How do I sell a business with no assets but a good revenue stream?
July 23, 2014 12:44 PM Subscribe
The problem in a nutshell: I am the sole owner of a S-corp consulting practice with one very large, very happy client. My company has grown a lot and, to handle the workload better, I've brought on some subcontractors who essentially do the same thing I do. Now I'd like to "sell" the book of business to one of my subcontractors, but I have no idea what sort of financial arrangement makes sense.
At present, I handle all the billing, manage the client relationships, and so forth. This is a very high margin business (~90% profit) because what we have to sell is our time and expertise. For work done by my subcontractors, I keep 15% and pay them the remaining 85% of the revenue they generate. Everyone is happy with this arrangement and it could conceivably continue like this far into the future.
In the next year or so, though, I'd like to retire and turn over my role to one of my subcontractors. We've agreed to this in principle, yet neither of us know what that would look like in practice, either financially or legally. And so I turn to Metafilter for ideas, suggestions, anecdotes, and anything else you can offer to help me figure out a way through this.
Other, possibly relevant, facts: The client is well aware of my desire to retire and wholeheartedly supports my passing the business on to someone they also know and trust (i.e., one of my subcontractors). The chance of losing the client to a competitor during the transition is essentially nil, especially since I won't turn it over until everything is humming along smoothly and the client is as comfortable with my subcontractor as they are with me. There is considerable trust between my subcontractor and me, but we live about 1000 miles apart. While I've developed a process that suits the client, I don't consider it to be intellectual property with a value of its own. The only value involved here is the great relationship, and promise of continued business, with the client.
At present, I handle all the billing, manage the client relationships, and so forth. This is a very high margin business (~90% profit) because what we have to sell is our time and expertise. For work done by my subcontractors, I keep 15% and pay them the remaining 85% of the revenue they generate. Everyone is happy with this arrangement and it could conceivably continue like this far into the future.
In the next year or so, though, I'd like to retire and turn over my role to one of my subcontractors. We've agreed to this in principle, yet neither of us know what that would look like in practice, either financially or legally. And so I turn to Metafilter for ideas, suggestions, anecdotes, and anything else you can offer to help me figure out a way through this.
Other, possibly relevant, facts: The client is well aware of my desire to retire and wholeheartedly supports my passing the business on to someone they also know and trust (i.e., one of my subcontractors). The chance of losing the client to a competitor during the transition is essentially nil, especially since I won't turn it over until everything is humming along smoothly and the client is as comfortable with my subcontractor as they are with me. There is considerable trust between my subcontractor and me, but we live about 1000 miles apart. While I've developed a process that suits the client, I don't consider it to be intellectual property with a value of its own. The only value involved here is the great relationship, and promise of continued business, with the client.
My gut is to say this should be a percentage of billables for between 2 and 5 years.
posted by 724A at 12:52 PM on July 23, 2014
posted by 724A at 12:52 PM on July 23, 2014
I recently sold a "Free" Walking Tour which I had been operating on my own for just over 3 years. As in your case there were no physical assets just the tours' reputation on TripAdvisor and similar sites, along with a high Google ranking for the main relevant search terms. The business had virtually zero in overheads and whatever was tipped, was yours.
Once I knew somebody was potentially interested in buying the tour I asked around a lot and sopke to a lot of people and eventually came up with the figure of 6 months turnover (which in my case was essentially profit). The buyer, who was also a friend, agreed and the deal was done.
Both of us were happy with the deal, but I think 6 months would be a minimum and you could maybe justify anything up to 12 months without too much problem.
posted by jontyjago at 1:25 PM on July 23, 2014 [2 favorites]
Once I knew somebody was potentially interested in buying the tour I asked around a lot and sopke to a lot of people and eventually came up with the figure of 6 months turnover (which in my case was essentially profit). The buyer, who was also a friend, agreed and the deal was done.
