I just had a business owner call up, concerned about how a valuation of his company may turn out. He has a very interesting business connecting lost money with its owners. No, not a scam, he really does it. He said the most difficult part is convincing people that he truly has money for them. It doesn’t help that his name is King Etete from Nigeria. Just kidding on the last part.
He makes $100,000 in this business, and he intuitively knows that it must be worth something. He’s right. Most certainly someone would love to provide a valuable service with their own company, work at home or a small office, and make $100K. And they would pay for it.
His concern is that he has very few assets – just a couple of desks and computers. He thought that it would take a lot of convincing to persuade someone that his business is really worth something. By far the most important ingredient in business valuation is the ability to produce earnings (see my post on this), and based on this it is obvious the company is worth something. In fact the lack of assets don’t matter at all, only the fact that someone can, with training, produce the same level of earnings.
Last year we sold a company for almost $1 million, and the assets consisted of only a truck, three desks and three computers. And the sellers even kept the truck after the price of truck was deducted from the business price.
It is true that banks like hard assets, but this is exactly why the Small Business Administration (SBA) 7A program exists. This program provides a guarantee to banks or lenders so they will loan on cash flow and earnings, not assets. That $1M company last year with no assets was purchased by someone with 10% down, AND they received 10% additional on top of the loan for working capital. Think about that. They essentially bought this company for nothing down, since they got their down payment back as working capital. Now, they really did need the working capital, so they could not have walked in and purchased this company without any capital, but still it was a heck of a deal.
So the lost property locator fellow who isn’t a king of Nigeria has truly built something of value, and he should be proud. That company, if priced right, will readily sell.