Assessing a Business For Sale

The easiest is the true net worth. Assets - debts - outstanding payables + recevables.

The accountant of the business, or the owner, should provide you with that.

An example was a friend wanting to buy a restaurant. From the bookeeping, the restaurant seemed profitable, because the owner was taking no salary, and working most hours.

At least it was debt-free and had assets, but it's net worth is the formula I gave - by the book.

The owner of the restaurant was trying to sell based on business volume, which was around 500k$ per year, which was wrong. It real worth was much less.
(and in the case of a restaurant - subtract what's needed for repairs / renovations)

If business volume was important - then there would be profits - and hence Assets in the form of Cash in the chequing account.

I don't find it's worth "a few grand" to do this assessment that you can do yourself, with perhaps the "help" of a business accountant, that you trust, and that would do your accounting in the future. Thus he/she would have a vested interest in your survival.

Another example was a friend opened up a Quiznos. Employees stole food like crazy, adding to the food cost, forcing the owner to do 70+ hours a week to not go under.
Sold the franchise exactly one year later for the same amount of invested money.
That person is now short one year's salary.

The person that bought it, will run it with his entire family that live together, keeping all the money under one roof.

So goodwill and reputation is Worth Zero. Recevables (invoices waiting to be paid) is worth money if they are not past 90 days.

Since you're in Frisco - look to cater for something highly repetitive, and desirable.

I'd open up a dairy bar myself on a busy tourist street - and give discounts to students and employees in uniform, and have lots of flavors in low-fat, and milk-free products. Also sell pure juices only.
Such a place, where most of the hours are done by yourself, and perhaps just a couple of part-timers, where the resell is high and the cost is low.

Put a big solar panel as an awning !

Haha, but seriously, what kind of business?

If it's relatively common - look at similar businesses in other cities - and take the owner to lunch / dinner on Your Tab. Much better than getting an consultant that you're paying to say What You Want To Hear and is not liable !

 

I think valuing a business is a tough question to answer without any information on the type of business. Generally speaking, I think one of the most important things you can do for starters is to find a trustworthy, independent CPA that can Audit the books to ensure that whatever price you're considering is based on factual financial data and not data that's been manufactured in order to lure a better purchase price. The CPA will also help ensure that you're looking at the type of financial statement preparation that's true to value, i.e. cash vs. accrual or income tax basis vs. GAAP, etc.

Unless you can personally fund the business comfortably over a few years span, you should also find out if a banker will support you in this endeavor before you even hire a CPA since without proper funding for future cash flow needs, the CPA's function would probably be for naught.

Good luck, whatever you choose to do. It's a big step but if you can get comfortable with the purchase, it will be worthwhile. Your hours will be very long and you'll have much stress but at the same time you will be working towards a personally formed and nurtured destiny.

 

It depends on the type of busineses. I've owned a flight school during the late 70's and 80's. it was a lot of fun but the old saying was true, You know how to make a small fortune in aviation? Start out with a big fortune LOL. A limo service was also fun in warm weather but sucked in the winter, but made money, and now a Ice Cream store, you make money but have to be there ALL the time.

 

I am a Certified Valuation Analyst, so of course I am recommending that you have a CVA do a business valuation for you. If you go to NACVA.com you can get a list of CVAs in your area.

Regards,
Dave

 

Just watch out for "blue sky". It depends on the business, but with today's economic climate, I would put very little (none) in blue sky equity.

 

If the assets are overvalued and the revenue's a little thin, it's not worth what the sellers think it is, and probably isn't the best buy. Are there other companies in the same industry you might consider? Could you start up your own company doing the same thing?

Whatever you decide, take a good look at your options first. Some time off to travel might not be a bad idea.

 

I'll throw my 2-cents in as I have a bit of experience with this. I have an MBA in finance and bought a small business almost 6 years ago. Honestly, it is very much a mixed blessing. The biggest problem that I have had over the years is finding reliable employees. I have been lucky in that they have been decent and mostly honest, but far from reliable. This is one area that you should really think thru.

As for your question on valuation - there are a number of methods but no single one that will give you a simple answer - what you need to do is run a few different methods and then weigh them. I do not know anyone in your area, but I would recommend that you look for a small CPA firm that specializes in SBA (Small Biz Administration) matters. They will be far less expensive than bigger firms and will have far more direct experience with small companies - if you happened to be in Boston I's have the perfect guy for you.

