Stats: 3,186,583 members, 7,929,875 topics. Date: Saturday, 24 August 2024 at 04:54 AM |
Nairaland Forum / Nairaland / General / Investment / Advice Needed Please On Selling Equity In My Business (1955 Views)
Invest To Own An Equity In A Promising Tech (SaaS) Startup / Invest $1: Earn $4 And 0.1% Equity In 2018 / Invest For Equity In A Business With 70% ROI (2) (3) (4)
Advice Needed Please On Selling Equity In My Business by grownaira: 2:42pm On Aug 05, 2015 |
Good day fellows. Please I need advice from those with experience. I have a manufacturing business, which I have so far invested close to N2,000,000. This amount went mainly into machinery and rent of factory. A little was left for raw materials, and because of that, we are operating less than 20% our installed capacity. The business have great potentials, and the fact that the product we produce is included in the list of products the government is looking into banning its importation completely (their is currently a partial ban on it), we foresee greater potentials in the business. Operating 80% our installed capacity, we forecast a realistic annual net profit of N24,000,000. This figure is expected to triple as the demand for our products increase and we expand our operations in the next 3 years. Now someone is interested in investing in our business in exchange for equity. Considering the bolded above: 1. What do you think the whole business is worth? 2. If I am to sell 25% of the equity, how much should it go for. Thanks in anticipation of your favourable responses. |
Re: Advice Needed Please On Selling Equity In My Business by jaybee3(m): 2:45pm On Aug 05, 2015 |
Step 1 Use the present to future value formula. Combine average annual sales profits along with average annual growth percentage and future period of growth. For example, if your small business shows a profit of $60,000 per year and has historically grown by 4 percent each year, it would be worth $62,400 in a year from now, $64,896 in two years from now, $67,491 three years from now and $70,191 in four years from now. Step 2 Calculate your small business' liquidation value. Add all assets, accounts receivable, fixtures, inventory, equipment and subtract business loans, accounts payable, equipment loans and lines of credit. This method allows you to estimate the liquidation value of your small business but does not predict future value. Step 3 Find market comparables. This method is not unlike estimating the value of a house. Using your local newspaper and industry trade publications, find like businesses that are for sale or have just sold within the last three months. The comparables should have the same annual volume, number of employees, market share, assets, equipment, and debts and liabilities, such as loans. Contact a local business broker to assist you in finding comparable businesses. Step 4 Use the rule of thumb valuation method. Take your small business’ yearly positive cash flow and multiply it by four. For example, if your small business generates a positive cash flow of $60,000 per year, it would have a value of $240,000 by using the rule of thumb formula. It is important to note the rule of thumb method is not comprehensive but provides the quickest result because it does not include your small business' market share, assets, liabilities and predictable sales--which are sales generated on a regular basis through the year. http://smallbusiness.chron.com/estimate-value-small-business-4124.html CC: sagamite 3 Likes |
Re: Advice Needed Please On Selling Equity In My Business by grownaira: 2:59pm On Aug 05, 2015 |
jaybee3: Thanks boss. Although I am trying to comprehend many things up dia. |
Re: Advice Needed Please On Selling Equity In My Business by jaybee3(m): 3:32pm On Aug 05, 2015 |
grownaira: You're welcome Sir I think the most important information that you've left out in your original post is annual sales/profit figures Those figures alongside a moderate projected growth rate will allow you calculate the worth of your company in the current state. 24M projected income seems unbelievable without enough info to back it up. You also need to consider what kind of investment are they putting in and how the investment will be structured. Are they planning to drop just cash or both cash and expertise in terms of branding, advertisement and sales? Are they planning to inject the cash in phases? Do they want to have shared responsibility in the day-to-day running of the company? These are things you need to consider before signing any agreement Good luck |
Re: Advice Needed Please On Selling Equity In My Business by grownaira: 3:49pm On Aug 05, 2015 |
@jaybee3, thanks once again. The business is less than three months old. 24M annual net profit from working 80% our capacity is realisable, and the person knows it. That's why he approached me with the offer. The offer is to inject cash into the business which will make us to more than double our current production. We on our side will handle all aspects of production, branding and marketing. He will be more of what I call I silent equity owner in the business. |
