Selling a Non-RE Business

[Nate Crump]

Not RE related, but with so many smart people I wanted to try my luck. I hope this is the most reasonable forum for this.

I was hoping for just some general ideas on selling half of a business, from one 50/50 partner to the other. I'm looking at how to come up with a valuation for what we hope to be a very amicable parting between two very good friends.

I'll use some fake-ish numbers for my privacy, I'm sure the principles will hold true, and maybe you guys can help. I will get professional assistance, but want to take a look and see if this is even something I want to do.

Internet business with website selling a physical product with good margins. Not dropship; we order and store the product in bulk in a warehouse and ship via FedEx. Started in 2011.

2012: Profits were roughly $40k to split by two owners, after reinvesting to triple the amount of product we keep in stock

2013: Profits were roughly $120 to split, but again had to reinvest in order to double product on hand.

2014: Accrued 190k in debt early 2013, paid back in full this month, and no need to grow product in stock even more. Profits based on pretty darn conservative projections look to be $340k to split... with a deal in the works that's 95% done that will lower the cost of our best-selling product tremendously. If finished this month, which it should, would make the $340k more like $380k... more benefit of that deal will be shown in 2015, as the benefit this year won't kick in until August, but we do 50% of our sells in the Spring time.

There is about $150,000 in our cost of inventory in the warehouse, not sure how or if that comes into play when selling a business. No other business assets to speak of.

Is 2 times annual profits about right for this type of business, or something else?

Does the cost of getting this product imported to us come in to play?

Thanks for any help here. Again, I will be getting professional help, but just wanting to see if anyone has a ballpark idea on this.

[Jon Klaus]

I agree with Bill and Frank's comments. However, because of the fast profit growth, it might command a richer valuation? What should this business profit in 2015 and 2016?

To keep alignment between the partners, a portion of the sales price could be an earn out, that is a portion of the profits or revenues for a period after the sale. For example, 1x profit cash at closing, and 50% of profit over the next 3 years.

As Bill says, if this company profits in the $100k's you need professional guidance. I also like a CPA over an attorney, at least to get started.

Another caveat. Most small businesses are sold for a multiple of earnings in the 1x-5x range. However, some have a greater value that may come from a competitive advantage or a fairly certain path to substantial growth. You need to understand valuations for your industry/business. Become an expert. Sounds like the dollar amount is enough to justify serious learning.