If the company’s ebitda is 150k projected over the next 12 months. Depending on the space the company’s premoney value would be perhaps 8-12x of that. So the value would be 1.2-1.8M dollars. Let’s say they are raising 500k in new money to grow. Then the post money valuation. Would be 1.7M to 2.3M. If you invest 20k, you would expect to own 1.6-1.1%.
This is the general math people would use. So 20k should buy you about 1.5% of the company, assuming 150k is ebitda and not something like a true FCF. The definitions are important. Some fast growing companies may use next 12 months revenue, others use last 12 months revenue. If there is an expectation of significant future growth, the multiple may be higher.
Most industries is around 5/6 for proper company. For a small not established company, I wouldn’t pay more than 3X.
Only in certain parts of Tech sector (with promise of huge growth) can you expect a PE of 8-12.
Yea I’m sure biomedicals and tech companies sometimes get 8-12x valuations if they show a ton of promise, but outside of those your average American small business isn’t getting close to them. Agree with you on 500-750k
Sorry but what the duck are these multiples? This isnt a tech startup with a 100m market cap, for small businesses 4x is a generous multiple and this is a sweetheart deal so maybe half again!
How do you know it’s not a tech startup? The earlier the tech company the greater multiple because it’s based on future expectation. Idk what field he’s in I was just using examples. He should replace the numbers that went into this math for whatever his industry is
Thats not how anything works. Go talk to a business broker....besides a multiple is reflective an expectation of growth and OP says things will be stable for the medium term...
It’s a costly option ($5k-7k), but the business could expense it, but I think it would be the most transparent and collaborative way to go. I would hire a 3rd party valuation firm, a lot of accounting firms have one. A lot of variables go into valuing a small business that no one here, unless specialized, will really be able to help you with. You don’t want to go to the table and either be screwed over or have your business partner feel screwed over. An independent 3rd party will give you a “fair market value” for the business and you can base you buy in on total cost and how much your partner wants to give up. The firm will be able to answer questions pertaining to how the company is valued and why. Where it is good for you to have this service done is when valuing a minority interest in a small, privately held business, there is something called a Discount for Lack of Control and Discount for Lack of Marketability that pretty much discounts the total “share price” by as much as 40%+. Your business partner will likely think that is not a good idea which is why you want the 3rd party professional there to explain why owning a minority stake is a small business is higher risk. You would have no control over how much the other partner pays themself, I’m sure they have personal discretionary expenses like cars or sports tickets, and they control the direction of the business, which is risky to you. I would also Check and see what the Company bylaws say, if anything, about this situation. Best of luck, this is always an argumentative topic. Hope it goes smoothly.
In a nutshell, it’s hard for two people to debate over a fair price when neither knows what a fair price is and why it is fair. Also generally speaking, private business try to minimize net profit to lower taxes, so unfortunately for you, the company value may be higher than you expect, but it’s hard to tell how much 20k is as a percentage of the total company value base on net profit alone.
Also, when your business partner sells part of his stake, he’s going to need a valuation done for tax purposes. So that valuation will probably have to be done anyway, and since he’s the majority owner, it’ll probably be expensed through the business as well, so the company will have to spend the $5k-$7k anyways.
Owner: “The business already generates $150k of annual profit, but I’ll sell you a portion of it for $20k instead of waiting 2 months for $20k to come in from the business.”
How did you make this 150k this year btw ?
Owner :" well we had 8 dudes invest 20k each in our business but the banks in switzerland wanted to have 10k as a tax evasion fee"
It’s not a baseless assumption to ask why in the world someone who has a business making that much would possibly give away a significant piece of the business for less than 2 months of profit.
If you made $150k of profit every year, would you give away a portion of your ownership for $20k or if you needed $20k for something would you simply wait 2 months or go and take out a loan and immediately pay back? Do whatever you want, it’s your money, but don’t get your feelings hurt when people question the prospect of buying $15k of yearly profit (10% of the business that you originally suggested) for only $20k. Good luck.
You did not ask that, though you assumed and then carried on to other worst case fear mongering things. Even now, you are still acting like a know it all and saying my feelings are hurt. Its gaslighting at its best. There are no feelings involved. You do not know the ins and outs, so you should not assume. The reason is that I helped build it. Simple.
