This may seem like a bit of a stupid question, but I do need some help/advice if you can give it.
I went into business with a family friend about 3 years ago. It’s been mostly good, but occasionally very rocky, to the point where I think I would actually just be far more efficient running it myself. He enjoys his work, but the industry we work in is not his passion, and he is easily distracted and not enormously effective day-to-day. His wife is also about 3 months pregnant (their first child) and they’ve been struggling to come up with a first-home deposit, which is why I think that making an offer for his half of the business now is good timing. I won’t be mentioning the idea to him until (or if!) I have all my ducks in a row, and even then will be posing the question to both him and his wife together, as she is deeply pragmatic, and will rein in what will undoubtedly be his inclination to see the idea as an insult to his ego. And of course this is all moot if the value of his half (yes, we’re 50/50) is too much for me to afford!
My problem is that I can’t quite figure out how to calculate the current value of his half. It would be simple if we were turning a profit; I’d just use the same calculations we used to figure out the value of the business before we bought it… but instead we’re running a small loss. The business’ sales figures/gross profit have increased hugely since we took over (e.g. gross profit for FY2013-2014 – the previous owner’s final year – was around $250k, and ours for FY2016-2017 was $550k) but our expenses have been significantly higher too, mostly due to having to reinvigorate an ailing business via large stock purchases and renovations etc, thus the small loss (in the realm of $5k a year).
So that’s my problem… The sales and cash flow have significantly increased since we bought the business, but the net profit has decreased. I used net profit to calculate the business’ value previously, but now that we’re running at a loss, I don’t know how to put a value on it! My instinct is to assume that the business is worth MORE than it was thanks to the higher sales/GP, but the net loss makes me question that.
I’ve looked at using discounted cash flow and EBITDA to figure it out, but all the online resources seem to be geared toward calculating investment risk instead of my particular conundrum.
I’d just ask our accountant to give me an idea, except that he would be obliged to let my BP know what I was doing, and as I said previously, this is still hypothetical. I love the guy but he is prickly as hell and I don’t want to damage our relationship going forward if it turns out that it’s not feasible for me to buy him out.
Does anyone have any ideas or tips for me? Happy to PM some more details to anyone particularly interested. Thanks in advance!