How to gauge a business' worth or value?

[turbosam6]

I will be completely buying my dad out of our business soon, and after I do one of my employees wants to buy in. He's a friend of mine and brings alot to the table, things I am not as good at (sales, lead generation, etc). I have been running the business for a year and a half, recovering from the theft we had, and getting things running smoother than ever. I still have a lot to learn, but one thing I need to know asap is how do you determine how much your stocks are worth? Is it based on gross income, or profit only, or ??? This guy has helped me out a lot in recovering from the theft we had, and I want to make him a fair deal, but also don't want to give it away.

For example, if we did $1,000,000 in gross sales last year, and 100,000 was profit (10%), and he wanted to buy 25% of the stock, would it be 25% of $1,000,000 or $100,000? I know this is an oversimplified way to calculate this, but in this instance I don't think getting down to the last penny is critical.

 

[zam70]

Hey Sam - Go pick up the latest issue of INC (april) magazine. They have an article on valuating your business.
There is an industry formula that is considered accurate - they have it in there....
Basically, it is based on your net profit, not gross income.

If you can't find the Mag, I'll see if I can find it around the house

 

[BLACK6PACK]

You have to take into consideration what assets the company has also if he will be part owner.

One of the main ways to determine a business' value is ROI - Return on Investment. After all salaries are paid, including yours and his, if the profit is $100,000 and he is buying in 25% of the company, you need to find out what his goal is for ROI. So if you both determine that a 12.5% ROI is fair to you both, just like stocks, he will have to buy in for $200,000.

 

[ronbuick]

Where are you located??

Ron

 

[tbcash27]

Go to a tax lawyer

Go to a tax lawyer as selling stock in your business is not something to be taken lightly (even if it is to a friend or employees).

The tax lawyer may or may not know how to properly valuate a busisness for selling purposes. If the lawyer does not, he should be able to point you in the direction of a person/group who does business valuation as a job.

It's not about just gross income, net income...there are many items to consider.

Chris
(Master of Taxation, University of Denver, 1998) No longer practicing.

 

[AZ Vic]

I cannot stress enough how much a lawyer needs to handle this contract for you guys.

It is not as simple as here is x amount of stock valued at x amount of dollars.

There is so much financial responsibility with a business from taxes, growth, debt, and so forth. You need to cover both of your butts in case of a lawsuit. What if you expand in the next 10 years? Who knows... maybe you will go a different direction with something (or maybe even the same) and have a fortune 500 company by the time you retire...


There are so many scenarios that this really needs to be covered by a lawyer.


Good luck!

Vic

 

[BLACK6PACK]

As was said, a lawyer and or accountant needs to be in on this. Not only for figuring out the value, but also to set up the company so that you pay the least amount of taxes. You'll want to look into partnerships, S-corporations, limited liability stuff etc.

 

[VernLee]

DO NOT SELL A PART OF YOUR BUSINESS, You will be sorry in the long run, no matter what he brings to the table, JMO

 

[The Blob]

Ditto what Vern said. That is the best piece of advice you will ever get.

 

[STP]

I'll third that...If you can get by without being in a partnership do it.

 

[BLACK6PACK]

I have no experience, but when I was getting my business degree many moons ago, I remember the teachers and the books saying how much trouble a partnership can be. Now, if you have a silent partner with no say-so in the company and is not involved in the day-to-day opperations, its a different story.

 

[2QUIK6]

Before going into a partnership, make sure you know that person very well, not only what he can bring to the table, but his work ethic as well. Be perpared to share all books with the part owner also, you get a bonus, they get bonus' too.
I'm co-owner of a computer consulting company, me and 2 other guys who worked together for more than 10 years formed it 4 years ago and have not regretted it one bit. We all knew what are individual strengths were and we all had the same work ethic and respect for the Customers. We don't monitor how many days each of us takes off either, we know who pulss their weight where, its all about trust. 1 person handles most of the book-keeping, but the other 2 look over the books each month to make sure all the deposites are there and all of the payments are there and documented and all of the bank accounts balance. We have over 11 sub-contractors who work for us also so its not a small potatoes business.

As far as stock worth, you have to factor in tangible company property, its past history revenue generation, its expenses, and its projected business (its ability to make money in the future)....not an easy equation, if you have a CPA that does your books today (provided you are currently incorporated) they will have a good idea about this value.

 

[dan lephart]

partnership

Pay the man well! Use a performance based salary/commission program. STAY AWAY FROM A PARTNERSHIP! AT ALL COSTS. I have been involved in a not so good partnership and a family partnership. In both cases, hind sight being 20/20 a sole owner is the only way to go! If after talking to a quailfied CPA and attorney and you still want a partner do an S corp. Be aware that if you own it you are the boss, no excess baggage or strings down the road. Owning a business is an exciting and rewarding pursuit if you enjoy what you are involved in. I have 24 years experience owning businesses. I loved all but the last three years - I was bored and had done everything I set out to do... I have been selling vehicles for the past 8 years. Kind of like working for yourself but without the major headaches. Good luck! Be smart and seek professional advise!!!

 

[neverenuf]

I am a shareholder in a consulting engineering firm and we are currently going through ownership transition. We are in our seventh year of this process as the two principal owners who started the company are looking to remove themselves slowly from ownership. We have utilized this company as they specialize in engineering firms;

http://www.zweigwhite.com/cgi-local...L+aa0019820+rfxv7129F1502Cff7d117d+1111532453

They have a series of formulas that you use to calculate the worth of the firm. The factors invloved in this are; number of employees; net revenue; backlog; earnings before interest, taxes, depreciation, and amortization for the 12 months leading up to the valuation date; profit; book value; and interset bearing debt.

This is not something that I would go into on my own, as many have said I would seek help from an attorney, make sure that everything is legal and binding, and know the people you are getting involved with.

 

[Chad Oliver]

If you decide you must have a partner, make sure you have a buy sell agreement incase one of you dies so you don't end up with a new business partner that doesn't bring alot to the table.

Alot of good advice here.

 

[DKREDT]

Re: Go to a tax lawyer

Originally posted by tbcash27
Go to a tax lawyer as selling stock in your business is not something to be taken lightly (even if it is to a friend or employees).

The tax lawyer may or may not know how to properly valuate a busisness for selling purposes. If the lawyer does not, he should be able to point you in the direction of a person/group who does business valuation as a job.

It's not about just gross income, net income...there are many items to consider.

Chris
(Master of Taxation, University of Denver, 1998) No longer practicing.

I agree. More than likely there is an Accounting Firm in your town that specializes in business valuation. There are industry specific ways to calcualte what you are trying to figure out. Pay to get an appraisal done right.

One thing to think about is do you really want a partner? Do you need the capital? There may be other ways to reward this person. Good luck.

 

[turbosam6]

I do have a tax attorney as well as my corporate attorney involved, they are just very busy right now so I was trying to get an idea.

I understand the pitfalls of a partnership, but I also like the idea of the responsibility being shared. I really don't think I could pay this guy enough to really do what he does. He needs the incentive. I have tried offering commisions, bonuses, etc. We were friends before and still are, and even though I am the boss we have a good working relationship. We have similar goals and work ethics, and I can trust him to get stuff done right.

We have discussed the idea at great length, and he understands that I will always be the boss, no matter what.

What bad experiences have you had to make partnership a bad idea?