Just one last thought - you mentioned that the owners were likely overvaluing assets - I'd bet you dollars to donuts that they are. They might be trying to pump them up, or they might be decent and trying to value them honestly, but they are not objective. You will find that the owners are going to be your best source of info, but I'd advise that you be skeptical of everything and check it out. You can probably figure out a fair value for the fixed assets pretty easily - get their list and then check online - craigslist, ebay etc and if it is specialized equipment there will be a company or two that specializes in selling used and refurb equipment. Your value on the assets will most likely be lower than the owners - just how much lower will tell you just how much they are pumping up everything.

Good luck.

 

You need to go see a commercial real estate appraiser. Not only do they value the real estate lease/purchase but the assets and the intangibles also. Good luck! :yo:

Wildkow

 

I knew a guy about 40 years ago in L.A. who owned a business renting lighting and sound equipment to movie studios. He wanted to sell the sound equipment portion of the business, so he set his sound equipment rental prices so low that he became the preferred source. For a year he did a land-office business. No profit but a tremendous cash flow. Then he put that part of the business up for sale and got a really good price. Not so good for the buyer, however.

I echo the suggestions above to have an accountant audit the books, and an appraiser value the property and a professional appraise the business itself.

Note that there are actually appraisers who specialize in appraising low, and others who specialize in appraising high. If you are valuing an estate for tax purposes, you hire the former, and if you are selling a property you hire the latter.

I think we'd all be curious to know what kind of business you are looking at. With some kinds of businesses customer loyalty is to the service provider, not the company, and so the company itself is worth no more than its physical plant. I had a massage therapist I liked. When she left her employer and set up her own business, I followed her, as did all her regular clients. If my travel agent were to leave her employer, I'd do the same. On the other hand, if my favorite hiking lodge changed management, I'd stick with the lodge, at least long enough to see if the quality of service remains the same, because I like the location and the amenities.

Some businesses are not worth much without the people presently running them. Others it doesn't matter who's running them. The customers at a fast food joint probably don't care who the owner is.

 

Knowing the above, I'd add that an additional consideration is: Would you be the instructor, or are there instructors who would stay with the school? If the latter, are they personable? Students won't stay with a grouchy instructor. Would they make a commitment to stay with the school? How hard is it to find good instructors?

A teaching institution is a little different from, say, a travel agency: You don't get long-term clients. But you need to keep your students until they complete their course (unless they pay for the whole course in advance) and you want satisfied graduates who will tell their friends about your school. So, while physical plant is important, the staff is also very important. Unless you think you can find good people to work with you, or it would be a one-man operation.

Of course, like buying a used car, you want a good airplane mechanic checking out the planes. A CVA may be able to give a valuation of the business as a business, but only a mechanic can tell you if the planes are junkers.

 

I'd find out what replacement costs, liability costs, and parts costs were for the business also.

 

Thoughts.....

Is the CVA going to perform a receivable sampling whereby overall collectability is ensured (important in this economic climate) or is this a pay up front business?

Maybe order a Dun & Bradstreet to see how their credit report looks to make sure there's no outstanding judgments, liens, etc. Is there any way to check to make sure there are no suits in progress so that you're not buying these types of potential liabilities or are you able to structure the buy out agreement that you're not liable for any activity of the Company prior to the purchase date?

Is their insurance adequate for their business model or will you have to fund other coverages to ensure you're adequately protected. Knowing this would help you avoid any potential unexpected future expenses.

When performing the buyout, maybe you should set up a corporation to purchase the business to help mitigate any potential personal liability. Just a thought.....I'm not an attorney.

I know it may not be in your mind now, but trust me that it will be later. If you are the sole owner of this business and have only employees upon which you can rely, what's your plan for being able to take vacations down the road? Being an owner of a business can suck 12 hours a day from your life so a plan for future get aways should not be overlooked.

 

Generally a CVA will not do any appraisals of real assets. If equipment is involved, then an equipment appraiser would give that value to the CVA. Also, real estate would be appraised by a real estate appraiser. While asset value is important, it generally only provides a floor to the business value. The asset value tells you what you could sell the individual assets for. It doesn't tell you what the business is worth. The future potential cash flow is what usually gives you a value for the business. If I have time, I'll look into some comparables for you, although I don't place too much importance on them.

Regards,
Dave