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9/22/2017 12:11:25 AM
Posted: 1/14/2006 9:41:17 AM EDT
Anyone here have any idea how one goes about valuing a company?

Partners are wanting to buy me out. What are the different methods and formulas that are generally used?

The industry is a service oriented company ~~Engineering ~~Consulting

How do I know if I'm getting screwed?

Link Posted: 1/14/2006 11:46:48 AM EDT
[Last Edit: 1/14/2006 11:47:26 AM EDT by TacticalMan]
There are whole books written about business valuation. Go to the bookstore and look some up.

Generalities:

- Services can be worth little or nothing depending upon who is doing the service.
- 2-4x annual cash flow depending on the business.
Link Posted: 1/15/2006 7:00:34 PM EDT

Originally Posted By BUSHMAN15:
Anyone here have any idea how one goes about valuing a company?

Partners are wanting to buy me out. What are the different methods and formulas that are generally used?

The industry is a service oriented company ~~Engineering ~~Consulting

How do I know if I'm getting screwed?



This needs to be done right the first and only time. If you don't have any good sources to put a valuation on your company, call the nearest university and ask for their business school. Then ask one of their professors for a good referral (that prof may just take it on himself). You'll probably get some great advice and it won't cost as much, although you ought to be willing to pay for something that important, anyway. Good luck!
Link Posted: 1/16/2006 7:11:10 AM EDT
Assuming this is a privately held company, I would definitely consider hiring an attorney.
You may also have a 1st right of refusal, outlined in your articles of organization… but I think your 1st step is hire a forensic CPA, and an attorney.

You will need to have a cash-flow statement, inventory, and a few years audited financials to have the CPA value your stake in the business… and the attorney can help you along the way.
Link Posted: 1/16/2006 7:57:31 AM EDT

This is something I've dealt with many times for small businesses. Basing it on the annual income doesn't work very well for small businesses because the profitability can vary so widely. As an example, we have one manufacturing company and an ISP that make less than 0.25% of their yearly income as profit, but a couple of doctors offices and a CPA (yes, we do billing and books for a CPA, it's more profitable for him to hire us than have to take time out his billable hours) where almost 40% of every dollar that comes in is profit that goes straight to the owners. If the business, like most I've dealt with, is not making a profit, then the partners are usually just better off walking away. About a third of the time I've seen a partner pay money to get the other partner or partners to accept their portion of the ownership (and liabilities) of the company. Even if the company is making a profit, it's still likely that it isn't making enough to justify the partner's time investment. For the small business I'd take the yearly profit and multiply it by between 4 to 8. If the business profit is expected to grow, then pick a number closer to eight. If not, then closer to four. If the business is like most and not making money, then getting rid of the waste of time and liability will be worth it even if you don't make anything from giving-up your portion.

All of this changes if the eventual plan is to sell the company or take the company public. Then even though the company (and thus the partners) is losing money, you can easily make money. Then you have to look at how much money you think your portion will be worth. That's more difficult to do since you don't know what someone else is going to offer.

What it really comes down to is how much do you think they can pay and how much do you think they will pay? All of this talk of putting a value on the company is just talk if they don't have the money to buy you out.z
Link Posted: 1/16/2006 7:58:31 AM EDT
Different formulas for different sectors and verticals.

Can be a multiple of sales. Multiple of earnings...
Link Posted: 1/16/2006 8:05:56 AM EDT
[Last Edit: 1/16/2006 8:08:07 AM EDT by wise_jake]

Originally Posted By Jorge-Arbusto:
Assuming this is a privately held company, I would definitely consider hiring an attorney.
You may also have a 1st right of refusal, outlined in your articles of organization… but I think your 1st step is hire a forensic CPA, and an attorney.

You will need to have a cash-flow statement, inventory, and a few years audited financials to have the CPA value your stake in the business… and the attorney can help you along the way.


+1.

Also, those little non-compete agreements can/should be factored into the overall "value," as well.

