3 ms·

3x doesn't seem bad at all. It's like an investment that generates 33.3% annually. After 3 years it's all free money.

jasonlotito 11y ago
While that's technically correct, with only 1 year of data behind it, it's arguably a bigger risk assuming that the first year of data will continue into the second year.
manyhats 11y ago
It's not free if you become an employee and need to put in time to maintain it. Think of it like a fast food franchise - you're buying a job, not a passive income stream.
lsc 11y ago
It's counting the founder's salary as profit. In these small businesses? founders usually have to do a good bit of work. what do they say? you are buying yourself a job? if you're making 33.3% of $50k-$500K per year... the very top end of that is close to what you'd get working for someone else, and usually you don't have to put down a half million to get those jobs. So, while I don't think I'd sell you my company for 3x SDC, I completely don't blame you for wanting to pay less than that. It'd really only make sense if you were sure that I had things setup to the point where I didn't have to do any work (which is something I can deceive myself about... I don't see how you could get a solid answer out of someone who had an interest in deceiving you.)
- nedwin 11y ago
  "you are buying yourself a job?" Bingo. And the prospect of growing the business to a point where it can sustain a team and be less reliant on you. If the business can run without any input from the founder a) why would they sell it? and b) if they did they would sell at a much greater multiple.
  - heliodor 11y ago
    People might need to sell companies because of: 1) sudden financial hardship like hospital bills 2) a divorce court judge ordered it 3) a non-founding owner has no emotional attachment and wants to switch to another investment. Online companies that produce passive or near-passive income are bound to become obsolete quickly. The internet moves quickly in a lot of niches. The potential lifespan of the business affects the multiple.
    - lsc 11y ago
      Your fourth option, I think, is the most important one to understand here. Just about any business, assuming you have a competent employee or two, can kick along without your input for a while. But without you, the owner, actively putting in work? it's going to do worse this year than it did last year. It's gonna fade pretty fast. And yes, if you do need to ignore it for a while, selling it to someone who won't ignore it is a good option, too. But it's just plain wrong to think that you can look at the current numbers and assume they will go forward without more input from the owner. I would argue that the whole idea of 'passive income' when combined with the idea of a 'small business' is a little flawed, or really, a lot flawed. Owning a small business is not like owning stock in google. You are an active participant in the business. A small business owner is fundamentally different from someone who owns shares in a large corporation. I kind of like using marxist terminology for it. We are bourgeois[1]. We are not full members of the capitalist class; we still need to combine our labor with that capital, or else it's all gonna go to shit pretty fast. But the real takaway you need to understand is that owning a small business is not at all like owning stock in a large business. It's a completely different thing, and your return on investment capital should be very different (and in my opinion, much higher.) [1]no, not necessarily in the 'poor taste in lawn furniture' sense. I don't even have a lawn.
  - lsc 11y ago
    if a business owner insists on a much higher multiple, that usually has more to do with how much he or she enjoys that job they are selling you than it has to do with the fundamentals of the company.
  - 11y ago

While that's technically correct, with only 1 year of data behind it, it's arguably a bigger risk assuming that the first year of data will continue into the second year.

manyhats 11y ago

It's not free if you become an employee and need to put in time to maintain it. Think of it like a fast food franchise - you're buying a job, not a passive income stream.

lsc 11y ago

It's counting the founder's salary as profit. In these small businesses? founders usually have to do a good bit of work. what do they say? you are buying yourself a job? if you're making 33.3% of $50k-$500K per year... the very top end of that is close to what you'd get working for someone else, and usually you don't have to put down a half million to get those jobs. So, while I don't think I'd sell you my company for 3x SDC, I completely don't blame you for wanting to pay less than that. It'd really only make sense if you were sure that I had things setup to the point where I didn't have to do any work (which is something I can deceive myself about... I don't see how you could get a solid answer out of someone who had an interest in deceiving you.)

nedwin 11y ago
"you are buying yourself a job?" Bingo. And the prospect of growing the business to a point where it can sustain a team and be less reliant on you. If the business can run without any input from the founder a) why would they sell it? and b) if they did they would sell at a much greater multiple.
- heliodor 11y ago
  People might need to sell companies because of: 1) sudden financial hardship like hospital bills 2) a divorce court judge ordered it 3) a non-founding owner has no emotional attachment and wants to switch to another investment. Online companies that produce passive or near-passive income are bound to become obsolete quickly. The internet moves quickly in a lot of niches. The potential lifespan of the business affects the multiple.
  - lsc 11y ago
    Your fourth option, I think, is the most important one to understand here. Just about any business, assuming you have a competent employee or two, can kick along without your input for a while. But without you, the owner, actively putting in work? it's going to do worse this year than it did last year. It's gonna fade pretty fast. And yes, if you do need to ignore it for a while, selling it to someone who won't ignore it is a good option, too. But it's just plain wrong to think that you can look at the current numbers and assume they will go forward without more input from the owner. I would argue that the whole idea of 'passive income' when combined with the idea of a 'small business' is a little flawed, or really, a lot flawed. Owning a small business is not like owning stock in google. You are an active participant in the business. A small business owner is fundamentally different from someone who owns shares in a large corporation. I kind of like using marxist terminology for it. We are bourgeois[1]. We are not full members of the capitalist class; we still need to combine our labor with that capital, or else it's all gonna go to shit pretty fast. But the real takaway you need to understand is that owning a small business is not at all like owning stock in a large business. It's a completely different thing, and your return on investment capital should be very different (and in my opinion, much higher.) [1]no, not necessarily in the 'poor taste in lawn furniture' sense. I don't even have a lawn.
- lsc 11y ago
  if a business owner insists on a much higher multiple, that usually has more to do with how much he or she enjoys that job they are selling you than it has to do with the fundamentals of the company.
- 11y ago