Someone's offered to buy my company; how to value it?

[1865]

I set up my limited company in 2008 to in order to contract. Contracts lasted about 2 years and since then I've been freelancing. My main client offered me a job about 6 months ago but I politely declined. Now they've told me they want to acquire my company so that they can bring my services in-house allowing them to offer them as an add-on to their clients. They mentioned they want to keep my company brand and website, and for me to director of a new department in their company.

The company is just me, no other employees, with very few assets. I'm an IT specialist in a rather niche area, the market for which is pretty buoyant. They've asked for and I provided them with accounts for the last two financial years, the figures to date for 2013/14 and a forecast for the whole of 2013/14. This year already has outstripped last year in terms on profit, even though we're only 4 months in. How should I create a reasonable valuation of my company so I can negotiate when they offer me a figure at our next meeting? Do I use a profit forecast for 2013/14 using a multiplier of 5? Average profit for last three years? Any other method?

Any advice very gratefully received.

[Sockpuppet]

If there are no assets and very little good will I'd base it on how much do you want them to give you in order for you to work for them. I.e. what signing bonus are you after.

Seems like a lot of hassle. WHy not just close the company and work for them and agree a suitable bonus on starting.

[jmo21]

If there are no assets and very little good will I'd base it on how much do you want them to give you in order for you to work for them. I.e. what signing bonus are you after.

Seems like a lot of hassle. WHy not just close the company and work for them and agree a suitable bonus on starting.

Might be the only way they can pay a large sum by dressing it up as buying a company

[BlasterBates]

If your profit is your income and you earn a minimum salary then really you can't use that as a basis for valuating it, because once you've sold the company you don't get any dividends. You can't live on the minimum salary.

If your company earns 10000 profit (after your salary) then the FTSE average of 14 times earnings would be reasonable 140000. No harm in starting high though. Of course your customer is probably the only interested party so this puts you in a weak position. In the end you decide what the profit is, so set the price at level at which it is worth it to you.

How much is it worth for you to handover 10000 a year, or whatever the profit is for an indefinite period?

[1865]

Many thanks for your replies.

If there are no assets and very little good will I'd base it on how much do you want them to give you in order for you to work for them. I.e. what signing bonus are you after.

Seems like a lot of hassle. WHy not just close the company and work for them and agree a suitable bonus on starting.

Even if I did go for the 'signing bonus' route how would I work out what that should reasonably be?! I don't really want to pick a figure out of the air. What I didn't mention (and should have) is that they want to keep my company name and website as it has quite good brand recognition in the sector we both work in

If your profit is your income and you earn a minimum salary then really you can't use that as a basis for valuating it, because once you've sold the company you don't get any dividends. You can't live on the minimum salary.

If your company earns 10000 profit (after your salary) then the FTSE average of 14 times earnings would be reasonable 140000. No harm in starting high though. Of course your customer is probably the only interested party so this puts you in a weak position. In the end you decide what the profit is, so set the price at level at which it is worth it to you.

How much is it worth for you to handover 10000 a year, or whatever the profit is for an indefinite period?

Good points BlasterBates. Yes, they are the only interested party as far as I know which does give them some strength, but by the same token they approached me not the other way around, and I've already told them I'm pretty happy with my work/life balance at present. If I manage to get 14 times profit I'd be pretty happy!

[Boo]

Even if I did go for the 'signing bonus' route how would I work out what that should reasonably be?! I don't really want to pick a figure out of the air. What I didn't mention (and should have) is that they want to keep my company name and website as it has quite good brand recognition in the sector we both work in

Under the circumstances I would go in with an request for 14 times the company's average annual earnings as posted above. If the client cavils then say it is a discounted price based upon the fact they are offering you a job too and say the figure of 14 is low for the internet / web arena.

Good luck,

Boo

[TestMangler]

Average company profits for a year x 4 to 6 (depending on how good a negotiator you are).

[northernladuk]

Something doesn't sound right here. Why would they want to purchase a company that isn't really a company? I take it they are aware there is only you that comes with it so you are the only asset?

What type of company is your client? Small to medium sized owned by a single entrepreneur type who has a habit of buying smaller companies? If so I would be very nervous about them having a card up their sleeve and turning you over at a later date.

I would be getting some very good legal advice on this if you are going to do it. Sounds like a lot of smoke and mirrors just to get you to work for them IMO.

[jamesbrown]

Have to agree that it sounds odd unless you own the IP on something they want, such as a method or a tool. I can't see a company paying 14 times average earnings as a gesture of goodwill - where's the business sense in that? Either you own something they want or they're presumably talking about a relatively small golden hello as a gesture of goodwill for your personal service in future(?)

[Maslins]

Have to agree that it sounds odd unless you own the IP on something they want, such as a method or a tool. I can't see a company paying 14 times average earnings as a gesture of goodwill - where's the business sense in that? Either you own something they want or they're presumably talking about a relatively small golden hello as a gesture of goodwill for your personal service in future(?)

This...unless they're very naive.

There'd be nothing to stop them paying £Xk for your shares in the company, you then leave it and set up a new company. Why would they offer to buy a company where presumably the only asset is a highly mobile one that's outside their control (ie you)?!