How to put a value on a business?

[Haakon]

Not the easiest question to answer, I know.

But here is my situation. I run a small sign/graphics business. About 10 years old, yearly turnaround is about $100k or so. One-man shop, I do everything myself (have a degree in graphic design), from design to production and install. At least as far as my equipment can produce, namely cut vinyl graphics. Everything else is subbed out.

And now I'm at a crossroad, my lease is up at my current location (building is being sold to a company that will be starting to make face masks), so I have to either find a new location, or somehow join up with the company I sub out almost everything to. They need a designer, but in my view the only viable solution is then to buy out my business (equipment, supplies, and most importantly customer list) and employ me as a designer or what they need it to be.

So then, how do you put a value on the business? The real value isn't in the inventory, but the customer list and revenue. But everything has to be taken with in the equation somehow.

Probably several of you that have been in this position in the past, so every bit of input would be greatly valued! Thank you

 

[Jester1167]

You might think about selling them the equipment and taking a commission off all the clients you bring with you.

 

[Texas_Signmaker]

Jester has it 100% correct. You're like a salesman brining in your own clients, you get a percent of commission.

 

[BobM]

Or you may call a business broker - NOT A REALTOR. They can quickly determine what value your business has given your circumstances. It may be only the value of you used equipment and inventory or the "potential for growth" by new owners.
It is always worth the time to find out from a professional. "Value is in the eyes of the beholder". I sold a small business and was surprised a what it sold for.
The their suggestions have value as well.

 

[Hero Signs]

typically in the sale of a business but there are multiple factors, the business is worth 2-5 x owners income plus inventory.
typically when you hit the multiplier of 3 4 and 5 there are some long-term agreements in place but typically a small business will sell for about two to two-and-a-half times ownersincome plus inventory.
now with that being said you are a sole proprietor, many people will tell you that a small business doing under $300,000 in business typically that business exists because of that business owner. without the business owner there's half or less real value

 

[Bradley Signs]

Why not move to a new Location?

 

[iPrintStuff]

In the UK with the current climate it’s pretty much just value of equipment minus redundancy. I.e if you went into administration and sold all the assets/had to pay all staff redundancy pay.

Sure you may get a bit added on due to contacts etc but ~100k sales isn’t going to push that up too far, especially seeing that you may lose a few customers due to business change etc.

In your case you’re best selling the equipment (does your potential new job even need all your equipment?) and taking the job. Not sure how you guys do it over there but if you can get some commission from your old customers I’d be all over that too.

 

[Jeremiah]

Why not move to a new Location?

I agree move ! Deep down You will never be happy any other way .

 

[FireSprint.com]

(Net Profit x Multiplier) + Market Value of Equipment

How much do you pay yourself? How much would it cost to hire a person to do what you do day to day?

Generally, when valuing a business, you need to figure your profit after labor and that will give you an idea of the price you could sell your business for.

Let's say you sell $100k worth of signs (Gross)
After you pay for material there's $70k left (Gross Profit)
Rent, utilities, advertising, insurance etc - $25k (Operating Expenses)
Hiring a full time employee to replace you - $40k (Just a guess?)
That leaves you with $5,000 in net profit. This, times a multiplier, plus the market value of your equipment will give you a rough idea of what you would likely be able to sell your business for.

The multiplier is based on the strength of you brand. Your region, etc. A good online presence will attract an investor. Good client base. Little competition. Etc. I have seen anywhere from 1x-4x with small sign shops like this.

 

[Stacey K]

I think you should find a new location. After being your own boss you will NOT be happy working for someone else!

 

[James Burke]

One-man shop, I do everything myself... from design to production and install. At least as far as my equipment can produce, namely cut vinyl graphics. Everything else is subbed out.

In all honesty, "YOU" are the business. If you remove "YOU" from the equation, the business is nothing more than vinyl cutting equipment a customer list.

That is very different from an employee base, policies, procedures, etc. In other words, you do not have an "operation" in which another owner could step in and operate, unless they wanted to do the work all by themselves. It will be impossible for a "non-technical" business owner to assume, even though they may be very savvy in all other aspects of business.

We live in a world where equipment and outsourcing is easily accessible for one-person operations. Startups and bootstrappers will most likely buy their own equipment and build a business on their own, while investors with money may lean more toward a formal concern.

Your business is far more valuable to yourself than it will be to anybody else. If it were me, I would add a few employees and get it to the point where it can thrive without you before selling it.

JB

 

[Alan Clegg]

I'm in a similar situation. A small business that is entirely dependent on myself and my wife to run. if i wanted to retire, how do i box up the skills and knowledge that are the core of a business? luckily i have a few years to modify what i do into something salable, but I'm unsure what kind of ribbon to tie it up with.

I have to agree though, once you are your own boss, giving it up for another is like a hair shirt.

 

[printhog]

Almost all business sales are calculated from prior year (trailing) revenues.. COVID will affects that this year..