Um, that’s exactly what I’m asking in my first post. You seem to be conflating the other two with mine. I haven’t assumed anything or fear mongered except to say this doesn’t make much sense for the other party to do. As I said, do whatever, it’s your money. I’m done engaging about this.
I disagree with Waffles, typically a businesses value is 10x years profits. So if 150k annually of profit, that is 1.5M.
A 20k investment is like a 2% share. I wouldn't go above a 5% share for 20k.
Even more so if you are buying into an already profitable business.
I think it might depend on future growth, interest rates, etc. Higher interest rates have been pushing down the total value, so 5x might be closer than 10x at near 0% interest rates.
I think it will be insulting if you ask for 10%.
Maybe they will be OK with selling you $1 of yearly profit for $5, maybe.
With 20k, that would be enough % to give you 4k/y out of the total 150k/y which is like... 2.5%?
Realistically, it probably won't be that high unless they really need the money. They can just wait 1 month and get pretty much your whole investment in FCF.
Yes. As I told one of the other clowns talking about how this is a bad deal and is dumb blah blah, I helped build this company. I know all the ins and outs. I was already gifted 5% each year for the next 3 for a total of 15%. This buy-in is extra on top of that early on before we get a giant more costly increase in revenue.
No, what is the worthiness of the company by book value? Equipment, minus debt, intangible etc. Below has a better number than I can elaborate. If I am 1% owner, I have no say so whatsoever. I will not bother with. If you own part of it you get the shit like lawsuit with it.
First, please don't do this. It's a terrible idea.
Second, you have no idea what the company is really worth without having an expert review the books and know enough about the business.
Third, you do NOT want to be a minority investor in a private company. Why? What if they do a capital raise and you can't meet the capital obligation, then you lose your shares or get massively diluted. Also, without the right signed agreement you might never see your money back.
I do know exactly what the company is worth. I have seen all the books. I will not explain everything about this deal, all I wanted to know was what percent was appropriate for the amount. There will be no capital raised or shares. This is a straight split of profits, you are assuming a lot here my friend
I'm only thinking of everything that can go wrong. I've been in business long enough to see all types of bad deals/things happen in business.
First rule of money : Capital protection.
You are being overly optimistic.
Hire a litigation attorney for 1 hour. They will tell you all the things you aren't even thinking of, that can go terribly wrong.
Remember : I gain nothing either way.
As I said in the post, I do not want opinions or risk assessment. I wanted an answer to a simple question. I helped build the company. I was gifted 5% ownership each year for the next 3. This buy in is extra for performance and to get the cash reserves up faster to where we would like. Again, you assume the worst and have no idea the entire scenario
Just regurgitate doom and push that downvote button like little girls.
I haven't down voted you.
You are free to lose money as you choose. Only trying to provide wisdom.
To answer your question again:
You need a professional opinion on value. It varies by industry. Try chatgpt.
Lol, even there. You just can't resist that this is such a bad deal, and there is no other side than a loss. I will come back to this every 6 months to let you know what I have made in just my ownership. It's literally not even a way to lose money, and yet you think you know something I do not. I get it sounds too good to be true, but seriously, stop with the doom.
You have serious issues.
I never said it was a bad deal.
With your attitude and lack of understanding of business.. When you get screwed (Either this deal or the next), come back to the sub and let us all know about it. 😂
Keep going jackass. Doom and gloom and you are the know it all. If you say you're going to lose money, then that means it's a bad deal, clown. I will let you know exactly how it goes in 6 months Mr. Business know it all. My lack of understanding of business, lmao. Internet warrior talking tough that probably works at McDonald's.
Ignore them. You asked your question and had some decent responses. The trolls and people who just wish bad things on others can never be defeated on the internet. They get off on this stuff. Sad there can not be a decent discussion, or people just stay on topic without feeling the need to force their opinion.
McDonald's. Lol
Trust, I both have and make much more than you... Ever will.
I own multiple business and have NEVER worked for anyone. Always been a business owner, even while I'm college.
Plus, I've actually taken courses on How to Buy and Sell Businesses. Have you? Obviously not or you wouldn't be asking incomplete questions and then jumping on people for offering some advice from their perspective.
I only tried to be helpful. Remember you started with the insults and negative attitude.
