U.S. CitiesCity-Data Forum Index
Covid-19 Information Page
Go Back   City-Data Forum > General Forums > Economics > Business
 [Register]
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
View detailed profile (Advanced) or search
site with Google Custom Search

Search Forums  (Advanced)
Reply Start New Thread
 
Old 10-26-2019, 08:30 AM
 
5,133 posts, read 3,421,929 times
Reputation: 10431

Advertisements

Quote:
Originally Posted by StealthRabbit View Post

$50k valuation would be steep for me.
That's interesting. Your estimate is way under everyone else's.

I have nearly 30 years experience in this industry, the other business is 8 years old.
Reply With Quote Quick reply to this message

 
Old 10-26-2019, 10:44 AM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
25,393 posts, read 43,136,591 times
Reputation: 28244
Quote:
Originally Posted by KaraG View Post
That's interesting. Your estimate is way under everyone else's.

I have nearly 30 years experience in this industry, the other business is 8 years old.
That's great,

I have advised / taught small businesses for 15+ yrs (on finances), and have owned commercial properties for 40+ yrs and watched a LOT of extremely confident, diligent, and qualified people go broke.

Buying an Existing Small Business - How to Figure Value
BTW: it is VERY simple to ACCURATELY value a company (for free).

But... no need for that simple step (for most).


Good Luck, sounds Golden!

You've got it covered
Reply With Quote Quick reply to this message
 
Old 10-26-2019, 03:45 PM
 
251 posts, read 58,576 times
Reputation: 167
[quote=StealthRabbit;56495953]That's great,

I have advised / taught small businesses for 15+ yrs (on finances), and have owned commercial properties for 40+ yrs and watched a LOT of extremely confident, diligent, and qualified people go broke.

------------
There are many walking zombies out there !
Once I was having lunch with others,one of them cried how bad his business is,so his friend asked why cant you just quit?
He said then the bank will recall the loan !
Reply With Quote Quick reply to this message
 
Old 10-28-2019, 09:45 PM
 
7,851 posts, read 3,426,942 times
Reputation: 7088
Quote:
Originally Posted by Ted Bear View Post
There are a number of ways to value a small business.

The assets...machinery, inventory, etc. What is it worth. Beware of the "goodwill" factor if he puts it on the balance sheet.

Multiple of sales.....you are buying "business/customers". Maybe one to two times.

Multiple of book value.....hard to get a clean balance sheet and therefore compute book value...i.e., what is the financial condition of the business when you net out non cash items like depreciation, etc. Maybe 2-3 times book value is one way to look at it. What is typical for your industry, even if you are talking bigger competitors?

What does he want? What are his expectations, and what are you willing to pay, within reason? You are buying his reputation, his skills, his time, his experience. Given the above, find a number which "fits" within the scope of reasonable expectations.

And what are you willing to pay in order to feel comfortable with the acquisition? Maybe this is more gut based...experience based...industry knowledge based....and knowing your market based.....such that you find a number with which you are comfortable.

Formulas help guide you to a reasonable economic number. Your expertise and personal interest guide you to the "right" number.

Just try not to be emotional, sympathetic, nor too generous. Sit with the seller and lay it all out by each method if you are comfortable doing so. Negotiate to a number with which you both feel comfortable, neither being too generous, nor too stingy.
Goodwill can’t simply be added to the balance sheet, at least not under GAAP. The only goodwill that can be added is purchased goodwill. Self created goodwill? Never.

KaraG, I would echo the advice to have a good accountant review the books. A CPA isn’t necessary, but an accountant with a significant amount of experience can be invaluable. If you aren’t an accountant, you have no idea of the shenanigans that small businesses play with in their books, and you won’t even know the questions to ask. You will be in over your head. Simply managing your own books, even for decades, won’t give you the experience necessary to root out all the crap that’s sure to be there.

It sounds like the barriers to entry are minimal. Even with a good non-compete, are you sure you can prevent the seller from immediately setting up shop through his son/brother/cousin/girlfriend? If the existing customers aren’t under contract, this could easily be a deal killer.
Reply With Quote Quick reply to this message
 
Old 11-25-2019, 05:04 PM
 
Location: Silicon Valley
4,924 posts, read 2,207,763 times
Reputation: 7954
Quote:
Originally Posted by KaraG View Post
We are about 99% sure we are going to buy an existing very small business. It's a well established 1 person operation with the equipment we want to expand our business. We have a good working relationship with the owner already, he would refer existing customers to our nearby location.

We have a list of the equipment which is fairly easy to put a price on. We would use that equipment to continue servicing his existing customers plus expand our offerings to our own customers.

For discussion sake, let's say their gross sales are $100,000 and expenses are $35,000. This doesn't include a salary for the owner/operator. We would be paying someone about $20,000 part time to do that specific work. What would be a fair price for the business?

So you've got $45k in expected free cash flows...and hopefully have a person in mind that's interested in $20K a year compensation...or its a tuck in. Basically it's worth $45-65 a year to you guys....sounds like it's the same either way.

You want the guy to be happy enough and make sure he leaves the market. A couple ways, depending on the industry.

