Business evaluation

[White Haus]

The other issue that kills the value of any small business is the intimate relationships that the owner has forged with their customers. You lose a lot of that even when you do everything right.

This is very true.

One thing that hasn't been addressed beyond assets/liabilities and volume is how well the company is running. Do they have systems in place? Are employees cross-trained?

Our numbers/size are very similar to the company the OP is evaluating. I'm really curious what that company what will end up selling for.

 

[rossmosh]

First you want to evaluate the assets. How much would it cost to replace everything in the place with similar quality products. If the shop is really well setup, good equipment, good flow, very little changes needed, be a bit generous with the evaluation. If you hate everything and want to change it all around, be way more critical.

Then you need to look at their P&L and figure out their profitability. Looking at gross sales is a waste of time. You want to look at how much the owner takes in annually between salary, profit, and perks. Then you want to subtract what you think it would cost to replace them with a highly qualified worker. Make sure you include insurance, taxes, the whole thing. That's your net profit.

Once you have net profit, you have to use a multiple. Typically it's 1-3x net profit. Some industries will be higher, but I wouldn't suggest higher with an owner, operator type business like this.

 

[rossmosh]

I've always had the mindset that the assets in a complete business sale are only worth what they are able to produce in terms of net profit. If it isn't producing enough to service the debt you take on when you buy it then it is generally not viable unless it has been grossly mismanaged.
The other issue that kills the value of any small business is the intimate relationships that the owner has forged with their customers. You lose a lot of that even when you do everything right.

In 2018-19 we looked at buying up shops, primarily for their client list. The reality is, many businesses are run as jobs and sold as businesses. If you're an owner, grinding 50 hours a week making $100k/yr all told, out the door, you do not have a profitable business. You have a job. Your business's value is a bit more than the value of the assets. But people think 100k is net profit, then they multiply it by 3 and add on equipment value and come up with $500k evaluations on a break even business.

 

[Notarealsignguy]

In 2018-19 we looked at buying up shops, primarily for their client list. The reality is, many businesses are run as jobs and sold as businesses. If you're an owner, grinding 50 hours a week making $100k/yr all told, out the door, you do not have a profitable business. You have a job. Your business's value is a bit more than the value of the assets. But people think 100k is net profit, then they multiply it by 3 and add on equipment value and come up with $500k evaluations on a break even business.

For sure. The owners salary and perks need to match the market rate as if the new owner had to go out and hire the same skill set. Most owners don't pay themselves a real world salary to save on taxes and adjusting that will bump the net down. A lot of people looking to buy a business don't want to assume 60 hour work weeks either. I think that is some of the draw to owning a franchise, they do all the thinking and systems for you which makes things much easier for an owner to step back.

 

[netsol]

I've always had the mindset that the assets in a complete business sale are only worth what they are able to produce in terms of net profit. If it isn't producing enough to service the debt you take on when you buy it then it is generally not viable unless it has been grossly mismanaged.
The other issue that kills the value of any small business is the intimate relationships that the owner has forged with their customers. You lose a lot of that even when you do everything right.

one of my larger clients has grown through about 15 acquisitions, over the years
i have been a key part of 5 or so of these
it is interesting to see how often the customers who come over from the old (acquired) company react with "what the hell do you mean they BOUGHT ME?" when your sales people approach them
there are always a certain % of customers who bristle about policy differences between the 2 companies, etc & choose to move on