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tdlawyer
tdlawyer, Lawyer
Category: Law
Satisfied Customers: 1096
Experience:  11 years experience of general practice.
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How to value a business with a turnover of £19000, one year

Resolved Question:

How to value a business with a turnover of £19000, one year old, 1 employee/director, no assets (just a website), one client (maintained on a contract renewable annually). Medical tourism sector. Huge growth and expansion potential. Thinking of taking on a partner. How to go about taking her on without risk to myself.
Submitted: 3 years ago.
Category: Law
Expert:  tdlawyer replied 3 years ago.
tdlawyer :

Hi thanks for your question. My name is***** should be able to assist with this.

tdlawyer :

Whenever you take somebody else on to run your business (with or without you) there is always some risk.

tdlawyer :

On what terms are you proposing to take on the other person?

tdlawyer :

As half-owner, just as a director etc?

Customer:

She wants to be a partner, she has some skills to offer the business, possibly 50/50, I'm not sure.

Customer:

half owner i think

Customer:

Thank you Tony

tdlawyer :

Okay, so if you do this, then you might want to retain a casting vote on all decisions as if you have deadlock and can't agree what you should do, then you might have to close down the business and start again. This can be avoided by you retaining 51% of the shares, giving you the final say on all important decisions as a shareholder, and if you retain a casting vote on the board, you also get to decide any board issues.

tdlawyer :

So you can get as near as possible to 50*****

tdlawyer :

But you still retain overall control.

Customer:

thats fine

tdlawyer :

It's easy to put in place, although as this is an important business decision for you, I would encourage you to get a siolicitor to sort this out for you. There would be other things you might want you see, such as restrictive covenants if she left the coompany later on.

tdlawyer :

You might always want to put in place things like options to acquire her shares if she left using an agreed formula.

tdlawyer :

So whilst the share side is easy to deal with at Companies House etc., it's the other things which are really important which are not that easy to do yourself.

Customer:

thanks. And valuing the business? How much should she pay me?

Customer:

I have no idea how all of this works

tdlawyer :

Thats a difficult question, as it's really a matter of opinion, depends on the sector and the state of the business. It's really a matter for a business valuation expert, not a solicitor. You should speak to some accountants that are able to do business valuations. You often get valuations at 3x the amount of profit, but it's not always that easy, and you should take professional advice from the right type of advisor, which is an accountant, preferably a chartered accountant with experience of doing this.

Customer:

thanks, ***** ***** have chartered accountants on Just Answer that you could pass me onto?

tdlawyer :

You can post another question in the accountancy category, yes, but I would expect them to tell you the same really, that it really depends on the state of the business, contracts that might be entered into, liabilities etc., and to give you a proper idea of value you're going to have to sit down with soebody for an hour and go through the detail carefully and let them see all your accounts.

Customer:

ok thanks

Customer:

I really wanted a rough valuation from this consult

tdlawyer :

Your rough valuation is likely to be c. 3x the amount of profit for most things.

tdlawyer :

But that is a starting point and rule of thumb only.

Customer:

and does that mean deducting a 'salary' for me? My time? In which case I'd take the whole 19k. there would be no value?

tdlawyer :

If, for example, you'd been earning profit of £100k for thr last 5 years, but were about to enter into a £20m contract that would generate £10m profit, then clearly, £100k wouldlikely be a woefully low valuation!

Customer:

yes

tdlawyer :

YOu normally work things based on the "bot***** *****ne" which takes into account the salaries.

tdlawyer :

But again, you can argue this either way for smaller owner managed businesses because of their very nature.

Customer:

so i would deduct all expenses and salaries an that would be the value, x3?

Customer:

apporx

tdlawyer :

Usually, yes.

tdlawyer :

Some business sectors can demand 5x.

Customer:

ok thank you. So really it would be worthless

tdlawyer :

Especially where there is no risk etc. from the investment.

tdlawyer :

Sounds like you have an interesting business to generate £19k from just a website with no assets or massive liabilities though.

Customer:

its a referral business to an overseas surgeon. Its my secondary business.

Customer:

I get paid by the overseas hospital, after the event, not by the client

tdlawyer :

Ah I see. Well, it does sound veyr interesting. I suppose it can be difficult to value these things unless there is any ready market of them to compare to, but like I mentioned earlier, valuations are all opinion based and I've seen it happen many times where people argue for 2x and the other for 5x. They often meet somewhere nearer the middle, but it can be a painful process to get a decent valuation that everybody agrees with.

Customer:

there would be a slight risk for the potential partner as i suppose she could argue that the hospital could remove the contract at any time. I dont think they would though as I have made them £200000 in a year

tdlawyer :

Yes, okay, and that has to be factored into the equation somehow.

tdlawyer :

Obviously a spot contract or one terminable without notice for any reason might be worth less that one into which the parties were legally tied for a longer period. But, again, the background is important as is the risk of termination arising.

Customer:

yes. I also need to think about how to have a run in period

tdlawyer :

Yes, valuation is only one aspect (and important one, I grant you), but so are the mechanics of what you put in place and how it will work.

Customer:

yes.

tdlawyer :

You should see an accountant and solicitor - but I hope this gives you a useful insight?

Customer:

yes thank you

tdlawyer :

Great. Can I ask if you're happy with the service this afternoon please?

Customer:

I think I'd be lucky to get any payment from her at all really. So if i take her on, it would have to be for other reasons eg saving me time

tdlawyer :

Yes, then maybe a salary is more appropriate? It's a decision for you - but there is a lot to consider here.

Customer:

i didnt really want to get into employing people, it gets complicated then. At the mo its really simple.

tdlawyer :

Yes, those are the decisions you have to grapple with - there are always pros and cons, but it's the task of weighing them sometimes that seems the hardest part!

Customer:

thank you

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