How to judge the value of a company?
Let's say, some big company wants to buy up your business. How much do you figure what your company is worth?
Let's make it a bit more complicated. :) What if the would be purchaser is your main client? (Let's say 90% or more of your annual revenue.) How much is your business worth? Or rather, how much does that affect the sales price?
I'll let you all in on what I'm getting at once I've heard a few responses... :)
Depends on long you want to retire.
I'll let the more experienced guys talk about assets and debts, depreciation schedules and etc.
Back in my college accounting classes, they said one of a company's assets you had to track and account for was "goodwill".
This was a slippery thing to get a hold of, being somewhat subjective, but has to do with your company's reputation in the public eye. Like anything that for example has the name "Google" attached to it is going to get a boost in people's attention and perception from the association, be seen as advanced, cutting-edge, worthy of investment, etc.
It is the estimated cash value of the amount of advertising and PR work you would have to do to get a new company up to the same level of fame and popularity, might be one way to describe it.
When one company buys another, they also buy some of this magic "aura" with it, and someone puts a dollar value on that. (Though if you can tell me who got the goodwill out of the TimeWarner/AOL merger, I'd appreciate the explanation) If the company, on the other hand, takes some hits, and their reputation declines, you have to write down some of that as loss. But I never made it to the advanced classes that told you how you quantify such a thing and declare a numeric value to it with a straight face.
This concept also comes up a lot when companies consider a name change. A long-established brand name carries with it considerable weight in good will, and you throw that away to start fresh under a new name, unless you can find a way to call back to that "source" brand.
What a one-man boutique production company carries as goodwill is arguable. Depends on who that one man is, I guess. A name like Will Vinton carries huge good will from all the popular work he's done over the years. Then again, when you hire RSA, you tend to assume you're going to work with Ridley Scott at some point, even if he does have lots of staff to farm things out to now. On the flip side, a one man band can raise his own profile through association, by aligning with a larger company.
You look at the depreciation value of equipment if you are doing an asset purchase. If you are buying the rolodex, then you take the average net profit over the past 5 years and add the average annual distributions to officers etc, multiply that by 5, then add the value of the equipment.
Say $50,000 of net profit average over the past 5 years.
$50,000 average paid to officers as distributions after salaries
Equipment valued at $60,000
$50,000 times 5 = $250,000 (average net profit)
$50,000 times 5 = $250,000 (average distributions to officers)
$60,000 equipment value
Total company worth (on paper) $560,000
Now the things the business banker will look at is whether the key people at the current company will stay on and if they do not how that might affect the numbers stated above. In a hot shot agency, if the hot shot is not staying on, it might be valued less. This is a projection after all of what the future might hold for profit etc. The banker will also look at what the plan is going forward, industry trends, and other solid predictions that can be made about the business.
Typically in small, closely held, creative businesses (the kind where the company's true assets go home at night and return in the morning, ie. - people) there is an "earn-out" period for the seller. Simply put, if you, as the seller, say that the business earns $X00,000 per year, the buyer says "prove it" with the seller staying to run the company for the 2-3-4-5-etc years after the sale in order to "earn out" the purchase price.
(But what do I know? I've been self-employed for 35 years.)
this is my smart ass New York answer. Is this your company? Are you a one man operation with a Flame/Smoke, or do you have a team that does this project for your "big" client.
Because if you are a one man operation, the company that wants to buy you doesnt' need to buy you. They can learn about you, and steal your client. They can get all the info they need from you, and solicit your client, (better prices, better service - even if they are lying), and not pay you anything.
If you generate $200,000 a year, and expect that they will give you $200,000 for the client, and you can walk away with 200 grand - well, in my opinion, you are VERY lucky if this is going to happen.
However, if you have a team (several people) that work for the "big client", and your competitor wants to "buy in" so they can get this work, then it's more realistic. But unless you have a contract with the big client, I can't imagine your buyer paying you more than one years revenue for this. After all - they want your company probably because of this client.
Thanks all for the answers!
Here's the deal. I know someone who owns a post house that has one main client, that is 90% of their business. The gross revenue of this post house is easily in the millions per year. They also have high salaries to pay, so the profit level probably isn't that huge.
Anyway, I was told by one of the owners that their main client was looking into buying their company. For some reason this person thinks that their company is only worth the equipment value, because they have only the one main client.
Regardless of the situation, I have a hard time believing that the company is only worth the equipment it owns.
With respect to everyone's answers, we've asked this question more times than I can count over the years. We've asked accountants, bankers, other business owners in our industry, marketing and advertising consultants, etc. And they ALL give different answers. Even within the same discipline, they don't agree...meaning ask 3 accountants this question and they'll give you different answers.
That said, there are formulas you can find (if you search online) to assess the relative "value" of a company. But if it's not a publicly traded company with a stock price tied to it, it's very difficult to place a value on it that everyone agrees with.
The best answer I ever got for this question was from my older brother, who is a CFO at a large University hospital. His response was, "whatever someone will pay!"
We actually bought a car dealership group account (4 dealers in different cities) from a former client a few years back. They placed nearly $1 million a year in media and it was a 125,000/year account. We basically said we'd pay him a year's worth of value for the account over a 36 month period. We argued (rightly it turned out), that there was the danger of one or all of the car dealerships in the group bolting after the sale. If one or all did, we weren't on the hook for the payments.
Right after the sale, one of the car dealers got upset at the switch and "fired" us so to speak, then switched agencies. So we ended up paying $100,000 I think for the group. The reduction in price was based on the revenue percentage of the dealer that left. The other 3 stuck with us.
It was all written up by our attorneys, but in the end, it turned out to be a good deal for everyone. He made over $30,000 a year over 3 years (he has LOTS of other business interests), and we got a nice account.
On a side note. A year later, the dealership that left called and came back. Nothing was in the deal about that occurence, so we were off-the-hook for paying anything additional for that account.
Magnetic Image, Inc.
Yes, it is different for each case, but clearly the net profit (forget anything about Gross sales...doesn't matter) along with the value of the equipment and their standing in the community based on competitors etc all play a factor.
There are also different kinds of sales. There is such a thing as a property buyout only, where you purchase only the gear. But if the plan is to continue the business as it is now, and as an added bonus, with most if not all of the current employees, then that looks good to a banker as well.
In any case, you have to make your case to the bank why the company is valued at whatever you come up with and they will have to agree that based on the net profits, the loan can be paid off in that much time.
Jut like selling a home, there are several parties involved and the seller wants the best price, the buyer wants the lowest price. At the same time, the buyer is hoping for continued revenue based on current numbers (net profit) and the seller hopes that what they have is actually worth something, and usually more than just the cost of equipment.
It's not a math question but a question of what you wanna do with your time.
I personally would have em throw 2 mill my way and I'd retire to make the movie I have always wanted to. Less than that would mean I'd have to work more later and that would defeat the purpose for me.