The value of your time

When looking at the value of a company the one area small businesses frequently disagree with investors/buyers is the value of the owners time. I have seen this a few times recently (and had a discrepancy when I sold a website a number of years ago).

The problem starts when looking at the value of a company based on EBITA. The owner frequently considers this number to be higher than the potential buyer because the owner might be not taking a salary or is taking an unusually small salary. The potential buyer would need to replace this person with a real salary and for a small business that frequently will have a dramatic impact on the profitability of the company and thus the ultimate value of the business.

In the case where I was selling a website, the buyer made the argument that they would have to hire someone to do the work I was doing so therefore that salary had to come out of yearly profits and thus the purchase price was reduced. In my case it worked out because the person they ended up hiring, part time, was me, so I received the compensation anyway.

It’s important when looking at a companies profitability and value to factor in the cost of the owners time along with everyone elses.

Have a great day!

Lawrence

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