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Thread: Calculating Net Revenue

  1. #11
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    From what I have been reading, the seller does do the adding back (separately). Then the buyer is free to challenge those add backs.

    Thanks for the help!

  2. #12
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    I agree with everything that Clinton said though I would answer the last two questions a little differently (only in emphasis, not in substance):

    1. The "owners benefit" is not really a P&L item, so I agree with Clinton you don't do the adding back on the P&L. However, even in the bricks and mortar world, sellers often create an "adjusted earnings" figure that they supply to the buyer to supplement the P&L. For example, if a seller deducts a lot of arguably semi-personal expenses through the business, or pays family members above-market compensation, he will add those back to come up with adjusted earnings. Leaving the expenses off the income statement entirely, when they are actually paid by the business, would be considered fraud by most buyers.

    2. Development costs are considered capital expenditures, so even if you paid someone else to perform those duties, those costs would not be part of the determination of EBIDTA. They would not hit the P&L except to the extent they are included in the "A" - amortization - pro-rated over some period of time.

    As for the owner's effort, Clinton wrote a very good article for another forum several years ago (under a different name) that is the best discussion I have seen on how a website valuation should take into account the amount of time an owner has to spend on a site. If one owner writes all his own content and grosses and nets $2,000 a month, while another owner outsources all the writing, grossing $3,000 but netting only $2,000 after paying his writers, the blind application of multiples would value both sites the same. Only a fool would pay the same thing for a site where he had to do all the writing as he would for one where he hands off all the writing and is able to spend his time on other interests.

    I'd like to say that the offline world is smarter than that, but at least in smaller businesses I have seen the same mistake. If a buyer is looking at a sandwich shop or convenience store where the owner puts in 50 or 60 hours a week and takes home $60,000 a year, it is absurd to pay a 3x or 4x multiple on $60,000. You first need to deduct the "cost" of the owner as employee. If you could hire a full time manager to work those long hours at a cost of, say, $45,000 a year, then the owner is getting only $15,000 a year as the return on his investment and the other $45,000 for toiling the long hours. The multiple should only be applied to the $15,000 to determine how much the business itself is worth. Yet, I frequently see those types of businesses being touted at multiples based on the total "owner benefit" that includes the "employee benefit" and sometimes buyers actually pay those prices. The ones that do often find that they have to sell at a loss after they burn out because they can't find another fool to bail them out on the same basis.

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    Kay (19 April 2014)

  4. #13
    Administrator Clinton is a Premium Member
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    Only a fool would pay the same thing for a site where he had to do all the (work)
    The MFF market relies in large part on a steady supply of fools ... or at least people who can't tell the difference between net and gross, those who can't tell the difference between the value of an auto-pilot site earning $x and one that earns $x subject to a large time input from the owner.

    Makers of MFF site stand to gain from underplaying the value of owner time as their product is sites that they spend a lot of time on, over a short period, to bring to a point where each is generating revenue. If they included the value of their time these sites wouldn't be worth anything. In fact, they'd have a negative value. So the MFF crowd, aided and abetted by MMO "gurus" pimping "site flipping" advice (and by Flippa itself), usually ignore the value of owner time and, often, try and distract readers away from this topic. Flippa stands to gain as well. The more fools there are who are willing to overlook value of owner time, the higher the prices paid, the more commission Flippa makes on their % of sale "success fees".

    I have seen this market develop and was there right from the beginning and before many of the current players were out of nappies. The drive for profit at Flippa has, in so many ways, severely damaged the whole market for the buying and selling of websites. It's now considered normal by many Flippa users to exclude cost of owner time!

    It's a shame that some brokers have sunk to the same depths as Flippa and the MMO-MFF players. Those that are willing to actively exploit this cultivated ignorance at the crap end of the market are brokers who wouldn't command much trust with the buyers they claim to be targeting - the ones with 6-7 figures to spend. It's foolish, IMO, to expect to succeed in the big ocean while still following the kind of small pond stupidity that governs the $1000/site market (the average sale price of a site in Flippa).

    From what I have been reading, the seller does do the adding back (separately). Then the buyer is free to challenge those add backs.
    You'll notice my when addressing this issue. While sellers (and the selling broker) try to present the figures in the light most favourable to them, it's the buyer's version of the reconstructed accounts that influences the price he's willing to pay. So, yes, the buyer is free to challenge the add-backs, but don't count on him making this challenge. When things look fishy many buyers simply walk away rather than arguing the toss. I know I have.
    Find the right business brokers to maximise the value you extract from your business and improve the chances of selling your business.

  5. The Following 2 Users Say Thank You to Clinton For This Useful Post:

    David S (21 April 2014), Kay (20 April 2014)

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