotion rather than financial analysis. Someone may fall in love with your business and pay more than market value.

 

[2rocky]

Love this discussion. Would Moosies "brand" be something that could be attractive to a bigger fish in the outdoor apparel world and cheaper to buy than develop themselves? Perhaps a bigger brand would make money on the lower overhead per unit they have. Is Moosie's brand cutting intro another brand's target demographic? does it posess a trademark or patent that could prove valuable to a bigger entity?

To me that is where a young company with growth potential has value beyond the balance sheet. Even if it is to squash competition.

 

[SAJ-99]

Love this discussion. Would Moosies "brand" be something that could be attractive to a bigger fish in the outdoor apparel world and cheaper to buy than develop themselves? Perhaps a bigger brand would make money on the lower overhead per unit they have. Is Moosie's brand cutting intro another brand's target demographic? does it posess a trademark or patent that could prove valuable to a bigger entity?

To me that is where a young company with growth potential has value beyond the balance sheet. Even if it is to squash competition.

My first thought was along those lines, too. For someone (some company) who already had sales channels in place with big distributors, which made it easily increase toppling revenues, it would be an easy purchase. The problem with that (counter point) is apparel is just cloth and thread. It is difficult to stand out, to have a "defensible position". Maybe patent a camo pattern? There is very little protection from another company just making the same item and slapping their name on it. See most Amazon branded products. This probably goes to Big Fin's point about assessing the risk. Success breeds imitation, and there is alway another player out there who can reduce costs. Business school rule #1- Never compete on cost.

 

[Cheater]

Your best option may be finding someone that buys on emotion rather than financial analysis. Someone may fall in love with your business and pay more than market value.

Which means you'll need to find either an unsophisticated buyer or someone who is defending their turf. Probably the former in this specific scenario.

 

[Cheater]

Business school rule #1- Never compete on cost.

Rule #2 - Never hold your strategic planning meetings in a public internet forum

In all seriousness, lots of good advice in this thread. Ultimately, selling a business (or bringing on investors) is complicated and no two deals are exactly the same.

 

[Moosie]

@Big Fin , You got this place for a song and a dance from me and you never regretted it. Don't lie, you love it, its in your smile

So the Valuation is to see what investors would pay for a portion. I'm not selling. I have momentum and see this going well. Even if Joe shmo came in with a big number this one I'm seeing through. I think this particular brand is nothing without me right now. I do have a patent, I do have the name and logo's trademarked. Heck, the pattern is Moose, people are buying me. That's why the camo sells for so affordable (or cheap) I guess

5 years from now I'm going to bump this topic and these numbers will be "small fish". Right now I have several "Not so smart", as you guys put them, investors that see the vision or want it because they think it's something. So I'm fishing for valuation. More so for in the future. I don't think its worth it to me to chunk any off right now.

I have realistic expectations. I don't think $50k for a new bizz was worth it 2 years ago and I don't think $50k now would be a investors "smart money move" if you look at the numbers on paper. It's the idea and passion which have an arbitrary number value in a positive or negative way.

Appreciate the info fellas.

 

[Moosie]

Rule #2 - Never hold your strategic planning meetings in a public internet forum

I'm a public guy, what can I say. Keeps a guy honest... Plus, we're all family here, not public

 

[Moosie]

The value of your time or to hire your replacement is $40K.

Actually the value of my time is $0 most days, but I appreciate you giving me a value at all.

 

[Big Fin]

@Big Fin , You got this place for a song and a dance from me and you never regretted it. Don't lie, you love it, its in your smile

So the Valuation is to see what investors would pay for a portion. I'm not selling. I have momentum and see this going well. Even if Joe shmo came in with a big number this one I'm seeing through. I think this particular brand is nothing without me right now. I do have a patent, I do have the name and logo's trademarked. Heck, the pattern is Moose, people are buying me. That's why the camo sells for so affordable (or cheap) I guess

5 years from now I'm going to bump this topic and these numbers will be "small fish". Right now I have several "Not so smart", as you guys put them, investors that see the vision or want it because they think it's something. So I'm fishing for valuation. More so for in the future. I don't think its worth it to me to chunk any off right now.

