I have 80K in revenue with a 65% profit margin after paying an employee 24k which was my biggest expense.
I have someone interested in buying in. Business is 3 years old and my month over month revenue continues to increase.
I am interested, but I don’t know how to price it. Business has around half recurring revenue and half consulting revenue.
Any advice on formulas to use to price it?
You are not factoring the cost of your time. How many hours do you put into it?
Formulas are not important. The real price is the one you will agree on. Maybe you will never agree. Fundamentally, you must understand that: you certainly know the minimum price below which you won't sell. And your buyer knows the maximum price above which he won't buy. You will know soon if you can make a deal.
About formula: you can use a simple one: take your revenue and profit projections for future years, and sum up expected profits of the coming years. If you are on a hockey stick growth curve, take only a very few years because this is risky, and if you are on a secure and stable business, take a large number of years, like you would for real estate.
Here's how a VC might think about valuing your business. http://www.scalevp.com/a-valuation-framework-for-saas-companies
If your business is growing fine on it's own, and revenue is increasing each month, why would you want/need to sell any equity? If you need to raise some quick capital for speeding growth, or the person brings skills which will propel more explosive growth it makes sense, otherwise your just cutting out you own pocket for no reason. Otherwise, it seems like everything is going just fine, why not just leave it like it is? If it's not broke, don't fix it?
Exactly. If things are growing and this new equity person only brings money to the table don't take the money. Grow your company slowly and deliberately and save the equity for yourself or when you really want to sell out.
Do you need the money to grow? If not, don't bother. A better bet (rainy day solution) might be to apply for revolving credit facility with a bank.
I'd ask how much equity said potential investor wants, and look at their justification.
Irrespective of how you personally determine the worth of your equity, the above is a conversation which will occur anyway.
I will note, however, that "buying in" usually entails more than just a cash infusion. Does the investor want a board seat (or equivalent)? Does the investor bring in contacts/credibility? Does the investor want some form of special setup like participating preferred? Profit sharing? etc etc.
I wouldn't say price is irrelevant, but I would say that the baggage associated with a large percentage investor is one which you should contemplate taking on with caution.