New owner takes over existing business

[Britney93550]

Hello, Newbe here.

I came accross a great opprtunity to buy an established sign shop.
How do I determine the value of it, and profitability.
Also, like to hear any inputs you may have.
The present owners claim that it has been appraised for $200,000 but they are selling it for about one third.
Do not get me wrong, they are very nice people and I have faith in them that they are honest.
I am very excited and looking forward being trained and take over the business, but I have no other source to get answers to my questions.

Welcome any and all comments.

 

[GVP]

You really need to consult an accountant... the small cost could save you a lot of headaches...

 

[Pat Whatley]

There are so many variables to consider first you're really going to be stepping out on a limb if you're not careful, the first is consider who had that appraisal done and what did they know about pricing a sign shop. You can't price a creative business the same way you value a retail store.

Things to consider:
Equipment - How much is it actually worth, what's it's condition, do you know how to use it all

Jobs - do you have the same skills, talents, and resources the previous owner had and will you be able to continue to do the same quality and caliber of work he did

Goodwill - IS PRACTICALLY WORTHLESS. Customers are not going to keep coming just because "It's the shop John used to own"

Employees - Are there any employees? Can you trust them to stay on or will they use this as an opportunity to jump ship and take the client base that has been dealing with them for years with them? Are the sales directly related to the experience and talents of any one employee because if they are then that employee will own you.

You - Do you have any idea what you're doing? Don't expect to get trained on the myriad of things you'll need to know to survive in just a little time. If you're starting from no experience you'll be doing good to be up to speed in a year.

Then don't forget why he's selling, production methods, production systems, credit with vendors, shop reputation, inventory, liabilities, can you keep the building lease and on, and on, and on.

 

[R08]

The present owners claim that it has been appraised for $200,000 but they are selling it for about one third.

Sounds familiar. They all say that.

they are very nice people and I have faith in them that they are honest

Based on what? If they see you as a potential suck... I mean buyer then they will be nice as pie. But that doesn't mean you don't do your homework.

What signs n such said is good advice. Another idea is to enlist the help of a seasoned businessman to look over the common sense of the thing.

Good luck.

 

[WILLIAMS]

Consult with a CPA. Really look at the numbers. Have you considered a franchise?

 

[ProWraps™]

have you seen the books? no need to even consider the buy until you have.

 

[totalimage]

A little off track here..But palmdale ca. I use to live there at S & 20th..I bet that place has grown. I left there in 1991....

 

[Billct2]

You need a CPA who knows how to evaluate businesses for purchase.
You need a lawyer who's done this type of transaction.
And since you need to be "trained" to take over the business assume you will not be able to produce the same amount of work in the same time as the current owner for quite awhile, and you will not make as much profit because you'll be doing jobs twice when they get screwed up.
This is tough time to get into this business, the economy sucks and the sign business is going through some major changes including dramatic increases in costs along with increases in competition along with sinking prices.
And think about this...I have a nice Ford pick up that's blue book is $15000..but I'm a nice guy so you can buy it for $5000...does that set off any bells?

 

[N2Harpz]

One year ago in April, I bought a sign shop. It had been in business for 20 years prior to me taking over. I have learned tons about making signs this past year. The hardest part for me is the bookkeeping and business part. I hate bookkeeping, but I am in heaven when I pick up a paint brush.

This forum has a wealth of info.... But you can't learn everything here.

1. Make sure that someone stays on to train you. Or someone that will be there with a phone call to give you hands on when you are in a bind.

2. Make sure you know a little something about computers. BIG time learning curve to learn a new sign program.

3. Pat was right about the GOODWILL. You will lose customers cause the Good ol' boy is gone now. But you will also gain new ones as soon as they learn that they can trust you.

4. You are going to have to learn something about Design. There is a lot to learn in that field.

I'd do it all over again. It has been a fun job. Now if I could just learn how to make money at it..... LOL

PM .... me if you have any questions.

 

[onesmf]

Bottom line, it's worth what it is currently bringing in on a monthly basis. All the equipment, etc..., is only worth it's depreciation value. The only reason to purchase an exiting business is client base. If it isn't there, then you are better off starting your own shop. New equipment, software, etc.. is a bigger tax break. Two things to look at, the monthly income and "good will" assets.

 

[BobM]

CPA's know the numbers, lawyers know the legalities of the transaction but I think you need a business broker as well. Ted Burbank literally wrote the book on business valuations (bizval@buysellbiz.com). I worked with him on many business transactions and he has the formula to truly value a business for a buyer or a seller. The three professionals each have a place in a business purchase and each bring a very valuable and different perspective. Good luck. BobM

 

[iSign]

CPA's know the numbers, lawyers know the legalities of the transaction but I think you need a business broker as well.

ditto!
l
ot's of other good advice too!

