Inc.:
But it’s not just the fast growers who think their companies are worth more than they really are. Consider a deal that was brought to my attention a few months ago by my partners in the document destruction business, Bob and Trace Feinstein. They’d heard about a smaller company that was looking to be acquired. The owner was asking for two times annual sales, or about $1.2 million. Since other document destruction companies had been selling for three times sales, Bob and Trace thought we ought to buy it. But they were making a common mistake.You can’t value a company simply by looking at its sales. Yes, every industry has a rule of thumb for doing valuations and usually it’s expressed as a multiple of sales, but that’s a matter of habit and convenience. What most buyers are interested in is something called free cash flow, and free cash flow is a function of profit, not sales.
Photo by EXB-WDC.
Site-Reference.com on November 17th, 2005 at 10:36 pm
I am certainly glad to hear this. :) I am looking at possibly selling my website and was a little worried about the valuation of it. I have heard figures that range from 3-4 times annual revenue all the way up to 5-7 times annual revenue. I was wondering how anyone could value a company this highly, but then I realized that you just need to look at the pure profits in my industry.
WAHB on November 18th, 2005 at 5:01 pm
I am also considering selling my website, and I wonder; Is Page Rank a way of pricing a website ? Mine has PR5 at the moment, What can it be worth ?