There’s no “right way” to value a business
But, some standard principles will help you pick the best route
One thing I’ve always loved about “specialists”, is how they typically have a narrow view of the world.
In this case, the main culprit is Business Brokers, primarily because they’re the one valuing businesses.
You go into one of their offices, they’ll look at your numbers, create a “Seller’s EBITDA” and in turn — multiply that number by 3.5x.
From there, they create the “total valuation” number, which does work in some cases.
I personally like these brokers overall, as I know most business owners have no idea what asking price to use, but it’s not always that simple either.
In other scenarios, you need to look at everything as a whole, and the typical “profit multiplier” would hurt you there.
Maybe you have a piece of intellectual property that’s worth millions over the next 10 years, but your current profits are only $100K/year, meaning you’re selling your “$2M” property for $350K.
Doesn’t sound like a fair deal to me, and that’s just one of many examples I could give.
Personally worked on A LOT of Acquisition deals during my day, both as a banker and M&A Consultant, the process is complex because there’s so many different options you can use.
Think that’s why so many brokers like the “simple” route, as anybody can figure it out, but I wanted to take a second and show you more “advanced” logic in the simplest terms possible.
Not saying this will necessarily make you a “Valuation Expert”, but I am saying it’ll help you understand different ways of valuing your business, which takes us to the first step of this process:
Step #1 — Finding your ideal buyer
As with everything in the business world, who you sell to matters.
Some business owners have caught onto this, others are still in the “we’ll sell to anybody mode”, but no matter how you look at it — it’s a pretty important step at this point.
To give you a simple example of what I’m saying, let’s assume you have a free newsletter, one that’s accrued 100K subscribers over the years.
In addition to that, you’re emailing these subscribers every week, which creates a “hot list” of prospects.
Lastly, you continue to get an open rate of over 60%, which is very good in this industry.
With all these numbers in place, you’d think this is a valuable business, but the kicker is how you don’t have any revenue yet.
Why that is, I’m not sure, but we’ll just assume you hate “sales”.
The thought of pitching your newsletter to potential advertisers is weird, you just don’t like it, so from a “profit multiplier” standpoint — the value of your business is $0.
3.5 x $0 won’t get you very far, but that’s not fair, because you clearly have some “assets” that exceed this.
Seeing that, you’d have to take a different route, and to expand this one step further — we’ll assume your newsletter revolves around the “ketogenic diet”.
Maybe you send out free recipes every week, I don’t know, but that’s the gist of our example company’s “background”.
Really all you need to know from a valuation standpoint, and after that, we’d focus on who our ideal buyer is.
For one side of things, you could say:
“Anybody who wants to create a profitable newsletter”
Seeing how all the pieces are in place, they’d need to just start selling ads, creating immediate revenue because of it.
Fair enough, I’ll explain how to see if this is a good market next, but on the other hand we might consider selling to a “ketogenic company” as well.
Maybe we find somebody who sells exogenous ketones, meaning every subscriber on our list is their ideal prospect, providing them with (very) profitable data because of it.
Merely inserting their ads into the newsletter would generate immediate revenue for them, now, and for years to come.
There’s many other angles you can take here, but these two are enough for you to see what I’m saying, and that takes us to:
Step #2 — Creating your valuation
As I mentioned, or at least “hinted” at earlier in this article, there’s no “exact” formula you have to use when valuing a business.
Instead, you simply need to create a number that “makes sense”, and one that’s tailored to your ideal customer specifically.
To provide some context on what I’m saying, let’s look at our “first” ideal customer, which was somebody who’s looking to create a profitable newsletter.
They love the thought of how you already have 100K subscribers ready, allowing them to start “monetizing” it with little work, and the main way they’ll be doing this is by selling advertisements.
Ones that go into the newsletter, looking something like this:
And in that scenario, the main “logic” you’d have to use is by looking at what their future revenues could be.
To accomplish that, you’d do a quick search to find typical “CPM” in this industry, which appears to be around the $10 — $30 CPM mark:
And for example purposes, we’ll meet in the middle at $20.
Seeing that, we’d receive roughly $2K/week, or $8K/month.
Multiplying that by 12, we get $96K/year, which isn’t a terrible setup.
Fair enough, but after that, we’d have to figure out expenses.
Remember, to get a “baseline valuation” with this approach, we’ll have to understand the expected “profit”.
That’s where our multiplier would come in, and we’ll have to assume two main expenses here:
- Creating the newsletter (i.e. owner taking a salary, or hiring somebody to do it)
- Email Marketing Software
For the first cost, $60K/year sounds fair, and for the second cost — we’ll say that’s $1,200/year.
Definitely on the lower end, but it gives us some numbers to work with, meaning our annual expenses are $61,200.
