During my last net worth update, The Dividend Growth Investor asked me how I evaluated my online company. Since it is a big part of my net worth (and the only reason why I’ve had an increase of 13% in my assets last month), I thought it deserved a full article to disclose how I evaluate what my shares are worth.
Why Do We Need To Evaluate Our Online Company
The problem with your own company is that it always worth more to you then it would be to anyone else. I’ve put a lot of effort into it and know it has a lot of potential. Unfortunately, my “love” for my websites cannot be accounted for on a balance sheet. So why try to find a value for my shares? Mainly because I have a partner.
The thing is that I really don’t plan on selling. However, during our last company meeting, we discussed the eventuality of one of us passing away or if we ever decided to separate our sites and continue on our own. This is why we had to determine a way to calculate the value of our shares: to make sure that we have a way to buy the other’s part of the business if it ever goes sour.
The Magic Formula
So here is our magic formula to determine how much our company worth:
(last 12 months of gross revenue * 1.5) + cash in bank account – debts
Pretty simple isn’t? Since we wanted to know the value of our company in a case of a death or major dispute, we wanted to make sure it was simple and that nobody could interpret another way to calculate it.
Why 18 months of income?
The way accord a value to our company is done in 2 separate steps. The first part is what our website is worth. As I previously mentioned in another article, the usual value of a blog is set between 18 to 24 times the average monthly income. Therefore, we preferred to simply use the minimum value for a site; 18 times the monthly income, without considerating our expenses (writers, correctors, virtual assistant, an accountant).
We know that if we would take the time to sell all our websites, we would get much more than 18 times their income. However, the point it so keep it simple and conservative (in no way do we want to overestimate the value of the company shares).
The rest of the equation (cash minus debt) is just because we have a lot of cash sitting in our bank account right now so it wouldn’t be fair to have it disposable for the sole owner of the company. If we ever break up our partnership, most of it will be divided via dividends I guess.
Is This A Real Valuation Model?
Not at all. In fact, we had no clue how to value our company at first. As our company figures more as a SASI (Sideline-Alternative-Source-of-Income 😉 ), we didn’t find any valuation model guidelines to start our own. This is why we have decided to start from what we know (blog valuation) and extend it to our company model.
In the end, I am happy with the way we have evaluated our online company as it is conservative and easy to understand. This way, everybody (I hope) will agree on its value. I haven’t decide if I will use a quarterly or semi-annually update for its value as it has made a significant improvement since the last time I put a value on my shares. Do you have any suggestions on how I should proceed?
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