Hmm… a few weeks ago, I told you that my online company worth about $140,000 (so $70,000 each since we are 2 partners). To learn how I did my calculation, you can go back to see how I valuate my online company.
After buying The Dividend Guy blog about a month ago, I started thinking about how much our company was generating each month. If I consider that we both use our “free time” to work on it, I would probably blog just for fun anyway. Therefore, I will put the “how much my time worth” discussion aside while I write this post.
In my opinion, there are 3 ways to value something:
#1 How much you can get if you need to sell it quickly upon separation, death, or act of God (usually under the fair market value but still an acceptable and conservative price).
#2 How much you can get if you put it for sale and wait for the right buyer (usually close to the fair market value).
#3 How much you need in cash to recreate the same cash flow that you had previously.
While we discussed how much I can get in a case of an act of God, I started to think how much I would need in cash to generate the same level of income with the same level of effort (which is really work, would be around 10 hours per week as writing is a definite hobby for me).
Say what? What is this crazy idea of having a few blogs worth $1M? How much do you think my site, sideline or company is worth if your small corporation worth $1M?
Yeah, yeah, yeah, I guess all those things are coming to your mind as you read my rant. Keep reading and follow my train of thought.
Our online company generates more than $5,000 per month on average for the past 8 months (and I am not considering the sale of Gather Little by Little). So the question is; how much would I need to generate a cash flow of $5,000 per month?
To this, I’d say that costs are below $1,000 per month excluding our time. We now have writers, an accountant, a VA and we have servers to pay so it adds up to $1,000. Therefore, my company generates $4,000 of cash flow per month, net of expenses.
Well if you do the math quickly; $4,000 per month is $48,000 per year. $48,000 on $1,000,000 is 4.8%… 4.8% is way more than what you can get in the GIC market (and actually on the safer side of the bond market too!). On top of that, our corporation is taxed at 19%… So even if you only make 48K per year (i.e. no other sources of income), your effective tax rate (average) is 23%.
I guess that building and following a portfolio generating a 4.8% yield would require about 10 hours of work per week since I couldn’t just buy a bond and wait for my money.
If I would have made the same calculation a year ago, the magic number would not have been close to $1 Million. However, this also means that the magic number will probably be close to $2 Million in another 12 months… While this sounds ridiculous at first thought, let’s rephrase it the other way:
If I offer to put your $1 M somewhere that:
– Will generate a 4.8% yield
– Will require little effort on your part to manage
– Will offer a nice potential for growth
– Will keep its value over time and probably increase in value
Since nothing is comparable to the market, I would certainly give it some thoughts, what about you?
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