What's it worth?

[Garth]

After busting my butt for several years now to grow my businesses and working through buying out partners, etc. I've been approached by a large firm that I do business with expressing an interest in buying 75% of the shares in my businesses. It's VERY tempting to keep 25% of the shares, become managing director on a generous salary and reduce my workload from 100+ hours a week to 50.

What I'm looking for is a guide to deciding what it's worth in actuality. From an emotional perspective, it's priceless, but the cold hard reality is that it's probably not worth as much I'd wish for

My services business has an estimated gross revenue of +$400K this year (more than halfway there at the end of second quarter) on expenses of about $200K and my disaster recovery business will see about $75K on $30K in expenses. The DR business is all 3+ year contracts of recurring revenue and will see steady growth of 100% per year over the next 5 years based on the last 2 years experience.

In addition to this, the businesses have $200K in physical assets besides recurring contracts, unfortunately most of that is computer equipment/servers/office furniture/etc which isn't really worth squat except on paper for the taxman.

I've worked hard at marketing/branding/goodwill and both businesses are recognized in my industry segment by decision makers and the reputation of the services business is great and the DR business is getting there. My own reputation in the industry is great and has led to a lot of work from banks, pharmas and IBM. Ads for the businesses run in industry magazines and on websites regularly and continue to have a good effect on revenue.

Overall, both businesses are very healthy with good cash flow and reserves for capital investments and rainy months .

What are your opinions? Suggestions? Derogatory remarks? Thanks!

[Evan]

Hi Garth - congrats on building up your business and having the sale offer. It's definitely a good problem to have!

From my experience, the two elements that you need to figure out are financial and personal.

Financial
This is pretty straightforward - is the price they are bidding a fair representation of what your business is worth? Other considerations here are is it an all cash deal? Are they paying up front or over time? What is your own personal financial situation and do you need the money now? Does the price compare to the average multiple for companies in your industry? Assuming the financial end works out, you have to think about the personal side.

Personal
It can be a very difficult decision to sell a company. Many entrepreneurs start their own business to be independent and have their freedom. Do you now want a job working for someone else? In many agreements there is a period of time where you help the new company and then transition out so you can do something else - usually that's start a new business! Do you like the people who are potentially acquiring you? Do they have the same culture and will they treat your employees properly? What is their vision for growing the business? Is it in line with where you want to see the company go?

If you decide to go through you'll also need a good lawyer to make sure the acquisition goes smoothly as well as prepare a solid shareholder's agreement with as many covenants that give you some power. You will want at least a piggyback clause that prevents them from selling their shares to a new owner without having your shares be a part of the deal.

It's hard to build a company from scratch, struggle in the early days, finally build it to something substantial and not be interested when an offer to acquire comes along. I would suggest to carefully review the financial and personal aspects to the decision and go from there.

Keep us posted with your thoughts and how you are progressing!

Good luck!

[Garth]

Thanks for the input Evan!

Financial - I'm not really sure what the businesses are worth.

The services business, i3, is pretty unique in that there are lots of independent contractors/consultants doing what we do, but i3 provides depth with a virtual bench of IBM Certified professionals and we don't sell hardware. This means we can perform services for other IBM Business Partners by not posing a threat to their hardware sales and allowing them to make money on services which they previously missed. It also has has many of it's own clients who work with us directly. In addition, last year I started performing services for IBM on contract and have weaved some of my guys into those opportunities as well. What all this means is that there is always a steady stream of work/revenue.

The disaster recovery business, while not unique, is well placed and provisioned while operating at a profit and has excellent growth potential.

I don't want to sell my ideas or work effort short by asking too little, but realize that the number must be realistic. At this point, we have not gotten into firm offers or asking prices, but they have reviewed my financial statements and we have looked at how they envision going forward.

Personal

I like as well as trust these guys and feel that they see things the same way I do, but don't have the "entreprenuer" mentality in that they purchased their company after it was built. They have increased revenues from the time they purchased it, but have not built anything from scratch, so I'm not sure they understand the effort that this has taken. All that aside, I would have no problem being a cog in the wheel for a year or two and already have plans for other ventures. I don't "need" the money from the buyout as my personal finances are stable, but would like to move the equity I have in the businesses out and into something else such as property.

I trust my accountant and my lawyer, but like understanding a process as fully as possible befor emaking decisions. If anyone can provide any accounting principles that help valuate a company, it would be appreciated! Thanks!

[Evan]

Hi Garth,

A typical way to measure the value of a company is to take the 5 year projected EBITDA with a discounted rate. In the venture capital we used 30% per year as a standard discount rate. We would also take off another 40% if the company is private because it is harder to get liquidity. If you want me to post an example with some numbers to clarify, let me know.

[litekepr]

I've talked with several friends who were considering selling their businesses and other friends who were considering buying someone else's business. It can be hard to figure in all the factors to get a real value. BUt, even a fair market value would give you a starting point.

You know the revenue you're generating. You probably have an idea of upcoming projects, but do you have a number of repeat customers? If you were involved in a lesser way, would they still be repeat customers? How much authority would you need to give up in the transaction? If unknown entities are involved in a big way, will that harm existing client relations?

It is also possible that the new partners could take significant work and/or stress off of you? There are so many things to consider with the pros and cons. But, make sure you have an attorney you trust review the information and any contract before you sign

Shri

[Garth]

Thanks gents!

Evan, for sure anything that will point me in the right direction

[Evan]

Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out:

How Northern Crown Capital Valuates a Business

2008 Financial Projections

Earnings Before Tax
$5,865,000

Tax Rate
42%

Taxes
$2,463,300

Net Earnings
$3,401,700

Amount Seeking to Raise Today
$3,500,000

Discounted Value of Future Opportunity, 5 Years Out

2008 P/E Ratio
15

Value of Company in 2008
$51,025,500

Discount Rate Applied
30%

Year 2008
$51,025,500

Year 2007
$35,717,850

Year 2006
$25,002,495

Year 2005
$17,501,747

Year 2004
$12,251,223

Value of Company at Investment in 2003
$12,251,223

Less: Investment Amount
$3,500,000

Present Value
$8,751,223

Discount for Risk & Private Company
40%

Less: Discount for Risk & Private Company
$3,500,489

Private Company Value
$5,250,734

Present Value (What the Owner Keeps)
$5,250,734
60.00%

Financing (What the Investor Gets)
$3,500,000
40.00%

Total
$8,750,734
100.00%

I hope this helps!

[Garth]

Thank you Evan! Greatly appreciated

[Evan]

No problem Garth - let us know how it goes!