OT: value of small business

I've been out of work for about a year now, it's epidemic among engineers up here. Today a guy offered to sell me his business. It's a service business,
and he claims I can work as little or as much as I want, and I can easily make $200 a day without working too hard or too strenuously. I need some advice from someone who really knows small businesses. I need to know how much such a business might be worth.
By the way, I am reasonably confident that this is a legit operation and not some flimflam. Yes, I'd have to go through some training and get licensed by the state, and buy some special insurance, but it does sound appealing.
I'd rather not go into exactly what the business consists of.
I've heard estimates like "6X annual run rate" (jeez I hope not).
Grant Erwin Kirkland, Washington
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Grant Erwin wrote:

I hope it isn't locksmithing (:
I don't have any experience with service businesses so I'm not sure how much I can help. I do have a manufacturing business and a couple months ago I had to negotiate buying out the majority investor in our company.
That said, the business can be worth anything from it's liquidated value up to whatever the owner demands. The IRS probably has some ideas as to what the company is worth and if it swings too far either way, they will likely become involved.
I can't imagine the business being worth 6x it's yearly income. I would guess that a good starting point would be the inventory value plus 1-2 years income.
Now is a piss poor time to sell a business and this should work in your favor.
Why don't you try posting anonymously to a newgroup specific to this business and see if they can give you some answers.
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engineers
easily
how
appealing.
Without knowing more particulars it would be hard to give any real valuable feedback. As you know the Puget Sound economy is in the toilet right now. I keep hearing about an upswing, but I haven't seen it yet. I guess it all depends on if this business is of any value to anyone. If it is so good, why is he selling? Lane
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On Mon, 15 Dec 2003 16:54:38 -0800, the renowned Jim Stewart

It's easier to value a business that has a lot of employees, purely as an investment. If it's essentially a one-man service business, you're buying a job- I mean if you could take a job, all other things being equal, and get the 80% of the income, the "profit" is only the 20% difference- multiply that by some number and subtract the resale value of the stuff you have to buy.... Of course there are lots of advantages and lots of headaches that go along with being your own boss, some to do with paperwork, but mostly people and time-management issues. Valuing small businesses is extremely difficult even when it's a going concern- If it's a franchise type thing, try to make contact independently with existing franchisees and see how they are doing and what they say. Talk to some customers and see what they say. At the end it comes down to what the buyer and seller can agree on. Of course you want to find out why he's selling.
Best regards, Spehro Pefhany
--
"it's the network..." "The Journey is the reward"
snipped-for-privacy@interlog.com Info for manufacturers: http://www.trexon.com
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It sounds good, Grant! But ask for lots of proof, satisfied clients, references, that sort of thing. Good luck.
Bob Swinney

business,
licensed
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--------------000106010608020109070101 Content-Type: text/plain; charset=us-ascii; format=flowed Content-Transfer-Encoding: 7bit
A real business will have REAL accounting books. Witht he advent of easy software like quickbooks, there's no excuse for someone to say "you'll have to trust me". Sign a non-disclosure agreement (if you have to) and get a firm look at those books for as many years accounting as you can. That'll tell the real story. Ask to see something official to verify the books (like an IRS statement) to show that they aren't fudged for your benefit.
It's sad to have to do this, but 95% of the "business opportunities" out there are various forms of scams. If it looks too good to be true (and the statement of "$ 200 a day without working too hard" probably qualifies), look deeper.
Oh yea....make sure the seller signs either a non-compete or non-contact with customers or something similar. Too many times they sell, get bored in a week, and start back up with your customers.
Koz
Bob Swinney wrote:

</pre> <blockquote type="cite"> <pre wrap="">I've been out of work for about a year now, it's epidemic among engineers up here. Today a guy offered to sell me his business. It's a service </pre> </blockquote> <pre wrap=""><!---->business, </pre> <blockquote type="cite"> <pre wrap="">and he claims I can work as little or as much as I want, and I can easily make $200 a day without working too hard or too strenuously. I need some advice from someone who really knows small businesses. I need to know how much such a business might be worth.
By the way, I am reasonably confident that this is a legit operation and not some flimflam. Yes, I'd have to go through some training and get </pre> </blockquote> <pre wrap=""><!---->licensed </pre> <blockquote type="cite"> <pre wrap="">by the state, and buy some special insurance, but it does sound appealing.
I'd rather not go into exactly what the business consists of.
I've heard estimates like "6X annual run rate" (jeez I hope not).
Grant Erwin Kirkland, Washington
</pre> </blockquote> <pre wrap=""><!---->
</pre> </blockquote> <br> </body> </html>
--------------000106010608020109070101--
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On Mon, 15 Dec 2003 16:26:07 -0800, Grant Erwin