I have realistic expectations. I don't think $50k for a new bizz was worth it 2 years ago and I don't think $50k now would be a investors "smart money move" if you look at the numbers on paper. It's the idea and passion which have an arbitrary number value in a positive or negative way.

Appreciate the info fellas.

With this information, you'd be crazy to bring in any investors. The "ships" most likely to sink in the business world are partner-"ships." With what you feel is coming your way in the next few years, keep it for you, unless you absolutely need more working capital and you have no other options to access capital.

My advice to every CPA client - Never do in a partnership that which you can do by yourself. Sometimes you need a partner, often a strategic partner. But, a purely financial partner is usually one of those "ships" that will soon sink.

 

[kwyeewyk]

I'm not selling.

I grew up with a kid who's step dad co-founded Jansport, but he sold out early and always regretted it.

 

[Moosie]

My advice to every CPA client - Never do in a partnership that which you can do by yourself.

Great advice. I guess I just needed to hear that again, thanks BF.

 

[noharleyyet]

This is from the CPA part of me, not the knucklehead who bought your money-losing operation called Hunt Talk.

The value will be dependent upon the net profit of the business, adjusted/normalized for the value or replacement cost of the owners' time and effort. In other words, what would the business make if it had to pay wages for the Moosie family effort.
.
Small businesses do not sell for a gross sale multiple. They sell based on cash flow of the business after adjusting for the value of the owner's labor. Without adjusting for the replacement cost of the owner's labor, one is merely buying themselves a job. Why buy a job when there are thousands of them out there for free?

Let's follow your numbers a bit further. You sell $400K. Net margin on that is $100K. The value of your time or to hire your replacement is $40K. An outside buyer is going to look at it as a business that provides adjusted cash flow of $60K.

What will they pay for that?

They will go through a series of risk factors to determine what multiple to use. The higher the risk, the lower the multiple on net earnings.

Industry risk - Are you in an industry that can be impacted by political or social events?
Competitive risk - Are you the big fish in the pond or a small fish? Can others come in and compete against you easily? Can the big players stomp you into the mud if they want?
Regulatory risk - Are you in an industry subject to regulatory oversight that would be impacted by changes in regulations?
Brand risk - Is your brand built on something that is a fad, a quick flash, or is it sustainable?
Key person risk - Is the company dependent upon the activity of a key person(s) for its profitability and sustainability?
Longevity risk - How long has the business been in place? Is there a track record that can be sustained?
Accounting risk - Are the books and records kept in a manner that they can be relied upon for determining the cash flow and financial picture of the business?
Capital risk - Does the business require significant working capital? If so, can that capital be maintained/sustained and are there risks to internal returns on that capital?
Risk of alternatives - Could a potential buyer find a competitor at a lower risk/return than yours or could they start their own for the same price (or less) than you are asking?


There are even more than what I've listed. If those risks are rated high, buyers might be uninterested due to lower risk alternatives when investing their energy into a self-employment activity. Or, a few might have a passion for selling clothing, so they will accept the risks and their advisors will suggest a very low multiplier on a small business with significant business risks, probably resulting in a sales price below what you would need to retire your debt. And some might be interested once the business has a longer track record of cash flow.

Very few small businesses sell with only a two or three year track record. Once you get over five years, then a small business starts having the sustainability to lower a lot of the risk factors mentioned above and actually have some sort of multiplier applied to the adjusted cash flow of the business.

The last safety net is commonly referred to as "The Greater Fool Theory." Summarized that you might find someone who disregards all risks and thinks they can buy your business and sell it at a profit. In other words, they think there is a greater fool out there than they are. And, that the greater fool will pay them much more for your business than they pay you. Seldom happens this way, but in my 30+ years as a CPA, I've seen it enough to know there are plenty of fools out there and even a few who are "greater fools."

I'm printing this for when I get ready to sell accumulated blue sky as per the GF Theory.

 

[kansasdad]

I'm printing this for when I get ready to sell accumulated blue sky Bluestar as per the GF Gordon Gecko Theory.

I thought you meant this @noharleyyet!

 

[Steiny]

Your business is worth the profit potential of any business on the books, the value of any cash in the business, and the value of any tools, equipment, or real estate owned by the business.
Stuff, like; potential, blue sky and good name don't hold much value unless you're a heck of a salesman.