Both of us were happy with the deal, but I think 6 months would be a minimum and you could maybe justify anything up to 12 months without too much problem.
posted by jontyjago at 1:25 PM on July 23, 2014 [2 favorites]
Assuming sales = the 15% you retain, the business is worth way more than 1x annual sales.
posted by JPD at 1:36 PM on July 23, 2014
posted by JPD at 1:36 PM on July 23, 2014
multiple of profit. There is an asset - the intangible of the relationship with the client. The profit you generate is the return on that asset. So figure out a multiple of profit that seems fair to both of you and run with it.
Good advice. If I'm your buyer, I'm going to be interested in paying that multiple for a finite period of time. Additional options:
1. Paying fixed multiple every year for agreed upon period.
2. Paying higher multiple in Year One, declining over agreed upon period to lower multiple in Final Year. This option recognizes that your post-retirement involvement may not be strictly zero, but will certainly decrease over time.
Assuming sales = the 15% you retain, the business is worth way more than 1x annual sales.
This is likely so. (JPD is financial analyst. I'm not.) But, if that one "very large, very happy" client goes away for any reason (only you know that risk) the value of the business drops like a rock.
posted by John Borrowman at 1:44 PM on July 23, 2014
Good advice. If I'm your buyer, I'm going to be interested in paying that multiple for a finite period of time. Additional options:
1. Paying fixed multiple every year for agreed upon period.
2. Paying higher multiple in Year One, declining over agreed upon period to lower multiple in Final Year. This option recognizes that your post-retirement involvement may not be strictly zero, but will certainly decrease over time.
Assuming sales = the 15% you retain, the business is worth way more than 1x annual sales.
This is likely so. (JPD is financial analyst. I'm not.) But, if that one "very large, very happy" client goes away for any reason (only you know that risk) the value of the business drops like a rock.
posted by John Borrowman at 1:44 PM on July 23, 2014
You want the present value of your future cash flows. Basically, you figure out the likely net income for the foreseeable future. For something like a restaurant that is very risky, this would just be the next year. For your business, it sounds like this is basically forever so cap it 30 years, which, if you do the math, a payment 30 years from now isn't worth much.
Then you need to figure out what discount rate to use which should be based on investments similar in risk to yours. A decent benchmark would be what kind of interest rate you would have to pay on a business loan, but you should figure out a range that makes sense.
Then you discount those payments back to today. If your income is relatively stable, you're basically figuring out the present value of an annuity.
Or, you could hire a financial analyst to do a MUCH more complicated version of the same thing.
posted by VTX at 1:47 PM on July 23, 2014 [2 favorites]
Then you need to figure out what discount rate to use which should be based on investments similar in risk to yours. A decent benchmark would be what kind of interest rate you would have to pay on a business loan, but you should figure out a range that makes sense.
Then you discount those payments back to today. If your income is relatively stable, you're basically figuring out the present value of an annuity.
Or, you could hire a financial analyst to do a MUCH more complicated version of the same thing.
posted by VTX at 1:47 PM on July 23, 2014 [2 favorites]
Yeah - if I were them I'd try to get something that pays % of annual revs - as it eliminates the risk of them botching the relationship with the client or the client just deciding they no longer required your services. But the point of the sale is to transfer that risk to the buyer. If you had an unbreakable contract you would just figure out the Present Value of that Contract and sell it for that. But you don't. You need to figure out what the risks are to the cashflows and agree mutually upon a price that sufficiently protects the buyer from having the client walk through no fault of their own over the next few years, but that also pays you for the relationship you've built and handed over.
In VTX's terms you need to figure out an appropriate discount rate for a stream of cashflows given the odds of the client walking. But its probably better just to talk it through.
posted by JPD at 1:50 PM on July 23, 2014
In VTX's terms you need to figure out an appropriate discount rate for a stream of cashflows given the odds of the client walking. But its probably better just to talk it through.
posted by JPD at 1:50 PM on July 23, 2014
and agree mutually upon a price that sufficiently protects the buyer from having the client walk through no fault of their own over the next few years, but that also pays you for the relationship you've built and handed over.
