How much is a home business worth? I have a friend in Colorado who built a multi-million dollar business from home. He created a grocery-store Mexican food brand, outsourced everything from production to distribution, and handled sales himself, alone, from home. His product line includes 28 individual items. When he sold the company, it was grossing more than $10 million. He cashed out at a “get rich” price and he continues to run the company on contract. From his home.
As home businesses go, this is an extreme example. Most home-based companies are more like mine, a service company. I’m a freelance writer. A number of publishing companies buy my work on a regular basis. My overhead is close to zero. I have few assets – just my computer and the typing table it sits on. All my revenue goes straight to the bottom line. It’s a fine living, but the business provides virtually nothing to sell or pass down to my kids when I’m done with it.
There are two forms of value you can create with a business: revenue production – the cash you live on – and equity. The equity is the value of your business to others, after you settle company loans and obligations. For my friend in Colorado, the greatest value he created was equity. He didn’t take an earth-shattering salary from his business, but when he sold it, the equity was sufficient to make him a wealthy man.
If I have anything left when I’m done with my business, it will be because I saved some of my profits. I can’t sell my business unless I can convince my clients that another writer will be able to deliver equivalent goods at the same price. So if I can teach my kids trade journalism and the ins and outs of global automation systems, I may have something to pass down. More than likely, I will simply sign off with my clients when I retire.
I once owned a magazine. Since a magazine is a brand, I was able to create some equity value. The publication had been in growth mode for a decade when I sold it, so it had “blue sky” value in excess of its ability to produce profit. “Blue sky” value is your ability to convince a potential buyer that the company will keep on growing, and thus, it will be worth more in the long run than it is at the day of sale.
So I was able to realize a decent equity payoff. Except for one problem. The new publisher would have to fulfill unexpired subscriptions. I received $18.95 for a year’s subscription and spent the funds to publish the current issue – much like our government runs social security. Since the new publisher was going to publish and send out the balance of my unfulfilled issues to subscribers, he was relieving me of roughly $1 million in future obligations. Then there’s tax and a few business loans that needed to be tidied up.
I sold my business for $1.5 million and netted about a year’s salary. I could brag and say my business was worth more than a million, but when the dust settled, my take was about $75,000.
Business value is very had to fix. Most local service businesses – most home businesses – are sold on a simple formula. You take the average proceeds from the business and figure a four-year payout based on a year’s profit and a 20 percent down payment. And the company has to be able to pay its owner/operator a living salary. Say you pay yourself $60,000 per year and net an additional $25,000 beyond your salary. Your company is roughly worth $125,000 in your local market. The new owner will put $25,000 down, then pay you $25,000 per year (the profits) for four years while taking the $60,000 per year salary to run the business.
You can get more for a company if there’s a brand product – like a magazine or food product. But with most home businesses, there is little actually equity being produced. At the end of the day, you will probably have little to sell. This means you have to value your business based on its ability to pay you a decent salary.