Net Worth and your own business

[mouschi]

At present, including car, a collectibles collection (sell value), home equity, bank account and investments, I sit at around 230 nw. I am wondering though - how much value would you place on your own home based business? I hadn't thought much about rolling my biz in my net worth. I have brought in just north of 100k in each of the past 3 years after paying my workers and biz expenses. The expenses are very low. Anyway, how would you place a value on this type of a business to determine net worth?

[ERD50]

I've never heard of anyone rolling their annual salary into their net worth, so I wouldn't roll your business income into it either. Income and net worth are two different things.

Now, if you could sell your business when you retire, that will add to your net worth, $ for $. Prior to that, you may be counting chickens before they are hatched, esp if it would be tough for you to make that income outside that business.

-ERD50

[mouschi]

Oh yes sorry - I wasn't talking about income, I was talking about the value of the business itself. I have heard as low as 2 times the annual income and as much as 5 times.

[NW Landlady]

Net worth in a business simplistically is ASSETS less Liabilities. If your business has tangeable Assets, and/or intangeables including Good will such as customer lists & reputation that would be taken into consideration if you sold the business, less your liabilities, that would be the net worth. But if these things don't exist, there is no net worth, for instance a business could very well be a service that makes $$ but does not have much of a sales value, like income from a paper route that is owned by the newspaper distributor.

[v5200]

Is your business "sellable"? Meaning someone other than yourself could buy it and grow it, or at least replicate what you do? Sounds like it is... there are some good books about valuing a business using various valuation methods, such as discounted cash flow, EBIT multiples, etc. A site that you may find interesting is bizbuysell.com, which lists a lot of small businesses for sale.

[mouschi]

Residual is about 32k a year, so that is good. Beyond that, everything comes from word of mouth and such, so someone should be able to step in and take over so to speak. I personally don't do a whole lot of "work" myself I just delegate to my workers.

[youbet]

Quote:

Originally Posted by mouschi how would you place a value on this type of a business to determine net worth?

You ask how to place a value on "this type of business" yet you fail to tell us much about the business. Knowing your recent gross/net isn't enough.

What is there to sell? Real estate? Capital equipment? Inventory? Customer lists/customer loyalty? Intellectual property? Patents? Transferable licenses/permits? Etc.?

Why would a buyer need to pay you for the business rather than start up a similar one him/herself?

There are resources available to help you peg a value to your business, both diy and brokers. It's probably a good idea to have an idea of how you would sell the business (if it does have some value) and what you might expect to receive. Life changes.

I have a close friend who makes a nice income from a small HVAC install and service business. It's him, his DW, 3 service techs, 4 vans and leased office, workshop and storage space. He's been trying to sell and retire for several years and despite the fact that the business generates an attractive income for him and his DW, he's been disappointed that there is little value beyond the vans, tools, shop equipment and inventory. He thought the customer list would be worth $100k's but apparently it's only worth $10k's.

So...... whatdaya got to sell?


Edit: BTW, congrats on building a $100k/yr net home business where employees do most of the work!

[LARS]

I would assume for planning purposes that your home based business is worth basically zero beyond the discounted value of any truly saleable assets. Anything else will likely disappoint...

[ronocnikral]

Quote:

Originally Posted by LARS I would assume for planning purposes that your home based business is worth basically zero beyond the discounted value of any truly saleable assets. Anything else will likely disappoint...

+1. the value of our home based business = $0. even with a fire sale of our tangibles, i still say it is $0 for planning purposes.

[ziggy29]

Quote:

Originally Posted by LARS I would assume for planning purposes that your home based business is worth basically zero beyond the discounted value of any truly saleable assets. Anything else will likely disappoint...

I would agree. I would think that the "value" associated with a home based business (beyond assets that can be liquidated) is probably almost completely in the goodwill established by the individual running the business, in the form of trusted business relationships established which are likely to lead to repeat and word-of-mouth new business.

If that individual "sold" the business or had someone else take it over, that goodwill essentially resets to zero and the new manager probably has to re-establish it.

[Meadbh]

+1. If you are in a service business, which most home businesses are, the only cash valuation is in your equipment (e.g. computer) and any goodwill. If the goodwill is all about the wonderful customer service that you give, whether you are a lawyer or a masseuse, it isn't transferable and can't be assigned a cash valuation. Example: I have a professional corporation, whose value is based entirely on my qualifications, skills, experience and customer service. Other than retained earnings, the valuation would be zero and nobody would purchase such a business. When I'm done with the corporation, I will be converting it to a holding company. If I had an office practice and owned a medical building, that would be an asset of the business. If you own a small factory, or run a printing business in your backyard shed, then you may have capital equipment or a building to value.

[Ronstar]

I'm part owner of a service business and a real estate LLC. For the real estate, I list my share of the tax office valuation in my net worth. For the business, I use $0. I suppose I could use book value or the appraised value, but whats the point until I find a buyer. Then the value will be whatever we agree on. I can add it to my net worth at that time.

