[Dante2004]

Can you guys take a look at this and help me determine a "fair value" for the following business?

This business is running in a stand alone, leased 4,200 sq. ft .building. At the moment it is fully functional with a healthy flow of business. Gross sales are ~$250,000k and cash flow is ~$75,000k which the owner takes as their pay. They have 3 employees in addition to the owner.

They claim ~$125k in tangible assets.

Some of the equipment:
Digitizing Embroidery Machine and software
1 H Embroidery Machine
2 - 4 H Embroidery Machines
6 count Shirt Printing Press
12 count shirt pringting press
4 count Cap Printing Press
Numbering Machine
4 Count Cap Press
2 - Conveyor Dryers
2 – Exposure Tables (one with vac) and Vinyl Cutters
Finishing Equip
Proc Equip
Embroidery Machine Tag

Just looking for a ballpark figure.

Thanks!

 

[brice]

I'm not sure what some of the equipment you are listing is exactly.

Some of the equipment:
6 count Shirt Printing Press
12 count shirt pringting press
4 count Cap Printing Press
Numbering Machine
4 Count Cap Press
2 - 12inch Conveyor Dryers
6inch Conveyer Dryer
Finishing Equip
Proc Equip

What is a 6 count shirt printing press? Automated screen print press or manual? 6 heat presses?

12inch dryer HAS to be wrong unless, as does 6 inch...

What does finishing equipment and Proc Equip mean?

How old is the equipment? What brands?

The value you are buying is the customer based and promise of continuing their revenues. Why are they getting out of the business? Are the employees that will stay happy? When did they last get raises? What role do they have in the business? What's the lease on the building? Anything going on that could change zoning? Road construction potentially leading to the building being demolished...

Value is rarely just the fixed assets.

 

[Dante2004]

I changed the part in my post about the conveyors...that is confusing. I don't know the actual answer, so I just took the size off. I just copy/pasted the information that was sent to me and posted them here so you could get a rough estimate of the type of equipment they have.

I agree that "value" is based more on revenue, so that is why I included the financial information.

The road that the business is on is heavily traveled, but I don't see the size of the road expanding anytime soon, and if it did, it shouldn't negatively effect the business since it is set far enough back from the road. The building is in a small commerical plaza - again, I don't see that changing.

The owner is retiring - no kids.

The owner wants to sell, but isn't too motivated, so I don't see him as "bailing out of a failing business as it goes down in flames". Plus, we have discussed an offer based partially on future profit sharing, which he probably wouldn't consider if the business was going downhill.

I see potential with the business because he hasn't been as agressive in the past couple of years - because he was getting older. The financials show this. Gross steadily fell, but he was able to manage his expenses and maintain a steady margin throughout.

The current employees are happy and willing to stay. I got to speak to them.

 

[thutch15]

Can you guys take a look at this and help me determine a "fair value" for the following business?

This business is running in a stand alone, leased 4,200 sq. ft .building. At the moment it is fully functional with a healthy flow of business. Gross sales are ~$250,000k and cash flow is ~$75,000k which the owner takes as their pay. They have 3 employees in addition to the owner.

They claim ~$125k in tangible assets.

Some of the equipment:
Digitizing Embroidery Machine and software
1 H Embroidery Machine
2 - 4 H Embroidery Machines
6 count Shirt Printing Press
12 count shirt pringting press
4 count Cap Printing Press
Numbering Machine
4 Count Cap Press
2 - Conveyor Dryers
2 – Exposure Tables (one with vac) and Vinyl Cutters
Finishing Equip
Proc Equip
Embroidery Machine Tag

Just looking for a ballpark figure.

Thanks!

There are there was to base the value:
1. Asset Value: Just total up all the assets. This is going to be the min the business is worth.

2. Use a industry factor based on gross sales. Not sure what it is for screen printing industry. Example would be $250,000 * 2 industry factor = $500,000

3. *Personal Best* - Investment method - Most people would want to get a 20% return on their business investment. So you just want to calculate $75000 net profit/25% = $375,000

So for me... I would be saying somewhere between $125K and $375K for min and max.

 

[Dante2004]

True. This is the basic calculation that I came up with to evaluate that.