Deducting that from $96K (our annual revenue), we have an annual profit of $34,800.
Not terrible, then when multiplying that by 3.5, we get $121,800 as our “baseline” valuation.
This was calculated by figuring out potential profit, then taking the industry standard of “3.5x multiple”, which is a good place to start.
From there, we’d probably have to discount even further, as the revenues aren’t actually there yet — but we’ll leave this alone for now.
I’m just spelling this out so you can see what I’m saying from a “valuation” standpoint, and let’s see how this might look for our other “ideal buyer”.
As you can recall, this was the owner of a “exogenous ketone” company, somebody who’d be selling to our list directly.
Seeing how they could make A LOT more money with that setup, I already know it’s going to be more valuable, but we also need to put some numbers behind it.
If I was just like:
“We’re charging $500K, because it sounds fair”…
The buyer would have no “logic” to support this reasoning, making it a very hard sale.
To counteract that, we’d need to give some logic, so I’d dig around and find different ways to do this.
Not going to go through every scenario now, as I’m trying to keep this simple, but one of the first ways I’d look at this is by figuring out how much it costs to “rent” an email list.
That’d be a good equivalent to look at, because if they can buy a list and save money as opposed to renting, it’s a very simple “apples-to-apples” comparison.
Knowing this, I did some quick research, and found that companies typically pay $100 CPM — $400 CPM for rented lists.
This happens when they “rent” the contacts, then send them an email, and can only do so once.
Fair enough, we’ll assume the going rate of $200 CPM, which means they’d have to pay $20,000 just to email this list once.
That’s a fair start, and from there, I’d assume how many times this company could “profitably” rent the same list.
Assuming they have something “new” to say, such as:
- Product updates
- New products
- Etc…
It can occur somewhat frequently, but we’ll keep it simple and say 5 times a year.
That alone creates a $100K rent expense, and then annualizing this over 3 years, that’s $300K.
Seeing that, I could use that valuation alone, to justify a “higher rate”.
As I’m sure you can remember, when I did the typical “profit multiplier” approach, the total valuation was only $121,800.
That’s probably a little high as well, as we’d have to discount because revenues haven’t happened yet, but it’s a good starting point.
On the other hand, when we use a “different” style of valuation, showing direct beneficiaries that it’d cost them $300K to rent this over 3 years — we have a more “valuable” starting point.
As opposed to contacting them 15 times over 3 years, they can pay the same price and contact them MUCH more than that.
In addition to this, since they also own a brand they already trust (i.e. newsletter isn’t going to change), then they can get creative and sell from the newsletter itself.
After that, I’d probably provide some “sub-contextualization”, saying:
“That equates to $3 per subscriber, when the current going rate is $5 per subscriber”…
Which in that case, I’d use $5 per subscriber as my valuation instead, but you get the hint either way.
When you find the right buyer, the value instantly increases, and it makes everything a lot easier to “justify” after that.
As somebody who’s done a lot of marketing over the years, I can assure you, it’d be VERY easy for a company to make way over $300K with this type of list.
The only difference between them and “some guy wanting to make money from a newsletter”, is the positioning of your sales pitch.
When you reach out to the guy wanting to buy a newsletter, he sees an asset that can net him $121K over 3 years.
When you reach out to an exogenous ketone company, they see a media platform that can make them millions over 3 years.
Same product, different buyers, creating a much better profit for you because of it.
To recap
Long story short, when it comes to valuing your business, I recommend using “creative logic” over standard formulas.
I know the latter is great for “small minds”, as they don’t understand how to think outside the box, but I also know it’s not always the most profitable exit for you either.
For the most part, the important thing you can do is define who your “ideal buyer” is.
In some cases, this won’t make a huge difference, in other cases — it makes all the difference.
After that, you start seeing everything from their angle, and then begin putting a “rational argument” in place.
When people can see:
“Okay, it’d cost me $300K to rent this list 5 times a year (over 3 years), but I can buy for the same price and make a lot more money”…
It’s hard to refute.
I’d obviously create a much better sales pitch than that, but in simple terms, you should get what I’m saying.
The main goal of valuations isn’t to follow some standard formula, it’s to create a rational logic that’s hard to argue against.
When they can see this, along with understanding how it’s an asset they’ll ROI from, it’s very hard for them to say no after that.
Of course, you need to make sure you’re targeting buyers with money, as no amount of logic can overcome an empty bank account — but that should be obvious.
At the end of the day, this article isn’t going to make you a “valuation expert”, but it will help you see things differently.
Most follow standard formulas as they don’t know any better, but when you use the principles I just taught, a lot of times — it’ll allow you to get more money because of it.
Hope that helps,
-Sean