If it's really asset driven, then just do it as an asset sale.

If it's truly a business, then you're looking at a fairly low multiple at that level. If you don't buy it....who will? It's too small to get an interested outside party coming in, so it has to be industry looking for a tuck-in.

Maybe a multiple of 1-2....depending on how you feel. Honestly it's hard to justify above 1 in most industries at that rate.

Alternatively, take the business on an earnout. He'll need something up front, but if you have a good relationship and you can possibly track how you grow this business, he may prefer to have diminishing income stream as opposed to all cash at once. He'll want to help you keep the business going, and you've laid out plans for him on how there's going to be growth. It's the ultimate win-win if you can get there...

Remember, asset sales with a non-compete agreement are preferable, because you never know what debts he's got tucked into the company....especially if you're doing it blind in terms of financials.
Reply With Quote Quick reply to this message
 
Old 11-26-2019, 06:37 AM
 
5,133 posts, read 3,421,929 times
Reputation: 10431
Quote:
Originally Posted by artillery77 View Post
If it's really asset driven, then just do it as an asset sale.
...

Remember, asset sales with a non-compete agreement are preferable, because you never know what debts he's got tucked into the company....especially if you're doing it blind in terms of financials.
Thanks. I think this makes sense because we won't use the name of his business in any legal way and we won't be operating at his location, everything will be moved to ours and operate under our name.
Reply With Quote Quick reply to this message
 
Old 12-02-2019, 02:53 PM
 
6,959 posts, read 3,143,131 times
Reputation: 21085
I guess what I don't understand about this thread is that you asked our advice on valuation, everyone recommended getting an outside accountant skilled in valuation, and you just blew us all off. I mean, I've built and sold three businesses and advised multiple clients as they went through business purchases and sales--and I'm pretty sure other respondents on this board have similar skillsets and experience. So why do you ask our advice and then tell us you're not going to do it? To me, it's a few thousand bucks to make sure you're not making a really expensive mistake. I wouldn't do squat unless a good accountant, CPA or not, had done a full body-cavity search on the books.
Reply With Quote Quick reply to this message
 
Old 12-02-2019, 03:57 PM
 
5,133 posts, read 3,421,929 times
Reputation: 10431
Quote:
Originally Posted by MinivanDriver View Post
I guess what I don't understand about this thread is that you asked our advice on valuation, everyone recommended getting an outside accountant skilled in valuation, and you just blew us all off. I mean, I've built and sold three businesses and advised multiple clients as they went through business purchases and sales--and I'm pretty sure other respondents on this board have similar skillsets and experience. So why do you ask our advice and then tell us you're not going to do it? To me, it's a few thousand bucks to make sure you're not making a really expensive mistake. I wouldn't do squat unless a good accountant, CPA or not, had done a full body-cavity search on the books.
I appreciate all the advice. I wanted to make sure I was on the right track thinking that $50,000 was a fair price based on the initial numbers. Beer Geek was one who did the math and threw out a price:

"$100,000 sales - $35,000 expenses - $20,000 for the PT employee (is this his total expense?) = $45,000 profit.
My opinion is that the business should be bought for no more than $90,000, which gives you a two year payback."

There was only $35,000 worth of expenses to look at. And I sat down and analyzed 3 years of sales and expenses. There's really not much because it's a labor intensive business, a one man show. The good news is $20,000 went to rent, an expense we won't have since we're moving it to our space.

The other $15,000 or so goes for supplies, a little bit of product samples, advertising, merchant fees.
Reply With Quote Quick reply to this message
 
Old 12-04-2019, 07:51 AM
 
Location: In a city within a state where politicians come to get their PHDs in Corruption
1,793 posts, read 1,297,431 times
Reputation: 3452
Quote:
Originally Posted by KaraG View Post
I appreciate all the advice. I wanted to make sure I was on the right track thinking that $50,000 was a fair price based on the initial numbers. Beer Geek was one who did the math and threw out a price:

"$100,000 sales - $35,000 expenses - $20,000 for the PT employee (is this his total expense?) = $45,000 profit.
My opinion is that the business should be bought for no more than $90,000, which gives you a two year payback."

There was only $35,000 worth of expenses to look at. And I sat down and analyzed 3 years of sales and expenses. There's really not much because it's a labor intensive business, a one man show. The good news is $20,000 went to rent, an expense we won't have since we're moving it to our space.

The other $15,000 or so goes for supplies, a little bit of product samples, advertising, merchant fees.
The rule of thumb for one man operations is not to pay more than one time its annual profit. So, you're in a ballpark.
Reply With Quote Quick reply to this message
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.

Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.


Reply
Please update this thread with any new information or opinions. This open thread is still read by thousands of people, so we encourage all additional points of view.

Quick Reply
Message:

Over $104,000 in prizes was already given out to active posters on our forum and additional giveaways are planned!

Go Back   City-Data Forum > General Forums > Economics > Business
Follow City-Data.com founder on our Forum or

All times are GMT -6.

© 2005-2020, Advameg, Inc. · Please obey Forum Rules · Terms of Use and Privacy Policy · Bug Bounty

City-Data.com - Contact Us - Archive 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37 - Top