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My advice is as follows
If you are looking at paying these sums then consult an accountant and get some due diligence done. Get the accountant to review the accounts for oddities and act in your interests with respect to a valuation.
Looks like a decent business ... clients that actually pay for a service. Unlike the accountancy profession where you get an abundance of scroungers.
You have no doubt noticed that the owner, if he or she works anything like full time in the business, has been on very short rations for the whole of the period covered by your figures. Barely minimum wage level, if that. Are you sure you are interested?
Figures don't stack up.
Surely if they do web design they are merely selling their time/skills designing stuff. What are all the cost of sales which run to nearly to 70% of revenue or does he sub contract all the design work out. As said above you need to get someone to crunch the figures as on the face of it all you are buying is a poorly paid job at first glance. They have a decent amount of revenue and I would think that they should make high profits of £100k plus, so something is not right does the existing owner have a big salary charged to COS.
Figures don't stack up.
Surely if they do web design they are merely selling their time/skills designing stuff. What are all the cost of sales which run to nearly to 70% of revenue or does he sub contract all the design work out. As said above you need to get someone to crunch the figures as on the face of it all you are buying is a poorly paid job at first glance. They have a decent amount of revenue and I would think that they should make high profits of £100k plus, so something is not right does the existing owner have a big salary charged to COS.
As John says, net profit looks pretty grim after 10 years reading.
As another poster says though, would have to see the accounts to give any real feedback.
Is it a ltd co or not? If its a company and that is the profit after a market rated directors salary then that is different to if it is a sole trade and the owners are not getting much at all. Does it run itself or is it owner dependant?
What percent of turnover is contract ie repeat work?
Lots of questions.
While there can be many factors explaining low profitability, I tend to agree with the statements above. On the face of it, there is a reasonable turnover but not enough profit. Either staff are not efficient enough (paid too much or too slow) or the charge out rate (which will determine the fee levels) are too low. My guess is it is the latter but you need to know as you can sort out the former but resolving the latter brings a whole host of client retention risks.
Drilling deeper it seems to me that either job costing is poor and that costs allocated to the main client are understated (owners costs?) or the business should consider reviewing what clients it wishes to keep. For example if at the start of y/e2015 it had terminated all clients except the main client, then it would have made £57k instead of £13k. Irrespective of your multiple that action would pay for itself.
You definitely need to look into this in more detail with a professional. You need commercial advice and once you have agreed some principles some due diligence to ensure what you have been told is right.
Personally I would not touch this with a barge pole. The fees incurred are going to be disproportionate. If you remain keen consider buying individual clients instead of the whole block AND agree a clawback mechanism so you pay less if future revenue falls. It pushes the risk (subject to TUPE) back on the seller particularly on the main client.
Best of luck!
If the company owes the Director £90k then is it even solvent? He is getting £10k a year which may not have even been paid and has put loads of money in. Why do you want to buy it and how would you afford to employ someone if the company has insufficient profits to remunerate the existing owner?
You must be mad
Run a mile, it's not worth considering. Next to no profit, heavily reliant on one customer.
And, for a web design business with 3 staff the figures don't look right.
Aside from these figures...
I have an entrepreneurial client whose background is in another business area. He's bought and sold several businesses in that area at a good profit and I worship the ground he walks on.
Although he's intelligent and good with figures, when buying a company he looks at the customer base and what he thinks he can make from it. I doubt he could do this if he didn't stick to his industry sector, but his 20 years of experience give him a real head start on any accountant. By the time he asks for due diligence reports he has a pretty clear idea of whether he can make money out of the company. The accountant's report is just a backup as far as he is concerned. Don't forget a set of accounts is already out of date and things may have moved on for better or worse since those accounts were prepared.
If you aren't an experienced web design person I would really caution against even thinking about buying into this size company - however good the figures. There is simply no substitute for substantial know how when buying an existing company.
these numbers on their own do not a picture paint
With respect, the summary information is pretty meaningles, you need to drill into the numbers to see what is included the fact that the 1 profitable client would make £57k np whilst the others make a loss seems very odd , get the microscope out !
Historical information - here are some thoughts based on the limited information.
Your decision should not be based on the PE multiple x some historical data. Historical financial information is history. It merely shows the outcome of what the current owner managed out of a business employing his unique operating/management style. Your outlook may be different, may have a different approach to business generally, and your risk appetite may be different. So you ought to look at the whole thing from your perspective. Ideally you would be looking at least at a 3-5 years time horizon in terms of :
- Business concentration risk - this business is concentrated on a single customer (let us say P1). If that customer comes to know of this, then they are likely to dictate terms. So the biggest question before you should be: can you continue to keep them happy over the next 3-5 years? If you think No, then you know what to do next. If Yes, see the next step below.
- From the numbers, looks like most of the overheads go towards servicing the other small customers (let us call them P2). P2 business is in loss because the current level of business is unable to absorb the overheads or it is not producing enough margins. Can you turn it around and make the P2 part profitable? Common sense suggests that you need more of P2 customers (assuming reasonable margins) first to absorb the current level of committed overheads - like rent, salary etc. Growing the P2 business would depend on variables unique to the business but generally speaking you would consider the market, competition etc etc.
So in summary the P2 side of this business with its current attributes has no value!!! The P1 part of this business should be risk-adjusted (having identified, quantified and mitigated all the associated risks) considering your risk appetite and then decide on its value.
I would still be concerned regarding the reliance on the main client. Have you thought about how you could retain this client? What a JV with the seller where his only input is keep this client sweet until its revenue is not a key factor. Any cost to the seller for this service would shore up the goodwill value.
Can you slot this business into your existing operations?
Perhaps you can reduce the risk by paying less. With a share of revenue from this client for period of time.