If you can get owner financing & a longer training committment, then the seller will have incentive to help you succeed.

Also, in addition the the risk Pat mentioned of a key employee breaking off to start his own business & take all the clients who know him, you also have the seller to worry about. Make sure you have him sign a no-compete clause, because whatever he plans to do now might fail... and you don't want him setting up down the street calling his 20 years worth of clients.

 

[FrankenSigns.biz]

Goodwill - IS PRACTICALLY WORTHLESS.

I would agree with that if the goodwill was given as a customer list, but when it comes along with the existing phone number the goodwill is extremely valuable. If I sold my business tomorrow the phone would continue to ring for years based on the goodwill of my clientele. Why just yesterday we got a call from a client we haven't heard from in three years who spent over 2 grand on color copy work. The client didn't ask for me, they just called and placed the order. Had I no longer been a part of the company, the order would have been placed just the same.

So, if the goodwill includes the company phone number it certainly has value.

 

[imagep]

I have purchased several businesses, and I have made every mistake possible....

If you can keep the same:
1) employees
2) location
3) phone/fax/email
4) vehicles
5) and business name

then it may be worth while. But the loss of ANY of those attributes will cost you most of the existing clientel. The ONLY way that you are going to be able to actually keep ANY of the customers is if you can make the transition without customers even recognizing the ownership change.

You didn't tell us a whole lot about the business, but if it is homebased business, or if it has no employees that will be staying on, you need to assume that you will loose 100% of existing customers. At that point the business is only worth equipment fixtures and supplies value.

Even if you manage to keep the majority of the customers, if you don't have a capable staff (employees), the only thing that you have purchased is a job. That job may very well be worth $66,000, but only if it pays significantly more than you currently make.

I have read a ton of theories on business valuation, but the only one that is logical is this: Reasonably project what the total owners compensation will be (gross profit) over the next five years, then subtract out either the salary that you currently make or alternatively the salary that you would have to pay someone to manage the business - that will give you the "true profit". Then add up the five years of projected true profits, reverse amortize (compute the present value) that figure at an interest rate that makes sense to you (maybe the interest rate that you would have to pay inorder to borrow $66,000).

Ask the seller for a copy of the appraisal and complete financials (a balance sheet and P&L's dating back for at least the last three years). If he is not willing to disclose that, then offer to sign a confidentiallity agreement. If he still won't provide the docs, then walk. Any real business should be able to provide you with a P&L.

 

[Signsforwhile]

I see a lot of people have recommended to use a CPA which is a definite.

You ALSO....WITHOUT A DOUBT should visit a lawyer. Also a small fee compared to what may happen down the road if you didn't.

 

[cartoad]

Lots of good advice here. Look at what and how soon will equipment need to be replaced to remain competive. This can be a killer when you look at purchase/lease costs on the equiment. If it is old will it will need expensive maintenance. You have not said what you will bring to the party, if it is only your money and good credit, it will be a rough road with out a doubt. Good luck, on your decision.

 

[binki]

There are a lot of ways to value a business but you should at know the basics. Get a book on how to establish a value, or valuation of a business.

Then, contact someone who does this for a living. You will need someone to audit the books and someone to negotiate the transaction.

A few things to look for in a business to indicate problems:

Can the owner provide at least 3 years of sales records? This will indicate recurring customers and give some indication of volume and cycles throughout the year.

Is the owner pocketing cash sales? This would be indicated by differences in reported sales to you and deposits into the bank and also in reported gross sales for tax purposes.

Is the owner running personal expenses through the business? Like pocketing cash, this will have the effect of reducing taxable income and lower the net.

Will you be able to assume the lease under the same terms? Can you get all equipment and real property without renegotiation?

Will you need to petition your government, city, county, state, for permits?

Why is the owner selling? Some sell because they don't want to do this any more, some because they can't do it any more, some because they are retiring. Retirement is probably one of the best one to get because they owner is probably doing ok and not creating liabilities.

Will the owner stick around for a while to help you out? There is a normal transition period but the length can be a few weeks or a few years. Make sure the owner is willing to live up to that.

Will the owner open a competing business close to you? Get a non-compete that is not overly restrictive. If your business is all within 10 miles of your shop then a 20-30 radius is probably enforceable where a 100 mile radius may not be.

Finally, even if you do a bulk transfer because of problems the owner has created you may still inherit liability from the actions of the previous owner.

good luck.

 

[theskipman_98]

In the case where I work at, turning over the company included a no compete clause with the former owners' billboard shop (which use to be part of this business), but was written so it was one way, they could compete with us, but we were forbidden to compete with them, even though the billboard shop did smaller signs.