Aye. And there's the rub!
posted by John Borrowman at 1:53 PM on July 23, 2014
Aye. And there's the rub!
posted by John Borrowman at 1:53 PM on July 23, 2014
Yes, the big risk here is that there is only one client. That greatly reduces the value.
posted by alms at 3:07 PM on July 23, 2014
posted by alms at 3:07 PM on July 23, 2014
Here's an online net present value calculator with plenty of explanation:
www.free-online-calculator-use.com/npv-calculator.html
I agree that as a general rule having only one major client significantly increases the risk and therefore reduces the value, but of course there may be special circumstances in your situation.
posted by Dansaman at 3:11 PM on July 23, 2014 [2 favorites]
www.free-online-calculator-use.com/npv-calculator.html
I agree that as a general rule having only one major client significantly increases the risk and therefore reduces the value, but of course there may be special circumstances in your situation.
posted by Dansaman at 3:11 PM on July 23, 2014 [2 favorites]
5x annual revenue, (a simplification of http://money.msn.com/small-business-smarts/value-of-your-business-calculator.aspx)
posted by at at 5:44 PM on July 23, 2014
posted by at at 5:44 PM on July 23, 2014
What if your subcontractor refused to buy you out? Would your one client do a new search for a new contractor or would they hire them anyway?
It sounds to me like you're not in the greatest bargaining position, especially if your subcontractor already has any kind of independent relationship with your client. The client is unlikely to want to put themselves out for your sake, especially if your subcontractor can legitimately offer to work for the same or a lower rate than you.
It doesn't sound like you actually have much to sell, unless there's some 'do not compete clause' your subcontractor could buy their way out of. I think you should look for a price that is more symbolic and leaves your subcontractor and your client feeling good about you and that keeps your connections in that world in good shape in case you ever want to use them.
posted by Salamandrous at 6:15 PM on July 23, 2014 [1 favorite]
It sounds to me like you're not in the greatest bargaining position, especially if your subcontractor already has any kind of independent relationship with your client. The client is unlikely to want to put themselves out for your sake, especially if your subcontractor can legitimately offer to work for the same or a lower rate than you.
It doesn't sound like you actually have much to sell, unless there's some 'do not compete clause' your subcontractor could buy their way out of. I think you should look for a price that is more symbolic and leaves your subcontractor and your client feeling good about you and that keeps your connections in that world in good shape in case you ever want to use them.
posted by Salamandrous at 6:15 PM on July 23, 2014 [1 favorite]
Another thought: Is it practical to consider just stepping back (effectively retiring, just not calling it that) and keep pulling in a cut? Even if you have to reduce it a bit and/or pay an admin person out of it, perhaps an income stream might be better than a lump sum?
Also agree with others that, while it sounds like you have a great business in some ways, the threats are significant and come from a few directions - single client and potential for sub-contractor to cut you out. Ultimately it comes down to what agreement you can reach with the sub of course.
If you've played your cards carefully, they will know far less about the business than you, which gives you a strategic advantage. That won't last if they're astute though. I think you should move quickly if you're going to sell.
posted by mewsic at 1:07 AM on July 24, 2014 [1 favorite]
Also agree with others that, while it sounds like you have a great business in some ways, the threats are significant and come from a few directions - single client and potential for sub-contractor to cut you out. Ultimately it comes down to what agreement you can reach with the sub of course.
If you've played your cards carefully, they will know far less about the business than you, which gives you a strategic advantage. That won't last if they're astute though. I think you should move quickly if you're going to sell.
posted by mewsic at 1:07 AM on July 24, 2014 [1 favorite]
Only a single client? You're selling your time and expertise?
Has your lawyer vetted this? From where I'm from , that makes you what we like to call an "employee"
posted by Yowser at 3:25 AM on July 24, 2014
Has your lawyer vetted this? From where I'm from , that makes you what we like to call an "employee"
posted by Yowser at 3:25 AM on July 24, 2014
This thread is closed to new comments.
If I were them I'd demand some kind of earnout - but you are a seller not a buyer.
posted by JPD at 12:50 PM on July 23, 2014