Need assistance on business valuation

From the rest of your post it sounds like the site requires little work, correct? 15X sound reasonable if there's little downside. But the unknows here: What makes the site unique? If I visited, what's to stop me from creating something similar? On the other side, can the buyer put in some effort and 'double' the income? If the stream is steady but flat, 15X looks about right.

JOE

From what I've heard recently, a business valuation can be had for a few thousand bucks, so that's one alternative. They'll walk through different approaches based on revenues, assets, and earnings, and you can back-of-envelope something similar.

15X revenue in a business with .1X as expenses is, in effect, selling it at 16.7 times earnings. You think expenses could be reduced, but even assuming zero costs the highest multiple they'd be paying is 15X. And that would be with zero labor costs which isn't realistic. So that's one way of looking at it, someone is buying your stock at 15X earnings, maybe more like 18X earnings if some labor costs are factored in.

You might stop the analysis there and simply weigh the alternatives. You can get a lump sum, call it $100k, and invest it; alternatively you can keep getting 100k/15 annually. Which is worth more to you? Not-selling is in effect continuing to hold a single stock with a current P/E of 15, or a bond that pays you 6.67% currently (or a stock with that as a dividend). Can you do better than that investing elsewhere? What's the value to you of unloading this business when you have a chance?

It all hinges on earnings growth of course. If it truly has an equal chance of being higher or lower then your median assumption is zero growth and that 15X sounds like a decent multiple. In finance that's called a "perpetuity" and the value is the annual payment divided by a discount rate. Or put more simply, at this price it's that

6.67%-yielding stock and the question is, can you do better than that investing elsewhere? And...do you expect earnings growth?

The taxation will depend in part on how the business is structured and what your basis in it is. This could conceivably be 100% capital gain but that's a question for your CPA.

Yes, this kind of transaction is typically done through an attorney. Perhaps negotiated or found through a business broker but ultimately you'll need a contract of sale drafted, with someone there to represent your interests and perhaps offer suggestions on minimizing taxes.

-Tad

yes.

good domain name, lots of participants and hard to reproduce software.

they could hire a bunch of Indians and easily double the content, I do not think that it would doubt the page views, but it could increase them 40% or so.

i

Tad, thank you. I do not place much trust in these business valuation services, they probably just produce a lot of sophisticated looking paperwork with charts and graphs and that's all. My CPA says that it is going to be a capital gain.

Very good thoughts on P/E of single stock, indeed you are 100% right on target with your numbers, here.

i

Until recently, my company was in the business of buying small tech firms. A price of 2x revenue was considered a lot. With no growth expected on your part and an offer of 15x revenue, it sounds like a winner (for you) to me. Of course, there's very little detail here.

My company handles negotiations directly with the seller, but a lawyer is not a bad idea.

-Will

A revenue multiplier is not exactly a great metric of company value when we do not consider expenses. A company whose expenses are 80% of revenue is worth a lot less (in terms of a revenue multiplier) than a business whose expenses are less than 15% of revenue.

Agreed on the lawyer issue.

i

I absolutely agree. As Tad pointed out, it sounds like you were offered 16.7x earnings, a ratio that many would consider fair value. But, we buy tech companies, and given their high profit margins, we concentrate on revenues as the major selling point. On the other hand, we would never consider buying a company based on one or two metrics, but this is all the info you provided.

-Will

A price of 16.7 times earnings could be fair or not depending on the earnings growth assumption. If you assume an average earnings growth rate of 6 percent during the next 10-yr period, then you got a fair price for your business. If the earnings growth rate is higher (lower) then you are under (over) paid for your business. You may find this online calculator pretty helpful:

Jose, thanks, though I have no reason to make any assumption about future growth rate. It is highly variable and there is no crystal ball to say that my earnings would grow by some percentage every year. Next year I may earn 30% more or 60% less than I earned last year.

i

What was the average historical rate of growth of earnings? And the growth rate during the last year? It is very difficult to make an assumption if earnings are very volatile, but past history may give a guess about future developments.

there is not much history, as I only switched to adsense in 2004. last year was about 80% above previous, this year (2007) is not clear at this point, I am not expecting any miracles.

i