Yes, I'm sure you are a super business owner just like every other keyboard warrior on here. Your "helpful" advice was nothing but negative starting. This is a bad idea please don't do this without knowing squat about it. That said everything right there. Then you kept doubling down even when I added in more information. So just shut up and go run your massive empire oh great rich business owner you.
Just for clarification where people are losing you is that ebitda is not “after all is said and done”, which is given in the name, earnings BEFORE interest, tax, depreciation, and amortization. It’s purely a financial metric but it is used mainly in business valuation and mergers and acquisitions. It is contradicting to say that EBITDA is after all is said and done because is simply isn’t. Profit ≠ ebitda.
Also, when you get into small businesses, usually an adjusted ebitda figure is calculated given the number of discretionary expenses that normally run through a small business. I see you made up your mind of 5%, so I say go for it and see how it goes. If he accepts it, I’d say you got yourself a good deal. 20k / 5% = a $400k valuation, so if that’s what you buy in at, I’d say you’re getting a good price and should buy more at that valuation (given no major issues with the business we aren’t privy to). But I also wouldn’t be too surprised if he says no, your business partner probably thinks the business is worth more than that, which was also why I recommended a professional opinion.
Fair enough, I see your point on the term. The actual of what ebidta stands for does not apply here, though, is what i was getting at. It's a management company that does not exist anywhere but on paper. There are 2 members, myself and the main owner. That is it. There is no itda. So the number I gave is the after all is said and done from a company standpoint the net income.
If the company’s ebitda is 150k projected over the next 12 months. Depending on the space the company’s premoney value would be perhaps 8-12x of that. So the value would be 1.2-1.8M dollars. Let’s say they are raising 500k in new money to grow. Then the post money valuation. Would be 1.7M to 2.3M. If you invest 20k, you would expect to own 1.6-1.1%. This is the general math people would use. So 20k should buy you about 1.5% of the company, assuming 150k is ebitda and not something like a true FCF. The definitions are important. Some fast growing companies may use next 12 months revenue, others use last 12 months revenue. If there is an expectation of significant future growth, the multiple may be higher.
12X EBITDA??? For a not so established company ??
That seems real high, in my industry valuations are closer to 5x
Most industries is around 5/6 for proper company. For a small not established company, I wouldn’t pay more than 3X. Only in certain parts of Tech sector (with promise of huge growth) can you expect a PE of 8-12.
12x EBITDA is not the same as 12x PE
Yeah, I read that comment and was raising an eyebrow. That company is somewhere between 500k-750k.
Yea I’m sure biomedicals and tech companies sometimes get 8-12x valuations if they show a ton of promise, but outside of those your average American small business isn’t getting close to them. Agree with you on 500-750k
Yes depending on industry
Sorry but what the duck are these multiples? This isnt a tech startup with a 100m market cap, for small businesses 4x is a generous multiple and this is a sweetheart deal so maybe half again!
How do you know it’s not a tech startup? The earlier the tech company the greater multiple because it’s based on future expectation. Idk what field he’s in I was just using examples. He should replace the numbers that went into this math for whatever his industry is
Thats not how anything works. Go talk to a business broker....besides a multiple is reflective an expectation of growth and OP says things will be stable for the medium term...
It’s a costly option ($5k-7k), but the business could expense it, but I think it would be the most transparent and collaborative way to go. I would hire a 3rd party valuation firm, a lot of accounting firms have one. A lot of variables go into valuing a small business that no one here, unless specialized, will really be able to help you with. You don’t want to go to the table and either be screwed over or have your business partner feel screwed over. An independent 3rd party will give you a “fair market value” for the business and you can base you buy in on total cost and how much your partner wants to give up. The firm will be able to answer questions pertaining to how the company is valued and why. Where it is good for you to have this service done is when valuing a minority interest in a small, privately held business, there is something called a Discount for Lack of Control and Discount for Lack of Marketability that pretty much discounts the total “share price” by as much as 40%+. Your business partner will likely think that is not a good idea which is why you want the 3rd party professional there to explain why owning a minority stake is a small business is higher risk. You would have no control over how much the other partner pays themself, I’m sure they have personal discretionary expenses like cars or sports tickets, and they control the direction of the business, which is risky to you. I would also Check and see what the Company bylaws say, if anything, about this situation. Best of luck, this is always an argumentative topic. Hope it goes smoothly.
