How would you go about valuing a family business that generates 700K in annual revenue (with unknown profits)?

Question

With family businesses, it is difficult to determine profitability since the expenses include car payments, etc. Can I use traditional valuations methods here (DCF) or do I go with a multiple of revenue?

The business in question is a services business. So imagine15-20 major clients that appear fairly stable. Figure 3-4 employees to run the business. Let's also say I believe I could double revenue in a year (but obviously am keeping that info to myself)

Answer 1

Determining the value of this business requires a thorough analysis and what is called a recast of income.

The recast takes into account these expenses which are deducted for tax purposes, and reduce the value of the business, but that would be available as income (return on investment) for the purchaser.

This situation calls for a qualified business analyst or appraiser that will determine a range of values for the ongoing business operation and not just the assets the business owns. While your disclosure of pertinent facts is limited, probably for confidentiality reasons, this process requires a far more detailed analysis to max out the value of the company for the seller or negotiate the best deal for the buyer.

Good Luck,
Dana B
www.thebarfieldgroup.com

Answer 2

Whenever calculating your profit make sure to give yourself an income. It may be family owned but you should still have set salaries in order to calculate your profit. Only let epxenses strictly related to business be a factor in it. For example you do 20 miles with a car, calculate the mpg of the car, find a median gas price and round up. Once againthe stress is to keep the family and the business seperated, treat it like a job. The only difference here is you can redistribute the money from the business to the family and can call it a "bonus"

Answer 3

Rule of thumb says that a business of this type would be a typical 1.5X of the total revenue. The questions come in with the additional items that you mention. It would also depend on what type of business it is. For example a construction business where new construction is on a decline would go for less. Something that is hot and on the upswing would go higher

Answer 4

You've heard the saying: Lies - damned lies and then statistics. Who says the Royal family only cost 66p per person. Does this take into account the extra policing for every public engagement? Does it take into account the upkeep of the official buildings in which they reside? Does it take into account the official trips abroad which are paid from the privy purse? Charles and Camilla don't get a penny paid directly to them from the Government, but they do get their expenses met when undertaking duties on behalf of her Majesty - but the Duchy of Cornwall and the Duchy of Lancaster provide him with a very tidy sum. If he stepped aside to relinquish the monarchy to William where would that leave Prince Charles and Camilla - financially? Don't think Charles would be able to cope with being stony broke and living off the revenue generated by Gatcombe Park.

Answer 5

I don't really know how to answer your question, but it would seem to me that, say for example these 'car payments' etc. are yours, give youself a paycheque from the family business that reflects those additional expenses and eliminate the problem?

Eric J Warren
http://tinturl.com/yupapd

Answer 6

DCF would be more meaningful. Subtract out the car expenses and other non-business related items that you expect to eliminate. Do the multiples, too, if you have comparables.