August 16, 2010, 5:00 am

What if My Online Company Worth $1 Million?

by: The Financial Blogger    Category: Alternative Income,Make Money Online
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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).

This is where I came to the realization that my company is worth $1 Million

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?

The first objection would be; but there are costs to operate your online company!

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.

So tell me, how much do you need to generate $4,000 per month?

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.

And then, I didn’t even count growth in my equation

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:

From an investor’s point of view;

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

How would you react?

Since nothing is comparable to the market, I would certainly give it some thoughts, what about you?

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Comments

wow! You folks are doing well with your wheeling and dealing. The posts are good too 🙂

What evaluation would you use for insurance purposes? Do you have something in place, other than sell the company if one of you were not able to contribute due to unforeseen circumstance?

As an investment I would certainly put money into this company at those numbers.

we will actually keep the same number that we used for the valuation (i.e. 140k). but we are in the process of getting a 250k first to die life insurance so the partner is not left with nothing if it ever happens (he will be able to pay 70K to the surviving spouse and still be able to run the company at the same time).

I’ve been following your progress over the past few months on this blog, and I have to say that your progress to date has been pretty impressive! Not so many people share their numbers in detail like that, and it is inspiring just to see what is possible. Keep us posted on the now 1 Million + company 😉

It’s an interesting way to calculate the value. From a venture capital perspective, it certainly makes sense.

If I was to look at it though from investing my money, how much of the 4,8% is split across 3 ways if I were to come in? That would change it significantly as you would keep some for expansion, cover your share or profit you want to keep and then there is the investor …

In the death of either of you, I would argue that it reduces the value significantly as the value requires your contribution and it’s not guarantee that someone else would replicate that. I say that because you don’t have a product, you have your creativity and business acumen and that’s what drives the revenues.

All in all, well done! Really well done! I love your creative thinking.

Impressive! Congrats on your success!

by: The Financial Blogger | August 16th, 2010 (4:39 pm)

@ Passive Income Earner,

I agree with you that our company would not be the same without one of us. We couldn’t do what we do right now all alone. I guess this is why it’s a great business model since we both rely on each other’s competencies ;-D

How liquid would the $1M be…that is a major consideration. People, including me, would pay a premium for liquidity. Being required to spend a certain amount of time each day is like having an illiquid investment.

by: The Financial Blogger | August 17th, 2010 (6:55 am)

@ Josh,

I totally agree with you. Probably the the 1M$ worth is only good for the owner 😉

That is the main problem for most company owners!

I like it! Very interesting approach. After all, one of the benefits of wealth (especially in retirement) is how much income the asset will throw off!

A post on how you are making $5000 a month on a blog with 1300 readers would be very informative.

by: The Financial Blogger | August 19th, 2010 (2:32 pm)

@Nik,

The RSS readers number is only one indicator of the size of a blog (I used to own a blog with 3,200 RSS readers but with about the same size of traffic than TFB). Plus, I don’t make $5K/month with TFB alone, I run several other websites. Making 5K/month with one site is pretty rare, even in the PF blog field.