Valuation of a very small business?

LeeH · 09-03-2004, 05:58 PM

I know there are many different formulas for business valuation.
There's a home based tutoring franchise for sale in my area that sounds interesting.

Gross = $50K
Net = $25K

No real assets other than customer list, territory, and phone number. Results are based on 20-30 hours work from home by the owner. I haven't dug into the "net" to see exactly how they arrived at this number. In other words I don't know if it's a true net profit or if it's owner's cash flow.

They are asking $70K w/$20K down and owner financing on the rest. This seems high to me. Opinions?

campbellcj · 09-03-2004, 09:14 PM

IMHO a "customer list" without any type of guaranteed revenue streams is virtually worthless. I dunno if this type of business uses subscriptions or pre-paid services. A change in ownership is almost certain to see a change in clientele, as I'm sure you accounted for.

Small business valuation is very tough in general, as most of the "assets" are off balance sheet IP or intangibles such as customer lists or "domain knowledge". Case in point, one of our competitors recently went Chapter 7 and their estate -- which had no assets other than a customer list and some highly questionable software code -- was liquidated for $140K. This company was doing up to $5mil year in revenues up to that point. Our feeling is that the buyer got a bum deal at $140K...our max bid was $50K. What are assets to one person's accountant are not necessarily assets to anyone else...

LeeH · 09-03-2004, 10:30 PM

The seller can claim some "good will" in that they've been around 4.5 years. I just think about when I sold my last business. We had sales of $1.8M, lots of assets, a warehouse full of stuff, two experienced managers and I think we ended up selling for 2.25 X cash flow.

This seller has a home based, one person business with $50K in sales and is asking for a higher multiple.

turbo6bar · 09-04-2004, 05:55 AM

$20k down does sound high, but if the terms are good on the $50k financed, I suppose it would be OK. $50k financed over 3 years is bad. $50k financed over 10 years is better.

Are you buying an income stream or a job?

LeeH · 09-04-2004, 08:36 AM

Quote:

Originally posted by turbo6bar
Are you buying an income stream or a job?

Both! The business is a franchised in-home tutoring company. The owner is a matchmaker of sorts between tutors and kids.

http://www.clubztutoring.com/

I believe the initial start up fee for a new franshice is only $20K, but that just buys the territory and training. This business has been operating for 4.5 years.

Dantilla · 09-04-2004, 09:39 AM

The seller financing is a very good sign. That means they believe it will be profitable enough for you to be able to pay them.

They may also assist in a smooth transition. If the seller introduces his replacement, that tends to start things off nicely with the existing clients.

If a seller insists on getting cashed out quickly, they may think the business will fail, and are getting completely out as soon as they can, before the crash.

turbo6bar · 09-04-2004, 12:34 PM

Quote:

Originally posted by LeeH
Both! The business is a franchised in-home tutoring company. The owner is a matchmaker of sorts between tutors and kids.

If you can swing the cash, and you're OK with the weekly hours in trade for $25k/yr, try to stretch out the $50k of owner-financing. Like I said before, if you can't get the price YOU like, you can always go for the best terms. Let's say you'll pay back the $50k over 10 years. 4 years down the road, you can offer to buy out the mortgage for say 70 cents on the dollar.
good luck,jurgen

LeeH · 09-04-2004, 01:07 PM

The terms they've proposed are 7 years - I don't know about the interest rate.

The $25K is generated in 20-30 hours/weeks, plus there are lots of tax advantages to owning a true home-based business. When I bought my first business I had the luxury (?) of working from 7:00 am to midnight seven days/week. My wife travels now and we have a four year old in school so I'm limited in what I can do. This is the first ongoing concern I've seen for sale that would work with our schedule. I talked to a business broker recently and he just laughed when I told him what my available hours were.

techweenie · techweenie's Garage

$25 - 40K is about the right price.

Things are very fluid in the education business at the moment, and you might find yourself up against a bigger, better franchise next week or next year.

Small service businesses really aren't worth a lot of money, in my experience.

Sometimes the best deal is a sliding scale percentage of net, with a downpayment of, say, 1/3. That way, the seller has a vested interest in helping you achieve the goals promised.