If you're really interested, hire yourself an accountant, and ask to go through the books. If you can find other businesses in the same "niche," talk to them about business conditions generally. Find out about any pending lawsuits, any pending legislation that may be relevant, and draft yourself a very defensive contract.
Al Moore
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See the other posts for good comments.
Yes indeed, the going rate is 6x to 10x the annual PROFIT. (Invert the 6x to yield 16% on your money, 10 to yeild 10%) But this is **AFTER** paying yourself a salary. So if you spend 8 hours a day while paying yourself $20 an hour, your 'investment' is yielding only $40 a day.
But most service enterprises are not worth that going rate because they are so dependent on the current owner and/or the business. A lot of these businesses are nothing more than a customer list. Can you expect to CONTINUE making the same $$$ for the multiple years it takes to get a payout??
I do this kind of consulting in the small shops area. (wood, fabrication, machining, etc). Post if you want to talk off line. (I got creamed in the Swen virus thing, my real e-mail is NOT posted)
Cheers.
Grant Erwin wrote:

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Another option, if the owner is elderly & wants to retire, is to become a junior partner. The owner trains you & introduces you to the customer list and you gradually take over the business giving the former owner part of the profits as a retirement income. This requires him to trust you, but paying cash requires you to trust him. There has to be trust or there is no deal.
--
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HI Grant:
This is a very tricky issue... and there is more to small business than agreeing on a price and hoping will you make a living at it. The easy, first things are as follows and I won't insult your intelligence because you probably already know the basics:
Hire a good accoutant and get a MINIMUM of 3 years tax returns, 5 is much better. You need to determine the growth trend (up or down, in good and bad economies). Many businesses can show one or two great years... it is very hard to show 5 great years. The trend line is all important, as is the profit MARGIN, not just the bottom line profit. Get a real good handle on ALL the costs associated with the business. Break down the entire cost structure to see how really profitable this business is.
Hire a good lawyer to check on the legitmacy of the busiesss and check with the better business bureau for any complaints. Like I said, you know this easy stuff.
The HARD stuff is evaluting the "other" stuff. And this is really the hard stuff, because running a small one man business really is all about that one man... you.
YOU are the key issue. Do your skills and match the business/market? Do you/would you LIKE this business? Do you get charged up in the morning such that you cannot wait to get to the office?
What is your temperament, and your wife's temperament. Can you stand the uncetaintly of the ups and downs? I don't mean to be mean, but spousal support is SOOOOOOOO soo important. But, your skills and temperament are more important as to making this a success....
For what it is worth, here is my background/credentials:
BSEE from the Unv. of New Mexico (Navy ROTC scholarship), MBA from Northwestern University, 17 years of startup and and small business (3 venture funded startup in PC software and hardware, my forth is my own completely self funded company called Fluid Forms after I got laid off for the second time.)
At Fluid Forms, we do around 2MM in revenue and make very high end orthopedic knee pads for guys with surgically repaired knees. I have 2 patents to my name and just filed for the third. We are in our 7th year of business and are finally doing OK financially. But it has taken 5+ years to really get back on my feet and I still do not match the 150+K salary I made in the high tech world. But my personal and business assets on the other hand. are starting to get to where I want them to be...
I have bought companies, and one of my companes has been bought. Both times I was part of the negotiating team.
Also, my second wife owns her own marketing communications service business, and has for the past 18 years. She does over 9MM in revenue, with 75 employees. She has had 2 offers for her company in the past 3 years -- the first offer was for 3MM and the second for 2.3MM. I get into the details as follows:
In a nutshell, service business are VERY different than a product business. Any successful product company tends to have real value ( real revenue, a real distribution base, ireal inventory, brand value, intellectual property, market share, etc, etc.) Product companies can generate revenue (sales) 24 hours a day... someone some where can be selling your product. They are more easy to valuate. 2-3 times revenue is a good average, but that is really dependant on the product (how good it is, its market share, etc and what the profits are).
Service companies are real iffy to buy... and run successfully. THE only REAL assest is the the people and the market niche you are in. Companys like mine, can buy or get a particular service from a zillion different people... look how many lawyers there are out there. Or accountants.
SO, the first thing you have to know ( unless your service business is just so unique) you will have a LOT of competition.
So you have to take a REAL HARD look at the competition... and make a realist look at how good are YOU in running this particular service business... He (the original owner) may be able to make it a success, the question is can you? Can you sell? Can you be pushy as needed to garner new clients? Collect on unpaid bills? Can you stand staring at the phone, waiting for it to ring, or can you get on the phone and cold call?
I can guaranteed that thre is NO business that can succeed if YOU don't put the time in... the myth of picking and choosing your hours is just that -- a myth. ANY small, one person business will require 40 plus hours -- 50 -55 is about the norm... UNLESS this business is the cats meow and so unique you are the only one with that service. (don't count on it...)
Let me state that I do not know of a service business that is worth 6 times revenue. I have never seen it. 6 times profits, maybe. Again, you have to evaluate the market, the opportunity, can you grow the business and how.
My wife's company is a great example... 6-9 mm in revenue and only 3mm p off rice. Why? Becuase in a service business the revenue is solely dependant on clients paying for that service. They go away, and so does the revenue. No assets per se .. in fact, the people, who are the only assets, walk out a 5:00 PM and then then business literally shuts down. NO chance of further revenue.... until 8:00 the next morning. And, she has GREAT clients: IBM, Quest, Northern Telecom,, etc.
So, she is devoloping a software product that enhances her services business as they way to get a better valuation.
If the business is truely just a service business, be prepared to negotiate hard... services business are often a dime a dozen... if there is some real product (tangible, can be sold, can be inventoried, or can be packaged somehow), then the price can/should go higher.
Also, this guy is selling for a reason. What is the reason? Divorce and illness are too pretty good reasons and you can get sometimes get a good deal. Other wise, if the business is the greatest thing since sliced bread (work 4 hours and make a 1,000 bucks, unlimited upside-- ha!) why not keep it to yourself? I would!!
So please be sure of WHY he is selling.. It is very easy to get "taken".
Financing is a key question. Now if the business is selling for 20K, that is one thing. 200k or more is completely different. Recognize that it takes a LOT LONGER to get a return (read: real money in your pocket after all expenses) than you ever think. Do you have the money to buy it or will you take a loan? How about owner financing? Remember servicing any debt adds to the costs of doing business....No advice here, just be cognizent of the fact you are playing with real money here, and money can disappear faster than you can say "Say what"?
This is too long a post... good luck with you venture... just take a HARD look at t he business, the competitive enviroment and how your skills and temperament fit in.
Then negotiate HARD!!!!!! you have nothing to lose.
Good luck
Steve Koschmann