Re: Advice Needed Please On Selling Equity In My Business by Sagamite(m): 3:57pm On Aug 05, 2015 |
jaybee3: Thanks, jaybee. These are the kinds of things that should form at least a quarter of NL chats and what we should be discussing, so as to stimulate brains. Not the brainless "Stunning" and "Stuns" that the dilapidated forum is now known for. I am not an expert in valuation but I think I am reasonably knowledgeable enough to make a contribution. grownaira, in finance what you have spent is really inconsequential to the value of your company. What is relevant is what your company can do in future. Even if you have spent $1m it does not matter. A potential investor should not bother about that, because you spent it does not mean you spent it well (i.e. on creating value for the shareholder). It might have been a waste or you spent it on babes. ![]() Obviously if you are dealing with someone that is not knowledgeable on things like this, you can always bamboozle and swindle them by highlighting what you have spent. But it would not work on people like me. If I was even to buy a house for investment, I don't give much hoot about how much the owner has spent on it, I will value it based on the future revenues I can get from it. Which is why I think most Nigerian properties are overvalued considering what I can get from it and what they are being sold for. Obviously, if I was to buy the house for personal use only, then the happiness, convenience and contentment utility I would get from it would play a part in how much I value the property. Now to answer your questions: grownaira: jaybee has already given you valuable indicators. I will explain the most popular one to you as best as I can (I am a bit rusty). The answer to your two questions is interlinked. That is, you find out the overall value and then divide by 4. I will use the Discounted Cash Flow (DCF) model. The first approach on jaybee's list. Your business is worth all the free cash flow at net present value (NPV) of the business. The Free Cash Flow (FCF) is basically all you anticipated/forecasted future revenues minus all you cost and investment. Note: The use of future means the calculations only focus on the future, not what you spent in the past. Basically, try to calculate what true profit you think the business would bring in in future, up to perpetuity (that is forever aka 5000 years aka till Jesu Christi comes back for the saved souls). I can't remember, but I think a certain amount of years tend to form the bulk of the value calculated. That is maybe (I am picking this from thin air) about 15 years of FCF might account for 95% of the FCF to perpetuity. There is a formula for calculating something's value in perpuity (makes it fcking easier lol). I think it is Rate of return = Cash Flow/Present Value. Before you feel bamboozle, lets re-summarise: 1) Find out your annual FCFs, which is basically your revenue for each of the future years minus your costs and investment. 2) Then for each year, calculate the NPV because N10,000 in 1966 is different from N10,000 in 2020. That is, those future money in your FCF would have less value than the same figure today. It will buy less garri in the market. N10,000 in 1966 would buy the whole garri in the market. Today, it will buy 2 bags. 3) Add up the NPV for each year that you calculate. Lets say you did 15 years up to 2025, add them all up to get yout overall NPV. 4) After 15 years, find out how much you can sell the business assets for (i.e. the machinery, land, cars, brand, uniforms, raw materials, unused leases etc). Add this to the overall NPV. 5) Divide by 4 to get 25%. So let me give you example of how you can calculate these FCFs for a 3 year period. [Step 1] Lets say in the next one year, you expect your revenue to be N40m, after you remove your costs and a portion of your earlier investments (part of your N2m starting capital), you have N24m as profit. This N24m is your FCF for 2016. Lets say in the second year (2017) this FCF is N26m and the year after (2018) it is N30m. Now you need to calculate what N24m in 2016 is worth in 2015 (it would be worth less than N24m), and what N26m in 2017 and N30m in 2018 are worth in 2015. These are the NPVs. If we still had the Cretin of Otuoke in Aso Rock, I would have said N24m in 2016 would be worth about N8m after inflation and the devaluation of our currency. But thank God Nigerians voted him out. To calculate the NPV, [Step 2] you need to find what is called a discount rate to use in the formula for your calculation. It is quite complex to find this but I would keep it simple. Find out what else the investor might have used their money for that is roughly of equal risk to your business and what rate of return they will get from that investment for every naira. In Nigeria, that might be hard to get, so I can make it simple for you. So just say that they decide to put the money in a savings account (and this is their alternative investment) what rate of return would they get? Use that as