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How to Calculate Net Worth of a Company ?

Discussion in 'General Business' started by seoocean, Jul 7, 2008.

  1. #1
    Dear Members,

    I am planning to buy a company, its a proprietory firm and it has a turnover of $ 40 k per year. The turnover to profit ratio is about 10:4 ( $ 16 K profit ). The company has no loans on it. The expenses are the only outflow along with utility payments.


    What should be the Net worth of this Business / company ?

    Please help in case you are a financial wizard or know how this works. If anyone needs any more data to calculate the net worht, kindly let me know.

    Regards,
    Seo Ocean
    SEMrush
     
    seoocean, Jul 7, 2008 IP
    SEMrush
  2. Xabber

    Xabber Active Member

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    #2
    10-15 * profit/month right?

    I did read this somewhere, so I'm not sure if this is true.
     
    Xabber, Jul 7, 2008 IP
  3. Textbroker

    Textbroker Peon

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    #3
    Is there any "goodwill" or existing clients...?
     
    Textbroker, Jul 7, 2008 IP
  4. geester1

    geester1 Well-Known Member

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    #4
    I'd say, that if the profit was $16K per year and no good will, the business would be worth around $32K, however if it has good will, it moves up to $48K.

    I know, I have a UK biz and sold it for 4 x my annual profit because I have a core of clients who would trade with the buyer. If I had no clients to pass on, I was told to expect twice my annual profit.

    Hope the info helps.
     
    geester1, Jul 7, 2008 IP
  5. seoocean

    seoocean Well-Known Member

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    #5
    The company has a lot of goodwill and standing orders and clientele worth $ 60 k Sales for this year - does this change the networth ?

    Seo Ocean
     
    seoocean, Jul 7, 2008 IP
  6. Scoty

    Scoty Active Member

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    #6
    I don't know anything about this but for some reason I always thought 3 times the annual turnover .: $120k
    I would advise going to a lawyer or financial consultant or something (see I know like nothing about it lol)

    From the replies above however I seem to have been somewhere between (being twice as much or 4 times)
     
    Scoty, Jul 7, 2008 IP
  7. mudguts

    mudguts Peon

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    #7
    usual value of a company is 4X annual revenue. - Plus costs associated with included hardware / goods.
    though the stock can be depreciated at 10% / mo with a max low of 30% of value.
    ie. they have a delivery van bought new for $50,000 in Jan '07. it would be worth:
    $50000, jan
    $45000 feb
    $40,500 mar
    $36,450 april
    $32,805 may
    etc. etc until it reaches $15,000

    that's in Canada anyway...

    I'd want to call their existing clients if I was seriously looking into buying it.
     
    mudguts, Jul 7, 2008 IP
  8. xmartel

    xmartel Active Member

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    #8
    What the others have been talking about is what the company is worth to sell.

    What you wanted to know is what is the Net Worth. Annual sales doesn't have anything to do with net worth, that's more along the lines of what the Value is. in other words what you could sell it for.

    To calculate net worth, which I believe is more commonly called book value, you must add up all of the assets, and subtract all of the liabilities.

    For instance: say company X has $500,000 is real estate, $200,000 in hardware, furnishings, and equipment, $20,000 in company vehicles, and $100,000 in cash. The total assets would be $820,000. Now lets say they have $300,000 left on the mortgage, and a $50,000 loan for equipment. The total liabilities would be $350,000. Meaning company X has a net worth of $470,000. That is of course a very basic example.

    But if what you actually wanted to know is what is the value of the company, then it depends. For online businesses the norm I see is about 10 months revenue. Which means a company doing $40k a year is worth approx. $33,333.33.

    If it's an offline company then it's generally worth between 10 and 20 years profit from my experience. Which means that a company doing $16k a year profit is worth $160k-$320k.

    Just remember these are just generalizations and every company and situation is different. Hope this helps.
     
    xmartel, Jul 7, 2008 IP
  9. BusinessCoach

    BusinessCoach Well-Known Member

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    #9
    the4 value of a company varies on industry could be = to annual profit or gross could be up to 20x...depends on the industry

    But you have to look at everything

    What is overhead looking like? What will it look like once the owners leave? What about your expansion capabilities?

    Be sure to look at ALL expenses, like taxes, and organizational, trade and membership fees and subscriptions

    You said no loans, but do they have ANY open lines of credit? waht about closed lines of credit? Anything in collection?

    what type of regulations do they have to follow, is there a chance you may have to make financial adjustments to comply?

    Have they paid taxes every year? properly? anyowed?

    Are there vendors who are still owed money?

    make sure to get insurance (paid for by the seller) against any outstanding liens that are not disclosed.

    Is there inventory? what is its shelf life, how much capital is tied up, is a note coming due

    there are SOOOO many things to look at, don't be fooled by simply looking at the overall income and basic expenses.
     
    BusinessCoach, Jul 7, 2008 IP