Cash Flow - {Salary for person to do the stuff I don't want to/can't do} - {"salary" I would require for my work} = Remaining "cash flow"

 

[johnbol1]

Forget the assets, probably been written down in accounts anyaways dependant on the age. Just look at turnover and possible expansion into other revenue streams to exisiting customer. i,e. if you now supply say safety boots and the new business has a customer base turning over embroidered polo shirts there is a good chance that a lot of theose shirts will be buyiong boots so you instantly are tapped in to another customer base.
Just see the value for you.
If you are doing T shirts and embroidery at the moment then all you are doing is buying his customer list and adding them to yours, so this then would be minimal as his customers gotta go somewhere anyway if he sells or not..right, and why not come to you?.
I say approx 250 and see how you go, if he is retiring he may be quite happy with this.
Your are only risking 1 year turnover less proft and operating cost, offer as low as you dare as you can always go up.
Remember old assets are usually worthless in business selling terms, its the customers you want.
Good Luck
JOhn

 

[thutch15]

Forget the assets, probably been written down in accounts anyaways dependant on the age.

Valuing the business has nothing to do with what the assets have been valued at. You look at market value not book value. If the books show a press at $2000 or $20000 it makes no difference to the buyer.

Just look at turnover and possible expansion into other revenue streams to exisiting customer. i,e. if you now supply say safety boots and the new business has a customer base turning over embroidered polo shirts there is a good chance that a lot of theose shirts will be buyiong boots so you instantly are tapped in to another customer base.

Lot of businesses buy new "product line" instead of starting from scratch, but you cannot just guess at the value. It would almost be impossible to "guess" at what business you could get by "selling your boots to people buying polos." The only thing you can go off is past history and your plans for the future. In this case you know what they made and if you feel like that can continue you should just figure out what you want to make in return for you putting your money on the line.

 

[johnbol1]

Valuing the business has nothing to do with what the assets have been valued at. You look at market value not book value. If the books show a press at $2000 or $20000 it makes no difference to the buyer.



Lot of businesses buy new "product line" instead of starting from scratch, but you cannot just guess at the value. It would almost be impossible to "guess" at what business you could get by "selling your boots to people buying polos." The only thing you can go off is past history and your plans for the future. In this case you know what they made and if you feel like that can continue you should just figure out what you want to make in return for you putting your money on the line.

I dont want to argue with you and dont want to turn this post into a "whos knows best about company accounts"
but I never said "Guess" at anything, when aquiring another business especially of this small size the only sole meaningful value is the customer base.
1 can it be exploited further(selling them boots) or ice cream for that matter
2 can the costs be driven down further by combining purchasing power or exixiting machinery,
3 can any assets realistacally be worth anything substantial.

Do not just continue doing what the encumbant owner did see it for what it is now and what you can reap extra from it.

as for market value....mmmmm as a buyer(not a seller not an accountant) any business value is based on the BOOK value of any assets,customer base turnover, gross to net profit and available customers to be exploited by the buyers existing business.
to say that you value the assets at what is market value today is nonsense, they are part of a whole packageand should be treated as such. What good is screenptinting machinery bought at market value if you have no customers to supply your product too?
I have bought and sold businesses many times and currently have 34 employees in this industry. I assure you, be aggressive with your purchasing, do not offer market value for anything and act like a buyer and not a charity...
Market value the market is the person with the money.

JOhn

 

[binki]

Premium pricing in this biz is 2.5x net before taxes + FFE fair market value. If the owner is taking all the profits in pay then there are no profits so the biz is worth the fair market value of the equipment.

An expected profit for this type of biz would be up to $90K on that gross so it looks like they are doing it but fudging by not taking a salary.

You have to calculate a valuation on the net of the biz. Offer them a price based on the appraised value of assets. There is nothing else there if they are taking the profits in pay. There are no profits if they are doing that so you are only buying a paycheck.

Depending on where you are you may be liable for sales tax as well on the FFE. It is called Bulk Transfer Law.

 

[thutch15]

as for market value....mmmmm as a buyer(not a seller not an accountant) any business value is based on the BOOK value of any assets,customer base turnover, gross to net profit and available customers to be exploited by the buyers existing business.
to say that you value the assets at what is market value today is nonsense, they are part of a whole packageand should be treated as such. What good is screenptinting machinery bought at market value if you have no customers to supply your product too?
I have bought and sold businesses many times and currently have 34 employees in this industry. I assure you, be aggressive with your purchasing, do not offer market value for anything and act like a buyer and not a charity...
Market value the market is the person with the money.

JOhn

WHAT that makes no sense. So last year I purchased a $14,000 embroidery machine and used Section 179 deduction to depreciate the whole thing. Book value equals $0, because I have depreciated the whole thing. So you are telling me my embroidery machine is worth $0.

