How to value a business?

[Pilchard_Adams]

Hi guys. For the past 8 years I have put a lot of effort into building an internet based retail business from scratch, and am now interested in selling it. But I have no idea how to value it... After reading a few websites I am left with more confusion. Does anyone here know how to value an online based retail business?

So, the outline of my business is basic retail using eBay. I buy DVDs from Australias 2 largest DVD distributors (same ones Kmart, BigW etc use) then sell them for profit on eBay. I sell all over the world from my own home. Basically I order stock, list stock on eBay, stock sells, post to customer.

Some rough figures are:
current stock cost price: $45,000
current stock sell price: $110,000
DVD shelving: $4000
Postage and office supplies: $1000
Current turn over is roughly $60,000 a year
Current profit is roughly $20,000 a year

Would also come ready to go with 1140 currently active eBay listings, so would earn money from the day of purchase. There is stock ready to be advertised (another 200 listings), and I would hand over the business eBay account that has over 15,000 positive feedback ratings at 99.9% positive, powerseller status, and high ranking ratings which is all great for customer confidence.

I have previously earned over 30k a year from this with less stock available, but scaled it back when I started a full time job too. Now, after 3 years of running the business AND working 42 hours a week, I am tired and want to have a break from working so hard. Ive lost motivation and interest.

The business would be capable of earning $35,000 a year once all stock is advertised internationally (only about 15% is currently advertised internationally). Then, it would be possible to expand into gumtree, and amazon markets to increase sales.

Little to no training is required as eBay is a very easy platform to use, and I have worked an average of 2-2.5 hours a day 5 days a week to maintain this business.

Any rough help much appreciated.

 

[Fyfe7]

There are quite a few ways to value any business.
Some of the common ones include: NPV of future cashflows, Price to earning ratio (P/E ratio), comparable transactions comparison

The latter are mainly only useful with business's that are publically traded and have a large amount of similar options to be compare to.

In your case the NPV of future cashflows is the best option. Basically looks at the cost of purchasing/setting up the business and then discounts the future profits at a rate of return that is fair for the business owner. If you do this and vary the purchase price of the business until you get a NPV of 0 at a discount rate of between 12-15% you will get fair value for your business.

I ran a quick a dirty case for ten years of future cashflows at both the current profit margin and the potential number you quoted (all assumed to be after tax?), also assumed a $25/hr labour cost for the time you quoted (double time for high case);

Case Low High
NPV12 $150k $210k
NPV15 $130k $190k

Given that you have approx $50k of hard assets to sell with the business as well as the goodwill/reputation I could see you getting a number in the range of what is presented above.
The advantage you have is that you have a high profit margin business (33%) and a high return on capital (~66%) so this would be attractive to people who don't have a lot of capital available.
Might be hard to find a buyer though as you have a large amount of stock on hand (approx 2 years worth at current sales) and the potential upside is a bit hard to demonstrate.

Could I suggest that you think about taking on a part time employee to run the business and try to realise the growth you are suggesting before the sale? Maybe even look for someone who will work for minimum wage until the difference between that wage and a fair wage pays for the business so they can own it outright over a period of time?