Valuation of an on line service business

Culchie

I'm looking at a couple of on line businesses with a view to maybe purchase one (as a going concern).

They are service based, so no 'stock or inventory' as such, or indeed office or premises, as they can be worked from a home office (hence the attraction).

Any quick calculations on how I can roughly evaluate approximate value of business, before looking into the 'nitty gritty' stuff.

One guage I've been advised, is approximately 3 times annual turnover.

Any advice would be welcome.

Willie Wally

3 times the profit not 3 time turnover

antoinolachtnai

well, you could have a look at enterprise value, which is

EBIT/Weighted average cost of capital. (WACC)

This is basically what the formula mentioned above is, with the assumption that the WACC is 33 percent (revenue/0.33 = revenue * 3).

Interest rates are low at the moment, so a realistic WACC is probably more like 10-15 percent.

That would give a value of 6 times profits.

These rules of thumb are fine as far as they go. But these things aren't worth any more than people are prepared to pay for them.

You have to consider the risk and uncertainty around these very small businesses. To a large extent, these businesses are built around the reputation, ability and knowledge of the owner-manager. Take away the owner-manager, and my own feeling is that your starting point should be that these businesses are not worth very much at all, and it should take some persuasion for you to pay any more than the obvious value of the assets.

Unfortunately, you may also be expected to pay for 'future potential'. I really can't see that much value in the future potential of a small business though, other than what you are going to put into it yourself.

You have to look at why the owner-manager wants to sell the business.

You might be able to structure a deal where the original owner is able to 'earn out' of the company, if certain targets are met.

Beta2

Interesting question.

I recently set up a website selling services and its doing very well, The trouble is that I do it part time, and I just don't have enough hours in the week to spend at it.

The website has a limited lifecycle, it will be redundant by next year, so its not something I can keep putting off working at (I'm doing a Masters so i'm doing 7 days a week at that)

I don't want to say what the website is or does, but there is huge potential to make money with it, especially for anyone with sales experience.

Its only been running a month and is doing great business, and it will be redundant in 12 months and slow down in 4 months, but for anyone with time n their hands it could make a quick buck.

How do I value it, or even go about selling it?

B2

rsynnott

To OP, what sort of business? If its primary revenue source is advertising, be careful; that's an extremely changeable and unstable market. (For example, a change to Google AdSense a few months back, Smart Pricing, halfed or quartered the earnings of some, while multiplying the earnings of others).