Need advice how to evaluate abandoned business

October 11, 2024

by an investor in Denver, CO, USA

Good afternoon! I am considering purchasing a business, but I need to understand how to properly evaluate it. The company sells various accessories for clothing. 90% of sales come from its own online store, and another 10% from retailers. The company has a very clear niche and is fairly well-known within it. It has been in existence for about 10 years. I see a lot of potential in it, but unfortunately, or fortunately for me, it hasn’t been managed actively for the past two years, and sales have significantly dropped. The SDE for the past years looks as follows: in the last 12 months $240,000, -1 year $200,000, -2 years $550,000, -3 years $600,000.

The owner has listed the business for sale at appx. 3 times the SDE relative to the second year - $1,550,000. I don’t see that valuation, but as I said, the company does have potential. I plan to use SBA financing, so I need to determine a fair value for both the SBA and myself. So far, I estimate it based on the last 3 years, or approximately $975,000. I would like to hear your opinion.

Thanks!

Reply by a searcher
from University College London, University of London in London, UK

Hi, I have acquired 2 ecom businesses in###-###-#### skincare & haircare. If the sales are dropped 'due to mismanagement you can get advantage of lower SDE/EDITDA. For valuation and DD I rely on Sam at Allied Cons. He has good understanding of eCom businesses and have competitive pricing. You can reach them at redacted if you want to.

Reply by a searcher
from Brigham Young University in Lehi, UT, USA

Focus on the last###-###-#### months, weighing recent performance more heavily. Given the sales drop and poor management, a risk discount makes sense. Use comparable sales and aim for 2-3x the current SDE ($240,000), or around $720,000, as a fairer target. Highlight the business's potential as a negotiation point, not the primary basis for value.

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