Unless it's more of a hostile takeover <edit>and you'd like to get back at the fuckers</edit>, you may not want to bring it up.
Link Posted: 1/16/2006 11:00:13 PM EDT
Yes yes yes.... non-compete, how could I have left that out.
Link Posted: 1/17/2006 7:15:14 AM EDT
How does the Non-compete effect the value of a company?

Is it worth more if there is one in place?
Link Posted: 1/17/2006 7:38:17 AM EDT
[Last Edit: 1/17/2006 7:41:52 AM EDT by wise_jake]
Short answer: It would depend on a whole lot of factors.

For example, your partners buy you out for (just making #s up) $1M. With no non-compete agreement in place, they've essentially just purchased your ALE (assets, liabilities, equity). Or in this case, the remainder of the ALE which they presently "share" (bad word choice) with you.

Anyway, with no non-compete, you can start-up another business and compete directly against them. If you're the best in the business, the only real advantage they have on you is your start-up lag. And, depending on if you "sold" (another bad word choice) them your customer/client list.

If you "sell" them your customer list, you've gotta go out and make all new customers/clients. If not, you can "steal" (yet another bad word choice) your old clients back/away from them. Basically, a customer list is like a "non-compete lite". You can still compete against them, it just has to be with "new" customers. That's worth something, though.

A non-compete is (usually) worth more. All of this is VERY industry-dependent, though. And also on whether this is a "hostile" takeover or not.


ETA: I knew I'd left something unfinished. Keeping with the $1M purchase price for a "standard" buyout, a std buyout + customer list might be worth $1.5M (depending on a lot of factors: size, profit/rev generated by said list, length of time you must "lay off" of these clients, etc). For a "full" non-compete (which usually stipulates you stay out of the industry in the same [geographic] market as your present company operates for a period of 3-5 yrs), this same "portion" of the company might be worth a full $2M.
Link Posted: 1/17/2006 6:58:53 PM EDT
[Last Edit: 1/17/2006 6:59:15 PM EDT by Hartmann]
Long(er) answer: Read this book it is an excellent book on corporate valuation -- was part of a course I had in B-school.
Link Posted: 1/17/2006 7:41:52 PM EDT
Guys....all great stuff and worthy of my attention....I'm taking notes on all of it.

Hartmann....looks like a great book....a little steep at $50 I need to see if the library has that one.

Thanks for all the great advise....it is a hostile take over as far as I'm concerned and all done in my absense while on medical leave for back surgery, (I'm still suffering left leg disfunction from damaged nerves)

These guys has thrown me out on the street and locked me out of the office and I couldn't get another job if I had to right now....I'm really screwed.

They just sent a written offer to buy me out. It goes like this: last years reveues, minus my 2005 salary, minus 1/3 debt. No mention of assets, multipliers, fixtures, equipment, owned vehicles etc.

I don't get what is up with the less salary paid B.S. ?????? I have not seem that one in any valuation models.
Link Posted: 1/17/2006 8:41:21 PM EDT
Wow. That sounds like a fucked deal.

Your initial post didn't have any elements of "hostile takeover" in it, but I always ask, just to be sure. That said, how much is "revenge" worth to you? (Hint: If it is important at all, first define "revenge," for you, and don't deviate from that.*)

If you want revenge, and you /can/ compete [successfully] against them, DON'T sell your customer list or sign any type of non-compete. But, since you suggested that you can't (or at least can't right now), selling your customer/client list, and/or a non-compete will buy you time and money (or, money^2, since time=money). The trick is to figure out how long you'll be out of the game, medically, and make it for that term. Broken back? Two years in rehab before you're presentable? Looks like a 2-yr non-compete to me. Make it as specific as possible; if an element (a material element) is broken, you're that much closer to being released from it.