Book value deals with the current owners tax liablity. MARKET VALUE deals with how much it is worth. I totally agree he should try and get it lower than market value, BUT that just means he got a better deal... because he got it under the true value of Market Value.

 

[IYFGraphics]

A few things I'd also want to know is how old is the business, how much competition in the area, how old is the customer base (basically how long has he had his best customers), do the customers know the business is for sale, is the seller interested in a contract sale, do any of the employees also want to buy the business, is the seller interested in working with you for a period of time (3-6 months) to help in the transition for the business/customers, do you have cash to buy the business or will you finance, if finance have you already talked to your bank.

To me the most valuable assets in a small business is the name, the customers, location, employees, equipment, when your buying a small business the name/reputation & customers are by far the biggest asset and to me worth more than any other thing......biggest drawback I see is that he doesn't own the building he's in and that brings a landlord into the mix.

If the seller is retiring and in good health I'd try to work a contract sale where you give him a set amount down and make payments directly to him for the term of the contract, a sale like this has a lot of advantages for both parties, and keeps the bank out of your business.

JMHO

 

[mikelmorgan]

I don't know how to value a business. I don't know what my business is worth. I'll sell it in a heart beat though. My question to the buyer is this, Do you know how to screen print and run embroidery machines? If not the learning curve is tremendous, and learning is expensive when you have unhappy customers. If you don't love this type of work you will hate this business. As far as paying someone to do the things you don't want to do, let me know how that goes. We have 10 employees and have been in business for over 15 years. I washed screens last week! As the owner you will care far more than your employees and you will do whatever you have to do to protect your company name. Get ready for long hours and really crazy days where if it can go wrong it will. Good luck in your decision.

 

[Louie2010]

Lots of good advice here. A few things I would look at if considering buying.

The lease. Very important to look at the lease you will be assuming and what are your obligations. Is there a rent increase coming? Is the lease almost up? If so you had better negotiate an option for an extension before buying the business or you might fine yourself with an unplanned big rent increase.

Tax returns: Ask to see the last four or five years of tax returns to better understand if or how much profit the business has actually been making. Many small business overvalue and even fudge some of the numbers when trying to sell. They usually don't fudge higher numbers with the IRS.

How much of their sales is regular walk in retail vs regular repeat customer accounts. If a large percentage of sales is from on going customer accounts I would make sure that the owner selling is contractual involved in some sort of transition phase or period of time. He should be willing to take you around to make introductions and be around for a period of time as a liaison between you and them. Would be awful to find out after the fact that twenty or thirty percent of his sales were from a brother in law or close personal connection that no longer has any interest in using you.

Currently with the poor economy it should be a buyers market. A buyer should have the leverage to get a very good deal if buying a small business, just keep that in mind at all times while making this type of decision.

If buying a business don't forget to factor in the loan payment if borrowing any money to purchase. Or loss of interest income if using cash.

I would try and talk with the employees away from the current owners. It could be revealing.

Before buying a business I would make a comparison of what it would cost you to start one on your own. Not necessarily what it would cost to purchase the exact same equipment being sold, but rather what you would like to own and be interested in having if starting from scratch. What type of spaces are available for rent and for how much etc. Then compare the final numbers between the two. You might find you do or don't feel the difference is worth spending for the existing business.

 

[Dante2004]

Lease is up in about a year, but as you mentioned, a lease extension would be one of the contingencies in the deal.

The business has been around for a little over 20 years. Solid market position.

The employees don't know the business is for sale, but I would make talking to them another contingency (at the proper time of course). I would just want to make sure they had no plans on quitting out of loyalty to the prior owner. Brother-in-law deal someone brought up before.

I've looked at what it would cost to start up a new business, versus this deal, and I have decided that this route is what is best for me. Part of the what I am paying for is buying the business goodwill, customer database, current accounts, assets and the experience and skill sets of the current employees.

I was in a similar situation when I bought my previous business, and looking back, I am glad I went the route I did. For me, "turning the business around" was part of the challenge that I enjoyed most. As long as the business image isn't "bad".

 

[Dante2004]

You have to calculate a valuation on the net of the biz. Offer them a price based on the appraised value of assets. There is nothing else there if they are taking the profits in pay. There are no profits if they are doing that so you are only buying a paycheck.

Good point.

Depending on where you are you may be liable for sales tax as well on the FFE. It is called Bulk Transfer Law.

Was not aware of this. Thanks!