Generally the price you get for your business is driven solely by these things:

• the uniqueness of what you do - art, designs, copyrights, contracts, client relations, systems for production (labor/process guides)
• what you earn in such a way that the buyer can get that same earning and tax benefits as a going salary
• the rate of return the buyer will get on their investment compared to other opportunities
• ways the buyer can improve the existing thing for their benefit

So - if you have art protected by copyrights, you have value there - 5x revenue of those items. If you have the shop standardized with written processes so a minimum wage person can do the work, there is value and stability in that - makes you more appealing to a lot of buyers. If you have clients under contract there is value = 50% of the contract term x 1 year trailing revenues for those clients. If your clients can't get what you do elsewhere there is a stable base to nurture work from and again is more towards a broader base of buyers.

Then- line 2 is pretty much obvious, your buyer needs to make a salary and typically a 2 year window of this is expected.

Third line- If your buyer can find another opportunity and get a better return then you gotta beat that in the sale value. They will likely need to finance, so the debt will offset your price. You need to have solid auditable books that show a good history to prove they can get a ROI on your business.

Now the bad - youre in a pinch - your lease is up, and it takes time to sell a business - usually a year. So this whole thing is likely a train wreck for you.. sorry. I've been there. To add to that hurt -
At the $100k level doing knife cut and sub work, Id say that you're very far behind the market trend to digital, almost at the obsolete level. At least as to whether you can sell for a good chunk of dough.

now the last item in the list - There may be an opportunity for your buyer to move the shop INTO digital print, and that may be the one saving grace that helps you sell. They may keep you on for a year to get the new operation stable. In that case theyd upgrade and hope that new machines and tech will increase you from $100k to $200k and liekly thatd be the case.

But be very careful if you 'merge' with another shop, I've seen a lot of those go up in flames, figuratively and literally. I'd say look at your largest client (if at least 40% of your workflow) and see if they want you to be IN-HOUSE, you might get a deal there that keeps you in and hands on, and they might even be able to upgrade you. good luck. hope this helped.

 

[rjssigns]

My business is worth what someone would pay for my used equipment. I'm it. If I'm really in a bind my wife will help. For big installs my good friend and wrap genius is hired for the day.

James Burke is on point. You built the business. Your clients want you and your skill set not the person that bought it. Final point: Client are afraid of, and don't like change.

 

[Stacey K]

I saw my Dad go through this twice. First time he was an appliance repairman for Pranges. The store burned down and they didn't reopen the repair department. My Dad bought all the tools and 2 trucks and got the client list for free. In that case, he was already known to the client list as one of the 2 repairmen. He hired the other repairman so not much changed except the business name for clients. When he sold his business, his top repairman bought it so again, not much changed for the clients. He got top dollar for the business and the buildings which he may have felt slightly bad about for a while. I always thought if you hire someone with the intention of them buying the business someday, they will pay more for it than some guy off the street.

 

[PortlandPrint]

Anyone struggling with wondering how to exit your business pickup the book “built to sell”. It is pretty decent and gets you think about removing yourself from the business.

Anyone who has a business heavily dependent on you has a job, not a business.

I mostly work with online / websites and build those so that they can be sold for 3x annual earnings. Minus a 15% brokerage fee. Those do not really require equipment, but could have inventory which is additional.

A buyer wants an easy transition so employees or contractors that go with the business are the best case. My wife lost her work earlier this year due to covid so we had her doing lots of work in and in the business. We are in the process of outsourcing what she is doing so we can sell without the hassle of training.

anyhow I agree with everyone else. Look for a new location. Run things as you do but start planning for an exit. The sell on your terms.

 

[binki]

You would need someone to do a business valuation assessment. Basically a premium price would be a multiple of NET plus FFE. As you mention, the customer list is valuable however that value diminishes if you are the reason people come to you. As already mentioned, using a business broker would be the way to go.

 

[Sindex Printing]

If I was in your position I would ask for 10% to 20% of the yearly sales as a lump sum initial buy out. 10 to 15% of retained customer sales for a minimum of 3 to 5 years or longer. Then the last thing I would ask for is an employment contract for 5 years with an option for you to continue employment for the company and no non-competition clauses. All would be negotiable but this could set your self up for a start of a retirement or give yourself some financial security.

I have a current offer to a business owner.
Guarantee employment for both employees for one year at current pay converted from hourly to salary. Residual commissions for the business owner (or his wife) for the rest of their lives at 10% for all customers that would stay for the life of the customer. If the business sells before their passing they would receive up to 5% of the selling price. If the business closes they would receive the entire customer list and files to sell. The owner and his wife are considering the offer currently and are in talks with their accountant and financial advisor.

I know what I would value my own skill set, relations, connections and knowledge base that I have built over the years.

Don't be afraid to value your knowledge and skill set at good rate. You know your skill set and what you can contribute better than anyone else.

If you don't feel comfortable with the deal relocate and continue to push forward and sell when you feel its the right time for you and your family.