Finally, since your livelihood IS in jeapordy, stop listening to people on the intarweb and get yourself a good lawyer (if at all possible, one who specialized in this stuff; even if only to "spoil the pot" and prevent your partners' ability to use him/her). Yes, he'll/she'll be more expensive than that $50 book that you referred to as "a little steep," but should provide an extraordinary ROI in the long run.

These are just things to run by your atty. Depending on the specifics of your industry, situation, and the laws of your state, these ideas may or may not be worth a damn.


* IOW, revenge is usually/often expensive, but mission creep is often exponentially more so.
Link Posted: 1/17/2006 8:50:28 PM EDT
forgot to add: you do the math on their offer. is "last years revenues" a whole, whole lot? was your '05 salary a lot? how much is 1/3 debt? *what* debt are they talking about (annual, total firm, etc)? depending on the #s assigned to these figures/variables, are then gonna end up paying you anything to take a hike? are you gonna end up paying them?

btw, you *have* seen that in at least one valuation model......... theirs. if you go with it, it is then a "valid" model.

get a lawyer; these boys/gals are trying to fuck you. unless this was only a hobby to you, and principle counts for little/nothing here, you can't afford not to. how many yrs, how many hrs, missed birthdays, etc, have you put into this (in most valuation models, they mean nothing, since they're sunk costs, but they do/did have an opportunity cost to/for you and your family, so at least *think* about these things).

stay involved in the process w/ your lawyer/consultant/etc, to try and learn the ropes as best you can, but let the pros take care of this. this is not a situation where you want to be playing for keeps AND learning as you go.
Link Posted: 1/20/2006 10:33:10 AM EDT
What wise-jake said.

I had no idea about your situation. Forget the book I recommended, you need a solid pro -- lawyer with Inv. banker contacts or experience -- on your side.

Best of luck w/it, let us know how it turns out.
Link Posted: 1/20/2006 10:50:30 AM EDT
[Last Edit: 1/20/2006 10:50:47 AM EDT by Jorge-Arbusto]
KILL!!!
Not literally, of course...
Link Posted: 1/20/2006 11:01:23 AM EDT

Originally Posted By BUSHMAN15:
How does the Non-compete effect the value of a company?

Is it worth more if there is one in place?



Of course it does. The remaining partners don't want to buy out the poster and then have him set up shop across the street drawing their customer/clients away. If they have a noncompete in place it lessens the risk of competition and makes it much more likely that they will have a secure future income stream. Future income stream is one of the better ways to value a service type company.
Link Posted: 1/20/2006 11:03:37 AM EDT
I don't think a week has gone by in the last 5 years when I haven't done a valuation or two.

I'm happy to help here if you like.

IM me and I'll be happy to set up a call and do a quick valuation gratis.
Link Posted: 1/20/2006 1:22:24 PM EDT
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When this man offers help, you should probably take it.
Link Posted: 1/20/2006 4:12:27 PM EDT
Thanks guys for all the help and advice. I have a lawyer....but he has advised that I seek CPA type help or an accountant for assistance in valuation.

I'm not looking for anything that will stand up in court or anything just something to help me know if I'm indeed getting what I've worked very hard for the past 6 years.

They have locked me out of the office and ceased paying my salary. All while still on medical leave....not sure how that works, but I know most places, you have to be pretty careful about just firing someone.

I don't think I'm eligible for UC etiher.

Austrian...you have an IM waiting. Thanks much for the offer....that's most kind of you. I look forward to speaking with you on this matter.
Link Posted: 1/20/2006 4:25:59 PM EDT
I heard from another party today that there are several ways of looking at this.

1. Liquidation

2. Earnings Multiplier EPITDA then times 4-7 multiplier The company has seen steady growth of 8-12 % each year.....so close to a 6-7 multiplier maybe.

3. Normalized Earnings

4. Hybrid Method Book value X 40 % weight X 2.9 multiplier + total business value.

None of these methods seem to take into consideration the Assets, Real Estate, Vehicles, Equipment, Fixtures, Etc.

