View Full Version : Value of my business
07-17-2003, 10:31 PM
Ok I need some advise. I have a business partner, we are about to dissolve the partnership and I need to come up with a value of the company.
It seemed easy at first but then when I got to thinking I was kind of lost.
I know I need the value of all equipment, That is the easy part.....well maybe easy...
Do I add in the value of the entire contract? Or the remaining value (they have paid 4 of 8 months so far) all contracts expire in Nov so I have no long-term contracts.
I would assume any leases would not be considered value, as they are just an expense.
What about debt, (loans, Credit card, etc) is that subtracted from the value?
I guess what I am getting at is how do I go about this. I want to come up with the right value, as he will most certainly want a percentage for the buy out. Of course I also do not want to figure the value higher than it should be. I know there are many more questions I was going to type but for now I would like to hear some opinions from all of you. Thanks!
07-18-2003, 01:10 PM
You should do it just as you would your personal net worth. Add up all the assets (equipment, materials, stock, money in the bank, etc). Then subtract all the debt (credit cards, loans,etc).
Take this number and if you area 50/50 partnership, divide by 2 and that is the net worth of your partners side of the company.
I would not add the remainder of the contracts because that income has not happened yet. You could get cancellations. Also, if you decide to use the remainder of contracts, then you should also subtract the costs involved with finishing the work on those contracts (gas, equipment maintenance, etc)
07-20-2003, 01:51 AM
Excellent answer Dan.
07-20-2003, 11:15 AM
There are so many figgin' ways to value a business it isn't funny. I thought EBAY was way too expensive at $50/share and look at it now.
There are numerous logical ways to value a business. These are the two methods I'm most familiar with.
1.) Book value...the value of the assets. This method gives no value to customers. Customers are precious, so this may not be the right method.
2.) Free Cash Flow multiples. Figure out how much free cash flow the business generates annually and multiply by an agreed upon number. Generally speaking, wall street stocks with moderate growth get 8 to 10 times free cash flow. The higher the growth, the higher the free cash flow multiple. For partnerships like this one, the number is generally a lot lower...around 1 to 2.5 times annual free cash flow. I would also think this number, the Free Cash Flow number, should be figured after paying each of your salaries.
There are literally tons of other ways to value a business. Mulitiples of GAAP earnings are another common method. It isn't science and there is no standard. That's why stocks go up and down all day with no news.
There have been a lot of good friendships ruined over exactly what you two are trying to do right now. Good luck.
07-20-2003, 02:09 PM
I guess I am a little confused by the "free cash flow" How do you come up with this number?
07-20-2003, 05:22 PM
Free cash flow is the amount of cash you gain each quarter after paying all your expenses, which are basically operating expenses, interest expenses and taxes.
Your own salary would be considered an operating expense.
If you and your partner are doing all the work and there are no employees, this may not be the best valuation method, in my opinion.
But the customers and forward looking revenues are worth something. I'd say your business is probably worth something along the lines of assets plus some mulitple of forward looking revenues if you two are doing 100% of the labor with no employees.
07-20-2003, 11:34 PM
Ok what if I throw into the mix the fact that all work from the beginning has been done by me and me alone. His involvement ended after he loaned the company money.
I know after all is said and done the figure on the value will be fairly low. I know he will not be happy with that but for one I have kept things small knowing this buyout would come and also he, by far, does not need the money. Heck his house he just sold went for 250k.
So far any method I use comes up to him doing one of these:eek:
Not to mention he will not get a 50% split of the company value.
This figure will be the only arguement. I think between 1-15% I know he will want more.
thanks for all the help so far
07-20-2003, 11:39 PM
Do you have anything in writing that says what the partnership percentage is? Is this actually a parternship? Are both your names legally on the company?
If so, you will be legally obligated to give him 50% of the company. The question will be, "could you have done everything you did with the company if he did not put up the money?"
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