business,
licensed
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Having owned and operated service businesses since 1988(street/parking lot sweeping, landscaping, high pressure washing of sidewalks, buildings etc.)I can say that in those types of businesses that it is based on a factor of monthly gross, usually 5x plus the value of any equipment, real estate, office equipment etc. Other types of service businesses may be valued differently. In my area (Southern California) there are always a lot of service businesses for sale quite the buyers market. I would do as much research as possible about this specific type of business and make sure that is what it appears to be.
Sam

business,
licensed
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One more thing: the guy is selling because he is old and retiring. The way I see it a service company only has 3 things of value: the customer base, the people, and the business practices. This guy claims to have a large state-wide customer base but then there isn't really anything tying them to one service vendor so like everyone says those clients can go anywhere. How he does business may be simple or complex, don't know yet.
I appreciate all the answers. They show a wealth of experience and wisdom beyond any expectation I had had.
Grant
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On Mon, 15 Dec 2003 19:31:03 -0800, Grant Erwin

Another resource is as close as your mouse. How many of this type business are in your market area. He claims statewide. Compare that number to how many potential customers to get your seller/buyer ratio.
Keep in mind the customers may be individuals, government agencies, businesses, number of vehicles, etc.
Now compare that seller/buyer ratio with similar market areas. This is the tricky part; comparing apples to apples. A Buffalo,NY snowplow dealer doesn't need an office in Brownsville, TX.
If your ratio is much different, ask yourself why. A low ratio may mean that the supplier side has consolidated to only a few large sellers. You probably can't compete on price but is sometimes easier for a smaller, more nimble company to provide better service.
One other consideration, since this fellow seems old. How long has he been at this? Has his service skills kept up to date? Is he servicing machines or businesses that have run their course and are in decline?
When buying a business, I'm more inclined to purchase just the customer list, inventory, goodwill and a non compete agreement. This way I'm not buying a potential claim or lawsuit that was not of my making. You also don't have to worry about any holes in the corporate veil that might expose your personal assets.
You have my e-mail, if you have more questions. I'm far enough away not to be a competitor.
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Grant I'm not an expert but FWIW.... some , business types use a formula to value a prospective investment.. For example take the net yearly income, plus depreciation and amoratization minus capitol expenditures,and then divide by the us gov. long bond yield. This will give you a basic value of the company. Pay attention to the capitol expenditures,,,, this is a basic formula to start with.........
DE
remove nO sPam to return email
On Mon, 15 Dec 2003 16:26:07 -0800, Grant Erwin

