Business Valuation

fin i'll buy that business for $80k

Yellowfin

As you are likely already aware, putting a price on a company is one of the more difficult things to do in business. You can ask 1000 different people about valuation and you will get 1000 different answers for how much your company is worth. Before I dig in, I should qualify myself by letting you know that I have a start-up here in Baton Rouge and we recently closed on our Series "A" funding at a reasonable valuation. The valuation number that we landed on would be viewed by most as arbitrary, although it was the result of a series of conversations and negotiations with our investors.

That said, there are a number of questions I would ask before giving you a direct answer. Most importantly, why are you looking for a valuation? Are you looking to be acquired, are you looking for funding, or are you just interested in how much your company is worth? Whatever the reason, there are a number of variables that will affect your valuation:

-How long have you been in business?
-How many employees do you have?
-What amount of capital did you use to start your business and where did you get it?
-Are you the sole owner?
-What type of business is it? (Products, Services, Technology, etc...)
-How big is the market you serve? Is there potential for growth into larger markets?
-What does the competitive landscape look like?
-What is your month-over-month growth rate in revenue since you started? Is it increasing/decreasing/steady?
-What is your projected month-over-month growth rate in profit for the next 12, 24, 36 months?
-Do you have the potential to achieve economies of scale with your business model? (in other words, are your margins stuck at 25% or can you improve it by lowering operational costs)
-On average, how much of your gross profit are you re-investing into your business to fuel growth?

These questions provide a decent foundation to gain a better understanding of your company's potential, however they are only a start. If you have $45K in assets, I would assume those are capital expenditures which depreciate over time, and are somewhat irrelevant in your valuation (the alternative would be knowledge based assets or human capital which would require another level of complexity to your valuation).

Valuations are largely based on realistic potential rather than current earnings and net worth. There are intangibles that go along with your business that include the customers you currently serve, the brand equity that you have built with your company, etc... These things are factored into your valuation and, thus, should not be ignored.

I have heard people try to define a standard multiplier for valuations.
For example:
4 x End of Year run rate (which is your most recent month of revenue x 12 x 4)
2 x gross revenue + the enterprise valuation at the time of your initial funding round
10 x gross profit + enterprise value

There are many more formulas like this, but to know which one to apply depends on a number of missing pieces. The short answer is that there is no rule of thumb, the entire process of valuation is extremely subjective and should be treated as such. I would suggest talking to someone who has experience with business (specifically with buying, selling, or investing in companies), they will be able to help you narrow your scope of valuation to a reasonable range. If you are really in need of help or you lack the resources, I might be able to help.

Very high level, it seems as though you have a pretty good operation going, and I hope you continue to grow your business. Don't get too frustrated with valuations, they are not as important as growing your revenues and sustaining profits. Aside from that, don't take nominal valuations from rantards (myself included).

(For what it's worth, I would put your company at about $250K, but that is an almost completely blind valuation)

EBITDA x a factor relelvant to your line of business - all you really need to do is find others in your line of work who have sold or are selling and ask.

otherwise you would need something extraordinary to fall too far +/- the range