Looking at purchasing a business but not sure if valuation is correct. The business currently runs anything from 6 to 13 events a year, Turnover 2018 -£19705 and profit £12576. Each event turns profit of 2-3k. No assets and a team of self employed adhoc event helpers. The business was due to to role out a franchaise or ‘Sell territories - with on going support’ and has a manual set up ready to go to prospects (owner now ill - hence sale). It would be easy to upsize this business, it has good reputation and has been est 7 years with active website, booking system, social media and database of 2.5k. It’s valued at £20k and venues are set up and booked for the next 18 months. Is this a reasonable valuation?
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Your description is fairly vague (you haven't even told us the turnover) and if you want a meaningful (as in, relevant to the business you are looking to buy) second opinion then it might be an idea to ask a local accountant. Even if he or she would not be comfortable commenting on value, s/he probably knows someone who would be. If you do take it on, you'll need an accountant anyway. A willingness to refer work in the way I have just described is a sign you've found yourself a good one.
I would suggest you also talk to them about your chosen vehicle for taking on the trade. It sounds high risk to me - there's 18 months of commitment coming your way in the form of those venue bookings - and no guarantee of income.
One last comment. You're a new user so some of Sift's risk warning applies to you. Being new means you have no history. Sift thinks:
Please note that posting as an anonymous user is reserved for sensitive content that you need help with but don't want people to know who you are.
However, it will also mean that other users will not be able to see your history on the site and therefore might not be as willing to provide you with a reply.
You're a new user. You have no history. Some people (me included) like to see a bit of history. Ideally, one showing that you help others as well as asking for help.
Nothing personal - all of us were new users once (in some cases, more than once).
Tax Dragon is right. Although I am not an accountant, I have done a small amount of corporate finance work over the years (in the sense of buying and selling businesses myself). The difficulty with something like this is that the cost of advice is quite a high proportion of the theoretical profit of the business. However, you do need advice from someone. I would not say that this can be valued on a Price/Earnings basis. Furthermore if the business can be upsized easily why has the current owner not doing this.
What you have to work out is what you are actually buying. It is a regular customer base, is it intellectual property, is it market presence. Or is it the profit for 18 months. You don't even say whether the profit of the events is each or a total of the figure stated.
When you buy a business you can have a deal that is a bit more complicated and involves paying a sum to start out with, and the further sum later if things go well (or as planned).
It will cost something, but you should get some advice on this from an accountant or solicitor.
From my experience there is rarely any value in this sort of sole trader business. All the value is in the proprietor which is not retained when the business sells on. Steer clear, or at the very least take professional advice. Also be aware that the majority of small accounting firms are very bad at valuing this sort of business. They focus too much on the numbers and not the business itself. Too many small accountants are not particularly good businessmen themselves.
I tend to agree, although there's so little info that that even agreeing means guessing. If the "events" are annual and have their own brand, then who organises them doesn't matter so much. If the brand is the (individual) organiser and the events are all one-offs (though 6+ a year seems a helluva lot if so), that's another story.
But I'm guessed out now.
So even an established business running for 8 years with an active database and clear profits is not worth any thing?
No. At the profits you are quoting the owner is effectively working for peanuts. I wouldn’t buy something that would realise such a small profit.
£21,000 in profit in 2018/19. How much work did the proprietor have to do to make £21,000 profit? If it was a lot, the business isn't worth anything in my opinion. If it was none you could value it like an annuity.
Presumably it's somewhere in between none and lots though, nestling in there among the vast swathes of information we don't have.
You are missing the point that Duggimon is making.
Does the business pass the bleep bleep test.
The government is actively pushing to get the NLW to £10 per hour or £400 per week for someone without any skills or training.
On that basis if you could earn £20k per annum working in Tesco etc why would you pay £20k for the right to have a minimum wage job.
You would therefore be assuming a £15 an hour job, with none of the benefits or protections of full time employment.
At that level of income it may well be a worthwhile job for you to do (I have no idea what you earn currently) but I wouldn't advise paying anyone for the privilege, particularly since doing so renders the first year or more effectively unpaid.
Lots of businesses that turn a perfectly decent profit aren't worth anything when it comes to considering selling. This sounds like one of those but if you have your doubts you would be best consulting with a paid professional who can look at it in more depth for you, we can only speak in generalities here.
Having said all that (all of which I agree with), there may be value in the database (etc). As the OP says, there's a lot of work gone into that, starting again from scratch would be an investment in time and effort, buying one ready made is an alternative to consider. (But not at £10 per head, I suspect... sorry, I said I was guessed out, and here I am still guessing!)
It sounds like a situation where you should make a smallish (say 5k) up front payment and then share a tapering amount of profit until you have hit the 20k figure. You would want the previous owner to have some skin in the game to want to help you make it work. If they cannot cope because of illness then that is not an unreasonable deal for them.
You could offer a percentage of the profit on each event, but remember to value your time as something sensible.
Cutting through all of this the maths is quite simple.
Q1. How many hours worked?
Divide the profit by that to get the hourly return.
Q2. Is the buyer willing to "buy this job" at the price offered?
As a rule of thumb you would not "buy a job" for more than 12 months income, and possibly a lot less if the hourly rate is low.
On a slightly different tack to the other answers (which are all pretty good), why are you considering buying this?
- Do you already do this kind of thing, so you can bolt it on to your own business?
- Do you have some expertise that means you can run it better? (put on more events, make them more profitable)
You don’t say what sort of events but I’m guessing they’re fairly specialist. Whatever that is, you do need to be reasonably knowledgeable, but you’re too much of an enthuiast, it may cloud your business judgement.
Aside from valuation questions, I would counsel some sort of legal agreement, at the very least setting out rights and obligations on each side. For example the seller shouldn’t compete for at least a year