How do you value a small business?

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9 years ago 08/28/2014 9:51am EDT

re: wtfunny

wtfunny wrote:
Jabronic wrote:
No, I am not a business consultant.
OK .. so you're a marketing consultant and you don't know how to value a small business?

Maybe he does marketing research or trend tracking. Why in the world would he be required to know how to value a small business? Do you realize how complicated that can be? Every single niche business is going to be different. There are legal/CPA firms that specialize in this type of thing. A buddy of mine does this for mergers and acquisitions. He is a JD/MBA and makes like $10-$20 thousand dollars per valuation. Get your head out of your ass.

OP, you need to figure out if you want to buy him out or run him off. I would imagine you are either S Corp or LLC. Either way, I am guessing you keep very little cash in the business. Based on your description, I am thinking you have no real tangible assets other than what you listed, so that is a non-factor to the company's value.

5 x earnings? For a non-production business? No way. That is crazy. Where you are correct is that it will come down to how motivated the OP is to buy the guy out.

Sounds like the only real asset the company has is the OP. IF this is truly the case, it is probably best to bite the bullet and go out on your own. Split the current books by % ownership and let him take the name. Poach the clients if you want, but possibly go after new or let them just come to you. If he really adds no value, they will realize this and find you pretty quickly.

LRC normally has some good info, but this thread is terrible.

9 years ago 08/28/2014 10:07am EDT

re: Not a fvcking idiot

Maybe he does marketing research or trend tracking. Why in the world would he be required to know how to value a small business? Do you realize how complicated that can be? Every single niche business is going to be different. There are legal/CPA firms that specialize in this type of thing. A buddy of mine does this for mergers and acquisitions. He is a JD/MBA and makes like $10-$20 thousand dollars per valuation. Get your head out of your ass.
OP, you need to figure out if you want to buy him out or run him off. I would imagine you are either S Corp or LLC. Either way, I am guessing you keep very little cash in the business. Based on your description, I am thinking you have no real tangible assets other than what you listed, so that is a non-factor to the company's value.
5 x earnings? For a non-production business? No way. That is crazy. Where you are correct is that it will come down to how motivated the OP is to buy the guy out.
Sounds like the only real asset the company has is the OP. IF this is truly the case, it is probably best to bite the bullet and go out on your own. Split the current books by % ownership and let him take the name. Poach the clients if you want, but possibly go after new or let them just come to you. If he really adds no value, they will realize this and find you pretty quickly.
LRC normally has some good info, but this thread is terrible.

+1.

If the only intrinsic value is you and your client base, jump ship and tell him to get fukked. Or, more subtly, spin off into a "new" business or LLC and maybe change a few things to make it look like it is different from whatever you are doing currently. Then just spend less time at your old business and let it flounder.

And if its a service based business, I've been told 1.4-1.5x annual revenue is likely.

9 years ago 08/28/2014 10:19am EDT

re: bro science

bro science wrote:
+1.
If the only intrinsic value is you and your client base, jump ship and tell him to get fukked. Or, more subtly, spin off into a "new" business or LLC and maybe change a few things to make it look like it is different from whatever you are doing currently. Then just spend less time at your old business and let it flounder.
And if its a service based business, I've been told 1.4-1.5x annual revenue is likely.

Yes. OP did say that he wants to keep this relationship healthy, so the best thing is to dissolve the company or give it to his partner minus the equity he earned.

See, I think even the 1.5x revenue seems unreasonable high, especially if the OP is doing the actual work. Maybe 1.5x earnings, but that would be if he maintained all of the client relationships, etc.

You have to look at what you would be buying. How much would the partner pay for it? Would he pay 1.5x earnings/revenue? If so, sell it to him and start anew.

As a few people have said, it comes down to how much you or he will pay. There is no formula for this type of situation. Even different franchise chains have varying values based on location, competition, etc. Something like a marketing consultant without brand recognition is basically worth nothing.

If you are driving the partner out, you are basically paying him to leave, so that is going to be a mix of what you're willing to pay and what he is willing to take. You can call each other's bluffs, but that will likely lead to a fight (hopefully not legal).

OP, if you're still reading this. What does the partner offer today? Is he actually doing any work?

I hope some younger folks are reading this. The comparison to a marriage is spot on.

9 years ago 08/28/2014 10:37am EDT

re: Jabronic

Write up a contract with what you feel is a fair amount for him to leave and sell you his equity stake.

Then pull out a gun and tell him either his signature or his brains will be on that contract.

Technically, signing under duress would make that contract void, but only if he takes you to court on it.

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