What about accounts receivables, Cash in bank, client lists etc.

Does any of this make sense if the others cannot pay what I want?????



Link Posted: 1/21/2006 6:18:44 AM EDT
[Last Edit: 1/21/2006 6:30:22 AM EDT by wise_jake]

Originally Posted By BUSHMAN15:
Thanks guys for all the help and advice. I have a lawyer....but he has advised that I seek CPA type help or an accountant for assistance in valuation.

I'm not looking for anything that will stand up in court or anything just something to help me know if I'm indeed getting what I've worked very hard for the past 6 years.

They have locked me out of the office and ceased paying my salary. All while still on medical leave....not sure how that works, but I know most places, you have to be pretty careful about just firing someone.

I don't think I'm eligible for UC etiher.

Austrian...you have an IM waiting. Thanks much for the offer....that's most kind of you. I look forward to speaking with you on this matter.


They may have also broken some laws right there............

Not to mention the locking you out of your office stuff. That's OK to do if you're a "normal" employee and they've fired you (after dotting all 'i's and crossing all 't's, of course), but not when you're also one of the owners. I'm not sure what laws apply there, but in many states, if you buy land surrounded on all sides by someone else's land, they cannot prevent you access, even if you have to go through someone else's land to get to it.

The same underlying principle that ratchets your "right to be there" up enough to overlook what would otherwise be trespassing as a technicality should also bar them from denying you ingress/egress to "your" property (even though the 3/4/howevermany of you own it, some of the sticks in the bundle are still yours). Ask your lawyer about this: he/she *should* know the ins and outs of this in your state.


ETA: Some of that may actually be "evidence" of wrongdoing on their part, if this were ever to go to court. They knew or should have known that what they were doing was wrong. Also, what were they doing in there while you were locked out? Shredding documents? Tinkering with the books? Without you being able to be there, the world'll never know.
Link Posted: 1/21/2006 10:15:21 AM EDT
Wise....my point exactly....I have no idea what they have been doing. The Corporate bi-laws could have been altered. They could have (and I suspect they have) delayed job orders and work to show a loss for the end of the year. They have been out talking to all my clients and securing them fo rthemselves etc.

It really is bad what they have done and how they have gone about doing it.

All for the sake of doubling their own salaries....greed will be their undoing in the end.
Link Posted: 1/22/2006 12:12:13 AM EDT
Please keep us updated as much as possible. I/we will understand if you can't (i.e. following instruction of counsel).
Link Posted: 1/24/2006 2:02:08 PM EDT
Just a quick update. I have been in contact with "Austrian" and he has been a super help. I can't say enough about this guy....very smart and so generous with his time.

A great big "Thanks a million" goes out to Austrian !!!! This is a great community and it's wonderful how we all help take care of each other.

I have a much better understanding of the process now and a firm grip how to counter their initial buy out offer. And Austrian confirmed my suspisions......I was getting screwed.

Hope to have this finalized real soon and move on with life.

Thanks to all....for the input and support
Link Posted: 1/24/2006 4:27:33 PM EDT

None of these methods seem to take into consideration the Assets, Real Estate, Vehicles, Equipment, Fixtures, Etc. What about accounts receivables, Cash in bank, client lists etc.


Well it sounds like Austrian probably has the answers you need, but in answer to this question, the Liquidation method accounts for all of the above. Thing is, one would expect/hope that your future income streams are more valuable than simply what you have at the moment (that would be the EBITDA mulitplier, etc scenarios).

Take care and please keep us informed. Best of luck.
Link Posted: 1/24/2006 7:41:50 PM EDT
Thanks for the update, Bushman, and thanks for again helping fellow arfcommers, Austrian!
Link Posted: 2/6/2006 12:00:16 AM EDT
Discounted Cash Flow... Take the present Value of all future cash flows......

thats how its done... Also you will need to have a WACC (Weighted Average Cost of Capital) pretty much a rate to discount all future cash flows by.
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