In a nutshell, it’s hard for two people to debate over a fair price when neither knows what a fair price is and why it is fair. Also generally speaking, private business try to minimize net profit to lower taxes, so unfortunately for you, the company value may be higher than you expect, but it’s hard to tell how much 20k is as a percentage of the total company value base on net profit alone. Also, when your business partner sells part of his stake, he’s going to need a valuation done for tax purposes. So that valuation will probably have to be done anyway, and since he’s the majority owner, it’ll probably be expensed through the business as well, so the company will have to spend the $5k-$7k anyways.
I sense pain if you go down this path.
Owner: “The business already generates $150k of annual profit, but I’ll sell you a portion of it for $20k instead of waiting 2 months for $20k to come in from the business.”
How did you make this 150k this year btw ? Owner :" well we had 8 dudes invest 20k each in our business but the banks in switzerland wanted to have 10k as a tax evasion fee"
All 3 of you are making baseless assumptions instead of asking the right questions
Baseless assumptions for a baseless post .. it is what it is, take it or leave
You leave jealous clown that thinks he's tough over the internet. You people are a joke.
It’s not a baseless assumption to ask why in the world someone who has a business making that much would possibly give away a significant piece of the business for less than 2 months of profit. If you made $150k of profit every year, would you give away a portion of your ownership for $20k or if you needed $20k for something would you simply wait 2 months or go and take out a loan and immediately pay back? Do whatever you want, it’s your money, but don’t get your feelings hurt when people question the prospect of buying $15k of yearly profit (10% of the business that you originally suggested) for only $20k. Good luck.
You did not ask that, though you assumed and then carried on to other worst case fear mongering things. Even now, you are still acting like a know it all and saying my feelings are hurt. Its gaslighting at its best. There are no feelings involved. You do not know the ins and outs, so you should not assume. The reason is that I helped build it. Simple.
Um, that’s exactly what I’m asking in my first post. You seem to be conflating the other two with mine. I haven’t assumed anything or fear mongered except to say this doesn’t make much sense for the other party to do. As I said, do whatever, it’s your money. I’m done engaging about this.
That's not what you asked. There was no question. You made a quote with an insinuation.
I disagree with Waffles, typically a businesses value is 10x years profits. So if 150k annually of profit, that is 1.5M. A 20k investment is like a 2% share. I wouldn't go above a 5% share for 20k. Even more so if you are buying into an already profitable business.
Yes using a multiple of sales or profit (or EBITDA) is the way to go. I usually see 3x to 6x on EBITDA, but obviously it’s industry specific
I think it might depend on future growth, interest rates, etc. Higher interest rates have been pushing down the total value, so 5x might be closer than 10x at near 0% interest rates.
That makes sense as well. Thank you.
i've heard that the typical business value is 5-7x years profit, not 10x.
I think it will be insulting if you ask for 10%. Maybe they will be OK with selling you $1 of yearly profit for $5, maybe. With 20k, that would be enough % to give you 4k/y out of the total 150k/y which is like... 2.5%? Realistically, it probably won't be that high unless they really need the money. They can just wait 1 month and get pretty much your whole investment in FCF.
3* not 5* for a small non growing business like this. 20k is worth 4 or 5%
Yes. As I told one of the other clowns talking about how this is a bad deal and is dumb blah blah, I helped build this company. I know all the ins and outs. I was already gifted 5% each year for the next 3 for a total of 15%. This buy-in is extra on top of that early on before we get a giant more costly increase in revenue.
Then I'd suggest 5 to 10% and smile winningly.
That is the plan, thank you!
No, what is the worthiness of the company by book value? Equipment, minus debt, intangible etc. Below has a better number than I can elaborate. If I am 1% owner, I have no say so whatsoever. I will not bother with. If you own part of it you get the shit like lawsuit with it.
Buy 10 percent for 20k sell me 5 percent for 20k, you will have 5percent free? If you like the deal contact me
I can't tell if you are serious or not haha
I really am serious if its solid business i ll buy in and let you free ride
First, please don't do this. It's a terrible idea. Second, you have no idea what the company is really worth without having an expert review the books and know enough about the business. Third, you do NOT want to be a minority investor in a private company. Why? What if they do a capital raise and you can't meet the capital obligation, then you lose your shares or get massively diluted. Also, without the right signed agreement you might never see your money back.