the discount rate. Lets say this is 12% that Zenith Bank or GTB would pay as interest on savings. Note: A saving in Zenith/GTB is less risky than investing in your business, you are more likely to lose the money, so using this figure is not really ideal but I am just sampling. To calculate the NPV for a year use the formula: FCF/(1 + 0.12) Note: The 0.12 is the discount rate of 12%. So for 2016, the NPV is 24m/(1 + 0.12), which is equal to N21.4m. So, you see? The N24m you will make as profit in 2016 is actually worth only N21.4m in 2015. If someone wants to pay you for all that 2016 profit today, he should be paying only N21.4m now and collecting N24m back in 2016 if you are both getting a fair deal. What N24m can buy in 2016, N21.4m can buy the same in 2015. Do the same calculation for the N26m and N30m, and you will get N23.2m for 2017 and N26.8m for 2018. Add all this together and you get N71.4m as the value of your profits for the next 3 years. [Step 3] If you decide to close the business after 3 years and you can sell the assets for 8m, then the value of your company now is N71.4m + N8m = N79.4m. [Step 4] This is just an example. If you do it for maybe about 15-30 years, add them all up, calculate how much you will make by selling the assets after these 15-30 years and add it to the NPVs, you should get a reasonable approximate value for your business (i.e. what your business is worth). Divide by 4 and that is what someone has to pay you to get 25% of your business. [Step 5] Oya, Financiers come and correct me o because I know I am rusty. 9 Likes 3 Shares |
Re: Advice Needed Please On Selling Equity In My Business by grownaira: 4:47pm On Aug 05, 2015 |
Thanks a million @ sagamite. You've just given me the most valuable info I have gotten so far on nairaland. Well I must say I am turning down the dudes offer. Because from what I learnt from you, he is offering a ridiculous price for even 40% equity in my business, which I initially told him I can only sell 25%. From my quick-rough calculations using the guide you provided (@3yrs), the price he offered is less than 10% of the value I obtained for the business. I will just grow the business organically, and retain all ownership. Thanks very much and remain blessed. |
Re: Advice Needed Please On Selling Equity In My Business by Sagamite(m): 4:54pm On Aug 05, 2015 |
grownaira: My pleasure, mate. But I hasten to add that what I gave you was a sample. I am hoping you did not use the 12% in your quick calculation as your business is far more risky than an investor putting his money in a savings account in GTB. You are not of equal risk to GTB. You are more likely to lose the money and close down. Your discount rate can be as much as 60%. So I suggest you give a deep thought about how risky your business is and use a far higher figure than a good bank's savings rate before making your decision. I would suggest you use at least double the average Top 7 banks' savings rate as the discount rate in your calculation. So in my example (where I picked 12% from thin air), you should be using at least 24% in your calculations as your risk is higher. If you don't understand what I am saying in this post (I know it is complex), please ask for clarification. |
Re: Advice Needed Please On Selling Equity In My Business by grownaira: 5:06pm On Aug 05, 2015 |
Sagamite: Thanks boss, and I do understand your points. Will work on that. |
Re: Advice Needed Please On Selling Equity In My Business by Sagamite(m): 9:37am On Aug 06, 2015 |
grownaira: Notyourb1tch. ![]() |
Re: Advice Needed Please On Selling Equity In My Business by grownaira: 2:08pm On Aug 06, 2015 |
Re: Advice Needed Please On Selling Equity In My Business by Sagamite(m): 2:41pm On Aug 06, 2015 |
grownaira: That was not directed at you, mate. The person it was directed at understands. ![]() |
Re: Advice Needed Please On Selling Equity In My Business by grownaira: 7:18pm On Aug 06, 2015 |
Sagamite: Ok boss. Best regards. |
Re: Advice Needed Please On Selling Equity In My Business by SHOT(m): 1:17pm On Aug 12, 2015 |
Quite informative |
Re: Advice Needed Please On Selling Equity In My Business by Notyourb1tch(f): 11:40pm On Aug 13, 2015 |
Sagamite: ![]() ![]() Neways should I clap for you? Well done Mr FukuFaka Fuka for giving this man such valuable advice. On a serious note you and Jaybee gave some good advice. Yeah it needed a bit of tweaking here and there but you were mostly on point ![]() Am impressed really. There is more to you then Bleep..tard ![]() I guess you can be useful at times |
Re: Advice Needed Please On Selling Equity In My Business by Notyourb1tch(f): 11:58pm On Aug 13, 2015 |
These are the kind of topics that should make front page |
Re: Advice Needed Please On Selling Equity In My Business by DonX001: 11:40am On Aug 14, 2015 |
