Selling out my half of a company with a DVD library & sales - valuation help?
 

Here's the deal... I own half of a company (corporation) with a partner.
This company owns and sells 10 different DVD/CD products that we've produced over the last 3 years. It's time for me to move on to different things, so I'd like to make him an offer to buy me out. The company has no debt, and makes about 99% profit off sales (yes, after marketing/shipping/website costs, etc...) Beyond the intellectual property, the company owns nothing else of significance.

How should I value the company in order to set my asking price for my half of it? Sales are growing maybe 20% a year... I'm thinking of a value based on X months/years of sales, but don't know what number that X should be.

What do you guys think?

Dylan:

I look at this stuff occasionally in my legal practice. They are very situational limited, and of course dependent on what the "partner" seller is willing to do. In some situations, the loss of a partner contributor will change the profitability structure because the buyer has to pay to replace labors of the seller.

Another question I would have in the evaluation is what about the existing intellectual properties, how much is going to continue to be salable. I can't imagine any DVD product having continuing upward sales. At some point the existing product would become stale, outdated, or have saturated the available market. So it would seem the evaluating on sales of existing product only would be less than favorable to you. So you should be factoring in name recognition, reputation and other so intangibles, in order to arrive at your evaluation.

I have seen people use formulas like one or two years of the seller's shares of the company profit based on the last years sales. From the stand point of the buyer, it is going to be a matter of risk of not earning what is predicted, and how long it will take to amortize the buyout loan or get a proper return on investment for a cash buyout.

Hey Chris, here's some more info:

In the partnership, he is the on screen talent in the DVDs, I'm the producer. Since my part is done (producing all the products), there is no cost in replacing me. At this point in the business, my role is little more than taking money to the bank and phoning the accountant. (which is the way I like it).

Sales are going up because his publicity is going up (he's a motivational type speaker), and has been on a steady climb in the last 18 months. The shelf life of the products in question? Can never really answer that one. :)

LOL - if money is just falling into your hands with no effort required on your part, why jump off the gravy train and sell out? Become a silent partner and go do other things while keeping the cash flow.

Several really good reasons which I'll keep private for now. Email me if you really want to know.

Hopefully none of them have anything to do with sweat lodges. :-)

Andrew

Nope, didn't mean to pry into private things.

LOL, no... that's the NEXT DVD series. :)


So, what do you guys think? 1 year of sales? 2 years of sales?

as a rule of thumb - 2 to 2.5 times annual net sales plus stock/equip at valuation. The other rule (more important) is - whatever the market will bear.

does he want to buy you out?
what's it worth to him?
can you sell your shareholding to anyone else (does he have 1st option)?

Things are only worth what somebody else will pay for them...

Do you know if he wants to buy you out?

If you have such a diminished role, he might not think it is necessary to buy anything.

Who would buy it if he is not interested? Anybody?

He sort of has the upper negotiating hand here.

Dylan:

The way I would calculate it is use some kind of present value calculator, using projected net monthly income you would have over the life of the product. Say two years. Make an honest appraisal of that amount. Then plug it into a present value calculator, allowing your buyer a rate of return commensurate with the risk he is taking.


You could try one like this one: * Finance Calculator

In this case, I tested it by inputting that your partner is buying you out of you income stream of $ 500.00 per month over a 24 month period. I assigned 15% annual return (1.25% per month) He may want more or less due to risk factors.

In the calculator I put in for number of Payments, NP, 24
for paymemt, PMT $500
interest rate, IR 1.25%

Press the PV button to calculate.

The calculater showed that with the income stream being bought, with the rate of return desired, he would pay $ 10,441.02 for that future value of $ 12,000 in total payments.

Remember, he may want higher rate of return to convince him.

The other thing that he must bear in mind is that if he doesn't buy your share, somebody else will. That might become a pain in the ass possibility for him.

Andrew