[bizlady]

I own 2 home businesses and just had one valued for sale. While demand varies and there are many variables, and assuming your business is not dependent on you for the value (i.e. you are the product somehow) 2-3 times net cashflow is realistic.

[haha]

Quote:

Originally Posted by mouschi At present, including car, a collectibles collection (sell value), home equity, bank account and investments, I sit at around 230 nw. I am wondering though - how much value would you place on your own home based business? I hadn't thought much about rolling my biz in my net worth. I have brought in just north of 100k in each of the past 3 years after paying my workers and biz expenses. The expenses are very low. Anyway, how would you place a value on this type of a business to determine net worth?

There is an active market for real businesses. Essentially, you back out a reasonable salary for yourself as manager (if the business is unincorporated) and either capitalize free cash flow at some magic number that will be a piece of art, or choose another metric. One way is to try to value by sales. Another way is to call a business broker and have him evaluate yours.

If this is just idle speculation, I wouldn't bother. But if you have real value there that someone would pay for, of course it is part of your net worth. If you have built a business that nets you $100,000 per year you undoubtedly know this.

Ha

[haha]

Quote:

Originally Posted by Meadbh +1. If you are in a service business, which most home businesses are, the only cash valuation is in your equipment (e.g. computer) and any goodwill. If the goodwill is all about the wonderful customer service that you give, whether you are a lawyer or a masseuse, it isn't transferable and can't be assigned a cash valuation. Example: I have a professional corporation, whose value is based entirely on my qualifications, skills, experience and customer service.

A lot of medical practices have been bought out at pretty good prices by roll up clinics trying to get a patient flow and referral flow for their hospital or clinic or imaging center or whatever. I think this varies quite a bit from time to time. Dental practices also get bought out, often by a young dentist. Equipment is important, but so are the patients. Some patients will not like the new guy's looks or personality or nationality or whatever, but a fair number have been found to stay. Enough that they do have value.

Ha

[LARS]

Quote:

Originally Posted by bizlady I own 2 home businesses and just had one valued for sale. While demand varies and there are many variables, and assuming your business is not dependent on you for the value (i.e. you are the product somehow) 2-3 times net cashflow is realistic.

You should believe it when you see it.

It's real easy for some business broker to throw out a "value" in the hopes of shopping your business. It is a completely different matter to get a willing buyer to fork over cool hard cash.

Until you actual sell I would be highly suspect of realizing any real value.

[Culture]

I have only worked as an engineer, but having worked for many engineering firms, from the bottom (draftsman) to the top (president), from $200,000 billings per year to $100,000,000, I can tell you that the only way to extract value from an engineering business is to grow your employees into an ownership position where they can buy the company from you. This is a process that has to start at least 10-15 years prior to your selling point, and better to start even sooner than that. Best to have a culture of moving all qualified employees toward ownership. Otherwise, the value of your company is zero. My current business is worth zero, as I work as a consultant and have no professional employees. Even though my profits are 300-400k/year, it is worth nothing. My clients are hiring me personally, and it would be impossible to get them to accept someone else, even if they were perfectly qualified, with less than 5 years to put their face in front of the clients.

I suspect most other small business that sell professional services are similar.

[Meadbh]

Quote:

Originally Posted by haha A lot of medical practices have been bought out at pretty good prices by roll up clinics trying to get a patient flow and referral flow for their hospital or clinic or imaging center or whatever. I think this varies quite a bit from time to time. Dental practices also get bought out, often by a young dentist. Equipment is important, but so are the patients. Some patients will not like the new guy's looks or personality or nationality or whatever, but a fair number have been found to stay. Enough that they do have value. Ha

True.....for private practices in the community.

[nphx]

Quote:

Originally Posted by Culture ..grow your employees into an ownership position where they can buy the company from you. ...

Thanks, so far my best option was to court a customer I supply to for acquisition which may only be a 2-3 year stay on. I would be interested to know at what point do you share your endpoint goal with promising employees.

[Milton]

Quote:

Originally Posted by youbet Why would a buyer need to pay you for the business rather than start up a similar one him/herself?

+1. This is it, in a nutshell.

You likely have some happy customers who have dealt with your business for some time and will likely go on dealing with it no matter who the owner is (provided that the service and prices remain constant). If the name and telephone number remain unchanged, many will be unaware of any sale to someone else. So there may be some goodwill value ... but probably not much.

As LARS suggests, you would be prudent to assume the worst case ($0 value) for planning purposes, rather than being unpleasantly surprised later when if you can't find a buyer prepared to pay what you consider to be a reasonable amount.

P.S. For retirement planning purposes, in the absence of unusual circumstances I also would attribute no value to things such as your car or "collectables". Speaking of which, since you want to retire in 10 years (as indicated in your other post) I encourage you to sell the latter and put the money to work. You have limited capital and can't really afford to have it tied up in trading cards, Beanie Babies, etc.