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3 times the average of the last three years profits.
If they are negative the owner should pay you to take his business. I can't count as high as the number of times I've heard money losing businesses say 'but it's got potential' - BS - if it had potential the owner would stick around.
Inventory also has very insiginificant value - $2 mil of inventory that won't sell isn't worth a dime. If the owner wants anything for inventory make sure he can prove where it has produced profit in the past. Same goes for equipment and fixtures, not worth a dime if they don't produce.
3 times is a starting point - the seller thinks its worth more, the buyer thinks its worth less. Don't forget to require a lease for at least the amount of time you are financing the sale, it should be up to the seller to obtain that. If they can't/won't then consider deducting the cost of moving the business from the price.

business,
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On Mon, 15 Dec 2003 16:26:07 -0800, Grant Erwin

A manufacturing business can be valued that way, assuming the product has not reached the end of its cycle, and there is more than one product. A service business is a whole lot more difficult to value - particularly a one man operation.
What is the annual run rate of a one man business? If I make a profit of $80,000 a year and only take dividends ( no salary), or take a 50,000 salary and make a $30,000 return on my investment, I'm making the same money, but the numbers are a lot different.
Is my computer business worth 6 times what I earn from it in a year? If it is, I'll sell it tomorrow. I'll even give you a 50% discount. Your problem is my knowlege is virtually the only asset the business has, other than a small client list. If you do not have my level of expertise, you are throwing your money away buying my business.
On the other hand, my brother's garage business may well be worth 10 times the profit he makes - after paying his employees a very good wage. (limited company). The equipment alone has a significant value, and as a "going concern" with knowlegeable mechanics already in place, and several good contracts, the business can be expected to continue to generate significant revenue even in new hands.
A company making chemicals for killing domestic lawn weeds, making an average of $3,000,000 a year over the last ten years, may have its earnings reduced significantly by a local ban on pesticide applications to domestic lawns. By next year the company MAY not be worth the cost of the equipment owned - particularly if there is any legal exposure.
If the service business you are looking at is dependent on the softwood lumber industry (particularly in Canada) or the deep sea fishery, and the 10 year average earnings was $100,000 per year, last years could have been less than 10,000 and the prospects for the next 2-5 years may be even worse than that. The business may be a net liability, rather than an asset (you'd have to pay me to take it off your hands)
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Grant Erwin wrote:

$200 a day? That's $52,000 a year, ... gross. Before expenses, etc.
With all due respect, that doesn't seem like much. And that's putting it nicely. Try to find something better.
Unless of course, you can live off that. Abrasha http://www.abrasha.com
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Abrasha wrote:

Are you a politician?? You must be, because you obviously don't realize that a VERY LARGE portion of the our country's population lives on this much or less.
I've got a union factory job(see below) that doesn't pay me that much at 40hrs/wk. Yes, if I can weasel into an overtime position I can make more but it still takes a crap load of OT to eclipse the 50Kmark.
Remember when having a "good" union factory job with a world wide company meant: -- your household could do well one income -- your health insurance was paid, 100% -- you had a guaranteed pension, not a 401k that you have to manage yourself -- if you had 30yrs in you could retire, still on a good income, and still have health insurance
Got news for ya, it ain't happenin' anymore................
Tom
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engineers
business,
easily
it
that a

less.
40hrs/wk.
still takes a

meant:
yourself
have
You'll notice that Abrasha said "gross, before expenses", that is a bit different that someone making $50k with a salary, not running a business.
Lane
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Tom wrote:

I remember that. It's death started the year I graduated high school.
The health insurance is the one I notice the most, when I was a kid if a doctor thought there was something needed you got it. Now it's a battle to get anything.
--
Mark

N.E. Ohio
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