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Sorry for being vague, I am trying to protect my privacy not from you guys replying but from people in my area.
This business is pretty much entirely based on "good will" and intangibles with very little in real assets. That being said it grosses about 70k a year, has been operating a long time with a similar cashflow and should profit somewhere in the range of 40-45k a year after expenses (excluding a salary). Actual startup other than purchase price is less then 10k. It is very stable, but with limited potential for growth. I know these numbers seem small and most people who can give an answer to me would never consider something with such a low profit number but for this location those numbers work.
I can offer this:
Years ago I worked for Tandy Corporation (Radio Shack and other companies).
The president of Tandy Corp told me his goal was to reach 100% ROI. That's right. He wanted 100% of the money the company had tied up, and he wanted it back every year. I was privy to the inside numbers and I can tell you he darn near got it. Every year.
I know another man who was in the fabric industry. He has since sold his company for several million dollars, but he told me that his entire investment in the business was $500! The $500 was contributed years and years before he retired, but what he was telling me is that he reinvested money into his company over and over until he had the income and the company he wanted.
Most people pay way too much for their new companies. The buyer of the above company paid too much and went broke in a few short years - lost his entire investment.
So go in with the idea that you are going to go in cheap, work hard, "live on beans" and reinvest your profits until you get what you want. It sounds as if you have recognized the limited potential for growth, and maybe that will greatly influence what you are willing to pay for the company.
...you are your own boss and the hours are somewhere between full time and part time.
How do you put a realistic value on this?
You start with what Econ 101 taught us as the "opportunity costs".
Being involved with X means you can be involved with Y...
Y would pay you $50,000 + co paid benefits like HI, 401K, vacation, etc.
X proposes to pay you $40,000 but only require 30 hours per week vs 50.
Fill in YOUR exact numbers as appropriate... and do the math.
The INCREMENTAL difference (+ or -) is what you might "gain" (or don't)
If one were looking to buy a burger restaurant, and the two options available are 1) Big Bob's Burger Barn, and 2) McDonald's, and each of them has the same dollar value of PP&E, are you suggesting that the purchase price should be the same for each, because the goodwill associated with McDonald's has zero value?
If Bob's Burger Barn is returning the same profits and does the same level of business, you'd be nuts to pay a lot of extra money for McDonald's because McDonald is well known.
You wouldn't be paying the same price, though, because the McDonald's franchise fees are quite hefty, and you are not getting nothing but good will from McDonald's, you are getting a major national advertising campaign.
If Bob's Burger Barn is returning the same profits and does the same level of business, you'd be nuts to pay a lot of extra money for McDonald's because McDonald is well known.
You wouldn't be paying the same price, though, because the McDonald's franchise fees are quite hefty, and you are not getting nothing but good will from McDonald's, you are getting a major national advertising campaign.
I don't disagree. I was simply responding to MrRational's claim that when buying a business, there were only two basic assets, and that goodwill has zero value.
I don't disagree. I was simply responding to MrRational's claim that when buying a business, there were only two basic assets, and that goodwill has zero value.
Good will shows up in the profits, so if you are paying for big profits, you are paying for good will. But not paying for good will as a separate item. If Mr Rational is only paying the depreciated value of equipment, the rest of us are paying a price based on return of investment. Good will is rolled into that figure. Businesses with no good will are most often not doing much business and not returning profits.
For small business you must be careful about that good will thing. Some small businesses are a huge success because of the personality of the owner. Once he moves away, the clientele will go elsewhere. Owner charisma can be a big factor in bars and restaurants, but even in other small businesses like boutique clothing stores. It certainly can effect any sort of service industry.
"Everybody loves me" isn't worth much if that isn't translating into a nice profit margin.
Good will shows up in the profits, so if you are paying for big profits, you are paying for good will. But not paying for good will as a separate item. If Mr Rational is only paying the depreciated value of equipment, the rest of us are paying a price based on return of investment. Good will is rolled into that figure. Businesses with no good will are most often not doing much business and not returning profits.
Goodwill is the excess of the purchase price over the book value of the assets. It is a balance sheet item not an income statement item, and as such, doesn't show up in the profits. Might profits be higher because of goodwill? Sure. But the goodwill doesn't "show up there." Your next paragraph illustrates the point perfectly. One could pay for goodwill in the purchase of a business. But if all of the goodwill is directly related to the retiring owner, it is unlikely that profits will stay at the previous level.
Quote:
For small business you must be careful about that good will thing. Some small businesses are a huge success because of the personality of the owner. Once he moves away, the clientele will go elsewhere. Owner charisma can be a big factor in bars and restaurants, but even in other small businesses like boutique clothing stores. It certainly can effect any sort of service industry.
"Everybody loves me" isn't worth much if that isn't translating into a nice profit margin.
I would say this business isn't worth too much. $70K gross and $40K profit (salary) isn't whole lot. You seem to say there isn't much assets either. I'm assuming no employees besides the owner. How many hours a week are we talking? People always try to come up with scientific ways to say what a business is worth, but for most small business that is crap. Assets have real value, but low profits do not. You are basically buying an average paying job. There seems to be no growth possibility and you even said the business might have an expiration date. I'm just throwing out a number, but I personally wouldn't pay more then $20K for this business. Well, to be more honest, I wouldn't pay a penny, but if I had no other job prospects. This guy is going to have a heck of a time selling this business, so you might as well take advantage of that and give him a low offer.
I own a restaurant and they never sell for what brokers say they are worth. I'm specifically talking about locally owned restaurants or mom and pop stores. I looked at a restaurant that grosses $240K and had a owner salary of $50K and they started asking $80K, dropped to $40K, and finally to $20K. They never sold the business and closed. The assets were probably worth $20K, but there were long term liabilities like a lease. What a business is worth isn't black and white, but I'd guess this business you are talking about isn't worth much at all and I personally would be surprised if he can sell it.
Goodwill is the excess of the purchase price over the book value of the assets.......
You make it sound like you would only pay for the hard assets. There might be a business that generates half a million a year and the only assets would be an office lease and 2 fax machines. You are not going to be able to buy that business for the depreciated value of 2 fax machines. Not when other people are willing to pay based upon the amount of income the business generates.
You make it sound like you would only pay for the hard assets. There might be a business that generates half a million a year and the only assets would be an office lease and 2 fax machines. You are not going to be able to buy that business for the depreciated value of 2 fax machines. Not when other people are willing to pay based upon the amount of income the business generates.
I don't know think that is what they are saying. There are instances where intangible assets do have a financial value, but most of the time it's probably not true. It doesn't have anything to do with revenues or profits.
One example of a intangible asset with value is a local restaurant in my city that has been around for 90 years. They have been on national television and all sorts of food tv shows. Their brand does have a real value. My restaurant on the other hand has no brand value. Most businesses have no value for their brand, or business strategies. Most businesses do not have patents or copyrights.
Edit: anyone else with examples of an intangible asset or good will with real values?
Location: In a city within a state where politicians come to get their PHDs in Corruption
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Quote:
Originally Posted by oregonwoodsmoke
You make it sound like you would only pay for the hard assets. There might be a business that generates half a million a year and the only assets would be an office lease and 2 fax machines. You are not going to be able to buy that business for the depreciated value of 2 fax machines. Not when other people are willing to pay based upon the amount of income the business generates.
No, I think he is arguing otherwise.
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