Nice one Sagamite and Jaybee3.....really nice one. This is the kind of topic and response that characterized the good old Nairaland...before the childish 'Tonto Dike's n co colonised it and turned it to another form of 2go. On 2nd thots, if any one knows of any other forums in Nigeria where serious minds aggregate and discuss, instead of all these puppies here discussing Davido's latest shoe, pls kindly let me know. Even if its a small community but really sensible, like the Nairaland of 2006-2010, before internet became for every small kid, i'd like to know. I'm kinda fed up with the childishness on this forum, and need a forum with more mature minds. |
Re: Advice Needed Please On Selling Equity In My Business by Sagamite(m): 3:34pm On Aug 14, 2015 |
Notyourb1tch: https://www.youtube.com/watch?v=A4I9DMSvJxg Well, notyourb1tch, here is the deal ........ https://www.youtube.com/watch?v=TMV_A8hummE You really don't understand. ![]() ![]() These are the kind of posts I normally give out on NL before the forum went to the dogs. ![]() There was a time these forum was rife with people speaking intelligently and people had meaningful discussions. That was when I was generating posts like this to break down arguments: https://www.nairaland.com/154942/believe-free-healthcare-all-nigerians/2#4213102 I used to even say some of the things I am say now are so novel, that it takes a few months or even years before mainstream media picks it up. ![]() Take a look at what I was telling a banker on NL: https://www.nairaland.com/280487/top-10-best-nig-investment/3#4033650 Look at the date I stated it on NL. Now look at who was discussing the same thing months after (look at the date) and trying to implement? ![]() http://www.bbc.co.uk/news/uk-11833241 http://www.telegraph.co.uk/news/politics/david-cameron/9023086/Hands-off-my-happiness-David-Cameron.html I no easy. ![]() ![]() ![]() |
Re: Advice Needed Please On Selling Equity In My Business by Sagamite(m): 4:02pm On Aug 14, 2015 |
Notyourb1tch: DonX001: Thank you. Unfortunately, the forum has gone to the dogs and is full of fuuktards. The front page is full of moronic topics to attract such people. "See what this celebrity is doing", "X stuns in new dress", "Y eats rice stylishly" and all the other nonsense that one can see. I remember a time when if I put up an intellectual post like this on the forum, it leads to a discussion as intelligent people pick it up and join in. https://www.nairaland.com/2514170/reading-culture-gone-bad-worse/4#36816102 Now it just dies because the forum is so full of ediots, that these kinds of things are well above their heard. But ask them to discuss what P Square brought his child or Tonto Dike dancing Shoki and see them get excited. DonX001, trust me, like you, I am bored of the site, fed up and frustrated by the lack of intellectual stimulation as you are. I even said it some time ago when a forumite told me he was missing my intellectual contributions and was asking me why I don't come to NL that frequently anymore. Only for my reply to be (obviously) hidden because of myopism of adminstrators who strategised to degrade the intellectuality of the site. Sagamite: Like you, I am looking for a Nigerian conducive forum where contributions demonstrate people have brains. Unfortunately, can't find any so far. I am beginning to consider opening one when I have the time to manage it. So just watch and follow. Join me when I do. My aim is quality, not quality. NL can have the load of junk people it wants to attract. These are the types of threads we used to have back in the day and you will see intellectual discussions. https://www.nairaland.com/364347/bankers-really-deserve-multi-million-pound/ You will even notice I hardly called people fuuktard, cretins etc back then. The golden era on NL of 2006 to 2010 as you rightfully identified. From 2011, the forum just went to the dogs. 3 Likes |
Re: Advice Needed Please On Selling Equity In My Business by DonX001: 5:20pm On Aug 14, 2015 |
Sagamite: Absolutely right on point!!! In case you ever do start your own, let me know. I have also considered starting one, but the time and energy demands of my job will leave me with little or no time to manage or moderate it. In the meantime, guess i'll still keep searching. Might even open a thread to ask for suggestions. |
Re: Advice Needed Please On Selling Equity In My Business by Sagamite(m): 8:20pm On Aug 14, 2015 |
DonX001: Yes, man. I will let you know. While we wait, lets enjoy the little bit we can from the now junk forum. www.nairaland.com/2525598/n59bn-abuja-airport-expressway-becoming/1#36953585 www.nairaland.com/2526066/hierarchy-top-10-areas-live |
Re: Advice Needed Please On Selling Equity In My Business by blackpanther25(m): 10:27pm On Aug 18, 2015 |
Sagamite:You are still mentioning this chic! You are still a moronic retard ![]() |
(1) (Reply)
Advise On What To Do With #50k / I Will Teach You / Free New Currency Guys
(Go Up)
Sections: politics (1) business autos (1) jobs (1) career education (1) romance computers phones travel sports fashion health religion celebs tv-movies music-radio literature webmasters programming techmarket Links: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Nairaland - Copyright © 2005 - 2024 Oluwaseun Osewa. All rights reserved. See How To Advertise. 107 |