I started a services company a few years back that is doing well. We are in a new industry and have a very strong brand. We are not, however, as business savvy as some and have, therefore, reached out to a senior management consultant.
This management consultant is charging a pretty high rate to help us out with our organizational, finance, and people issues. He wants to take a controlling stake in the company to stay involved but will continue to charge for his time.
He has looked out our cash flow and balance sheet and determined that the company is "worthless" and has offered a small amount of cash for this controlling interest. We have a sizable shareholder's loan (from me) and another small loan (from my wife). We are, however, profitable. Our gross margins are 80% and net profit is 20% to 30%. His offer is currently equivalent to one month's net profit for 51% equity and voting rights. The loans are approximately 16 months net profit.
We currently have 20% to 30% market share in our current market and have 10x growth potential just by crossing borders.
I need to tell this guy what this company is really worth.
First off, cut ties with him immediately. The valuation is irrelevant. He is trying to steal from you now and will continue to do so for the rest of your time together. This is a bad relationship. There are tons of savvy business people on here who are good people who will help you honestly.
He is trying to milk you and you need to withdraw from the relationship ASAP.
My background is in services (customer care/experience) and I am very aware of valuation modelling, growth challenges, organisational design, etc. Happy to talk it through with you if you would like to contact me. Hope I can be of some assistance.
Very hard to value a company without knowing more information such as industry and competition in your industry and location but I would definitely get a second opinion before making such a deal. Even a good independent accountant can help you with your business if it is a matter of managing the finances and cash flows. A couple of quick points to make sure you are realistic about your business and growth:
- Do you have financial forecasts out 2 years (or more)? You need 2 forecasts - one with and one without the help of the management consultant - use this to figure out the value they are adding to your business.
- Does this management consultant really offer the right experience - what are you missing and is this person the best person to help. E.g., If you are a technical person and you need help in sales, will this person help with sales? Do you need help with pricing and business development - what has this person done to demonstrate success in those areas?
- service business are very hard to scale unless you create a software as a service (SAAS) or other product/platform that can be sold and easily implemented by customers. Otherwise you are dependent on growing people to provide those services and managing staff quality and growth can be very difficult.
- what is the competition? How easy is it for another competitor to enter your market or replicate what you are doing?
- how are you different to other service providers out there? What makes you special? Is there innovation in the industry that will ultimately replace the service you are offering?
- Do you really need to grow at this point? This sounds like a small business that is getting profitable and self funded. Would it be enough to stay small for a while and learn from the customers you have and make a sustainable living. Not all businesses should be big. Think about what you want from life and your business. Anyone you bring in to help you should be similarly aligned.