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What's Value of Companies Under $100K Net

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SethChild

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Is there an exception to MJ DeMarco's method of valuation of a business asset for very small companies like mine that have revenues under 100K? Our main competitor/counterpart in another city (they appeared on shark tank) said that someone could start up a business and do what we do, and that our income is tied too much to us as people, rather than our business system, so we could not sell based on our assets + net income times our industry multiplier. Thoughts?
 

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CareCPA

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Is there an exception to MJ DeMarco's method of valuation of a business asset for very small companies like mine that have revenues under 100K? Our main competitor/counterpart in another city (they appeared on shark tank) said that someone could start up a business and do what we do, and that our income is tied too much to us as people, rather than our business system, so we could not sell based on our assets + net income times our industry multiplier. Thoughts?
If it's truly built on your reputation as the owners, then it's worth very little.
I can go buy a tax practice, but if the clients really liked the person that's selling, there's zero guarantee they will stay with me. That's why it's common to see an earnout based on client retention.
 

MidwestLandlord

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Is there an exception to MJ DeMarco's method of valuation of a business asset for very small companies like mine that have revenues under 100K? Our main competitor/counterpart in another city (they appeared on shark tank) said that someone could start up a business and do what we do, and that our income is tied too much to us as people, rather than our business system, so we could not sell based on our assets + net income times our industry multiplier. Thoughts?
Just think of it from the buyer's point of view.

They are buying a business because they want an income producing asset.

They are paying for the current net income and the assets that produce it.

So if it's the owners themselves that are the income producing asset, because the clients rely on the owner and not the business, then the business entity itself is worth very little or nothing.

Take CPA's for example...

A CPA "one man show" that does all the work mostly himself has a business that is really not sell-able. He IS the asset that produces income.

A CPA that has multiple bookkeepers and such MIGHT have a sell-able business, to another CPA. But there is big risk to the buyer that the clients will not stay with the firm under new ownership.

A firm that has multiple CPA's, multiple bookkeepers, etc, where the business handles the clients has a sell-able business because it's likely that the clients will stay regardless of who own's it. (assuming they operate it the same way)

That's why building a business where you eventually can work "ON" the business instead of "IN" the business is so important. If the business model will never allow that, then you will likely never meet the fastlane equation of net income + asset value for a sell-out.
 
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SethChild

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Sep 27, 2018
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Thank you. Good reality check. I was getting excited thinking that because we'll hit the 40K net income threshold this year from this business that it is sellable. But I realize that I would/will need to put some automated systems in place before it has much value.
 

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