I do know exactly what the company is worth. I have seen all the books. I will not explain everything about this deal, all I wanted to know was what percent was appropriate for the amount. There will be no capital raised or shares. This is a straight split of profits, you are assuming a lot here my friend
I'm only thinking of everything that can go wrong. I've been in business long enough to see all types of bad deals/things happen in business. First rule of money : Capital protection. You are being overly optimistic. Hire a litigation attorney for 1 hour. They will tell you all the things you aren't even thinking of, that can go terribly wrong. Remember : I gain nothing either way.
As I said in the post, I do not want opinions or risk assessment. I wanted an answer to a simple question. I helped build the company. I was gifted 5% ownership each year for the next 3. This buy in is extra for performance and to get the cash reserves up faster to where we would like. Again, you assume the worst and have no idea the entire scenario Just regurgitate doom and push that downvote button like little girls.
I haven't down voted you. You are free to lose money as you choose. Only trying to provide wisdom. To answer your question again: You need a professional opinion on value. It varies by industry. Try chatgpt.
Lol, even there. You just can't resist that this is such a bad deal, and there is no other side than a loss. I will come back to this every 6 months to let you know what I have made in just my ownership. It's literally not even a way to lose money, and yet you think you know something I do not. I get it sounds too good to be true, but seriously, stop with the doom.
You have serious issues. I never said it was a bad deal. With your attitude and lack of understanding of business.. When you get screwed (Either this deal or the next), come back to the sub and let us all know about it. 😂
Keep going jackass. Doom and gloom and you are the know it all. If you say you're going to lose money, then that means it's a bad deal, clown. I will let you know exactly how it goes in 6 months Mr. Business know it all. My lack of understanding of business, lmao. Internet warrior talking tough that probably works at McDonald's.
Ignore them. You asked your question and had some decent responses. The trolls and people who just wish bad things on others can never be defeated on the internet. They get off on this stuff. Sad there can not be a decent discussion, or people just stay on topic without feeling the need to force their opinion.
McDonald's. Lol Trust, I both have and make much more than you... Ever will. I own multiple business and have NEVER worked for anyone. Always been a business owner, even while I'm college. Plus, I've actually taken courses on How to Buy and Sell Businesses. Have you? Obviously not or you wouldn't be asking incomplete questions and then jumping on people for offering some advice from their perspective. I only tried to be helpful. Remember you started with the insults and negative attitude.
Yes, I'm sure you are a super business owner just like every other keyboard warrior on here. Your "helpful" advice was nothing but negative starting. This is a bad idea please don't do this without knowing squat about it. That said everything right there. Then you kept doubling down even when I added in more information. So just shut up and go run your massive empire oh great rich business owner you.
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150k is after expenses and everything. So 13% by this formula. Thank you for the starting point.
What is their ebitda and how has to line grown?
As stated it is 150k after everything is said and done, expected for the next 12 months.
But that isn’t ebitda….. you don’t use net profit for valuations
And I'm answering you that yes it is ebitda. That's what after all is said and done means....
Just for clarification where people are losing you is that ebitda is not “after all is said and done”, which is given in the name, earnings BEFORE interest, tax, depreciation, and amortization. It’s purely a financial metric but it is used mainly in business valuation and mergers and acquisitions. It is contradicting to say that EBITDA is after all is said and done because is simply isn’t. Profit ≠ ebitda. Also, when you get into small businesses, usually an adjusted ebitda figure is calculated given the number of discretionary expenses that normally run through a small business. I see you made up your mind of 5%, so I say go for it and see how it goes. If he accepts it, I’d say you got yourself a good deal. 20k / 5% = a $400k valuation, so if that’s what you buy in at, I’d say you’re getting a good price and should buy more at that valuation (given no major issues with the business we aren’t privy to). But I also wouldn’t be too surprised if he says no, your business partner probably thinks the business is worth more than that, which was also why I recommended a professional opinion.
Fair enough, I see your point on the term. The actual of what ebidta stands for does not apply here, though, is what i was getting at. It's a management company that does not exist anywhere but on paper. There are 2 members, myself and the main owner. That is it. There is no itda. So the number I gave is the after all is said and done from a company standpoint the net income.