Sellling your website...

[chris ashdown]

Mike
You are right for a investor buyng into a company, but if you are buying a company to run yourself then you are looking at what you make each year running the company which would be the wages plus any profit

[Mike Hughes]

Sorry Chris, as I said before. The salary is for doing the work.

You have to take out the cost of paying someone to do the job. What's left is the return on the investment.

Again, no one will pay a lump sum for a salary bit. That wouldn't make sense when you can get the salary for free by working for someone else.

Mike

[steveaich]

I would tend to agree with Chris, especially when dealing with a small business, however I've never sold a business (still on business no1) so can't speak with any authority. Mike, are you speaking from experience/ a knowledgable position or just your best guess?

The multiple of profiit is also only a guide, as it will depend a lot on the business you are selling, ie is it a fad business which will die when the fad ends (ie mini scooters or cladding) or is it sustainable with a good customer base(ie hopefully, medical and personal products). That is going to effect the amount that a sensible person will pay for it.

[Mike Hughes]

Knowledgable position. MBA plus worked in business development (mergers and acquisitions) for a while.

You have to take out the salary bit (what you'd have to pay someone to do the job).

take another example. Business earns £10,000 profit for the owner (who doesn't take a salary).

If it would cost £20,000 to pay someone to do the job what is the business worth as an investment? The answer is nothing. It's really a loss making business that's being subsidised by the owner. Anyone in this position should consider a) how do they improve the situation or b) wouldn't they be better off doing something else instead.

Mike

[steveaich]

Knowledgable position. MBA plus worked in business development (mergers and acquisitions) for a while.

I assume from the terminology these were large businesses, where the ceo's salary would not be as significant as in a small(micro) business.

take another example. Business earns £10,000 profit for the owner (who doesn't take a salary).

If it would cost £20,000 to pay someone to do the job what is the business worth as an investment? The answer is nothing. It's really a loss making business that's being subsidised by the owner.
Mike

Unless someone wanted to buy the business as a lifestyle choice, which many people do, admitedly £10k aint much, but if that was part time whilst you were looking after the kids, that could be a great investment.

I do take your point though, so everyone, start paying yourselves less and make the P+L look better!

[chris ashdown]

Mike

How would that work then if say I took a salary of £100,000 out of the company and it still made the same £10,000 profit

Would it still be worth the same ?

[Mike Hughes]

As I said (somewhere above), you have to take out the cost of paying someone to do the job, not necessarily what you're drawing out yourself. So if the job could be done by someone else for £20,000 then that's what you should take off.

Mike

[Mike Hughes]

Steve,

but if that was part time whilst you were looking after the kids

In that case the salary equivalent would be less so the business wouldn't be in such bad shape after adjustment for the salary.

Mike

[wjcampbe]

@ Chris - I'll take your tax bill
@ the OP - is the number of lll's in the title an indicator of the amount of money you hope to make

I'm with Mike on this. If you cannot pay someone else to do the work, you don't have a business, you have a millstone (course you might be like me and enjoy carrying the millstone).

[chris ashdown]

Sorry mike still cant grasp it except for a outside investor

As a person who wants to buy a company to run himself, I would still consider the total as what my money would buy me,

Your argument is for someone taking ownership and employing someone to do the job the seller was doing, which most of us in small businesses would not be looking to do. We would take over his role and therefore the £20,000 or £100,000 is to be included

How would you rate the two companies assuming the onew owner replaces the old owner in his position within the company

[Mike Hughes]

Hi Chris,

The thing with the paid job is that it's a paid job. No-on pays/invests money to get a job.

Here's the example. You're a highly valuable individual, capable of running a successful business. Which of these makes sense:

1. You get a job as CEO of a small business. You work hard and the owner pays you £100,000 in salary.

or

2. Owner says to you. Hey, why don't you buy my small business for £800,000 (ok I'll take £500,000). It doesn't generate any profit, but you can work hard and draw a salary of £100,000.

Why do you think it's worth £500,000 to £800,000 to get a job that pays £100,000?

As Bill says, if you can't pay someone to do the job, then you don't have a business. All you have is a job and people don't pay for jobs.

Mike

[pinbrook]

To consider Mikes thread directly above, there is one factor not taken into account, there are people who want to be employed and there are people who want to be their own boss.

I don't think I'd take either of the above options.

A I refuse to work hard for a salary.
B I wouldn't buy a business that didn't generate a profit

[Jim Riley]

The normal approach in valuing a business is to look at the "maintainable earnings" of the business under new ownership.

In other words, what profits does this business currently earn assuming that:
(1) the previous owner is no longer involved
(2) appropriate costs are assumed for the replacement of the former owner (e.g. replacement manager)

Maintainable earnings should also take into account the strategic position of the business; considering factors such as:
- Market size & growth rate
- Relative market share
- Strength of brand, distribution etc
- Competitive threats / opportunities

This really is an art, not a science. But corporate financiers tend to use "industry benchmarks" as a guide to value; more often than not based on the metrics used in previous transactions. Some times these benchmarks are sales-related, sometimes profit or cashflow-related. But they vary widely, from industry to industry.

It is particularly important for any business buyer to assess the importance of the existing management. Often the business is intrinsically linked toits management/founders. Once they go, the business suffers.

And is rare for any genuine business buyer to allow a seller to get away without a non-compete clause in the sale contract.

Jim

[fully paid-up member of the ICAEW Corporate Finance Faculty :-)]

[chris ashdown]

I give in gracefully

I thought we were talking about selling a small 1 or 2 man company that trades on the web to a new owner who wanted to take over the running of the company, (I never mentioned zero profits by the way).

Most of this now seems about corporate sales or investors buying in

If i was looking for a bussiness then i would consider what i would get out each year which would include both the salary and the profit as well as growth potential etc. After all P&L can be bent anyway with directors drawings in a small company.