 

[dptk]

#1 ) add the replacement value of assets - What you could buy this equipment for on open market , only count the equipment you actually need. - dont figure in cost of 'dead weight' - equipment that doesnt get used or create profit

2) Make sure the owner is taking a salary that is competitive with what you could hire a manager for.l - If you don't do this you arent buying a biz , you are 'buying a job' . Example, - biz profits, 75k , owner took -0- salary, you would pay a manager 50k , you have 25k in actual profit. Even if you arent going to hire a manager you still need to figure a value of your own work.


3) After adjusting net profit for manager salary take that number X an industry ratio , Maybe 2.5 and add that to assest value and that should get you close

4) do an asset purchase instead of corp purchase, so you dont take on liabilities you dont want.


Disclaimer:This is not accounting or legal advise, always consult a qualified professional

 

[mikelmorgan]

What are you trying to buy? If you were buying my business, your buying a phone that will ring with customers, an established business with a reputation. The equipment is a no brainer, if you want to start your own business there is loads of used equipment out there at a steal. What is that customer base worth? What is that reputation worth? To me that is what your really buying. All the other stuff you can get anywhere.

 

[Old Dog]

Having bought and sold many businesses, the saying is true "It's only worth what someone is willing to pay for it".

Equipment should not be looked at what it's worth new, but what you could sell it for in a reasonably quick time. Look at what an equipment dealer would pay for it outright, not as a trade in.

Look at liabilites long and short term.
Ask for copies of the business tax returns that are signed. That will tell alot -sales, salaries. etc. Sign a non-disclosure if necessary to get this info.

Customers and employees are fickle! I bought a beauty salon for now ex-wife and the day we signed the papers the employees all walked out and started their own shop down the road and took all the customers-very bad for cash flow! Talk to the employees.

If you are serious, go and work a week or two at the shop to get the vibe and see if it is for you.

In these days unless you are very flush with cash, I would negotiate with the current owner to finance all or a portion. This has an effect on him to help make the business work for you so he gets his money.

Good Luck,
Old Dog

 

[binki]

good one old dog. we evaluated several businesses before we started out on our own and on examining the sales and tax returns we found out in all cases the owners were taking the cash sales and pocketing them off the books and running personal expenses through the business to lower their taxes.

BUT they were, for the purpose of the sale, counting the cash sales in their gross and removing their personal expenses to inflate the net. one guy even counted a single sale of $27,000 as a quarterly recurring sale even though it only appeared once.

beware, beware, beware.

each offer we made contained seller financing and a penalty to the seller if sales dropped below a prescribed amount. each seller rejected the sale which told me we were right that their sales were unsustainable or that they just wanted to have someone give them a pile of money for nothing.

make sure you get clear title to each piece of equipment. you need proof they are paid off and also check to see of they refinanced them. if their is money owed on them you will not be happy when the leasing company comes and takes it from you.

finally, make sure you get a non-compete for a period of time and number of miles radius. you dont want to pay for this biz and have the guy take the money and open up down the street from you.

 

[Dante2004]

each offer we made contained seller financing and a penalty to the seller if sales dropped below a prescribed amount. each seller rejected the sale which told me we were right that their sales were unsustainable or that they just wanted to have someone give them a pile of money for nothing.

I like the concept, but if I was a seller I wouldn't agree to this either. What gaurantee do I have that you will run the business that same way as I do? How do I know you don't cook the books just to make it look like it is under performing to collect the penalty fee?

When buying a business, I use a similar concept, but rather than penalize, offer a lower amount and reward the success. This shifts the control to me. If someone is going to get screwed and not get paid out...it will be the seller, not me. (Not that I would actually do it, but the point is that you reduce your financial risk).

For example, the seller says that "this was just a down year because of ____, sales are typically at ___ range". Great. Prove it. Stay on with the business for X months while you train me and show me how, with my help, to get the sales back to that level. If we are successful, I will offer you $X more.

This is how I purchsed my last business.

The asking price was $175k and I thought that was fair, but certainly was going to at least TRY to offer him less. So I put these two offers together.

$165k cash

-or-

$160k cash up front and a $20k bonus if "sales" are up by x% at the end of the year. Afterall, they had claimed that x% was the "true" average year.

With the $20k bonus route, I end up paying more for the business than asking price, however, at the end of one year, sales are not up by x% - thus the business has grown and it is truly worth $185k, so I don't mind paying the extra money. Plus, I essentially get the sellers labor/assistance for dirt cheap during that time AND they are much more motivated to train me properly because their is a big pay off at stake.