How to value a business??

[Wolf1]

My boss has recently offered to sell me his business. It is an independent auto repair shop. I have worked here for the past 9 years and currently do a large portion of the management responsibilities.

My question is: Other than the "real" value as in real estate and equipment, how do you figure a value for a business? It is well established and has been in business for the past 21 years. The shop currently grosses 450-500k a year.

He is currently working with his accountant and an appraiser. I'm just curious as to how you establish a value.

[Paul T]

There are several methods...business valuation can be tricky and methods range form very sophisticated to simple multiples of cash flow. For a business of this size, a discounted cash flow valuation is probably the best approach...I think I have a couple of links at the office I can post tomorrow that go into some detail, but it's not too complicated. What type of business is it? It can also be helpful to see what similar businesses are selling for in terms of multiples of cash flow, sales, etc.

Many brokers will use methods like 3x cash flow for "X" businesses and 5x for "Y". While I think there is some merit to this, it pays to look closer at the numbers. Are you looking for SBA or other 3rd party financing? If so, make sure tax returns show all profits or at least enough to support the debt load. Bottom line, if the cash flow can support the debt payments and still afford you a decent salary, and you like the business (most important) I'd say go for it.

The appraiser should use several different methods to arrive at a value, it would be great to have a look at his final report. Generally, it's easier to get financing when RE is involved to. Feel free to PM me, I'm no expert but have been down the due diligence path myself a couple time and am still looking to buy a business, but there is a lot of junk out there....most small businesses lie big time on tax returns which makes financing all but impossible...

[VaSteve]

Also account for "goodwill". That is the notion that one business is worth more than others because it has an established name. An example would be if John Walker was selling out and so was MotorMeister. All things being equal in terms of revenues and equipment, JWW would command a higher premium for goodwill.

most small businesses lie big time on tax returns which makes financing all but impossible...

Second that.

[Wolf1]

I will have a chance to look over the financial records and appraisal report.
As far as financing, he will possibly be willing to carry the contract. He would rather have payment over time than a lump sum.

On a side note; the business would be difficult to sell to anyone else. Most of our customers are very loyal, and many would leave if a whole new management/owner came in.
Plus if he sold it to another party I would be inclined to leave and start up somewhere else, taking many of our customers with me.
He realizes this.

[M.D. Holloway]

It may be easier and cheaper to buy it from him rather than relocate and start new. Think of the new location - tough to predict. Think of the tools you would have to buy - pain in the arse and $$$, plus all the start up costs including insurance and biz licenses and certifications and advertizing.

I am amazed that the sales is only $500,000 a year. That is only $62/hr for a loaded work week. If you only have one mech, OK but you are leaving money on the table do to zero margin on your parts. Two bays witha loaded week will double sales, add some services and apply a profit margin to parts and you may just start making out.

Is the building leased or owned? makes a big difference. How long is the lease for?

[gassy]

Wolf1--I'm in the same position...boss in Cali, business in IL. I run the show, he's in town apprx. 2 weeks a year. Selling soon, to me, but we haven't talked details. 2 years revenue? He's sitting on prime RE so that has to factor in.

[john walker's workshop]

the value of a business is in the person that runs it. when he leaves, it's just a building, land and equipment.

[RANDY P]

agreed with John W. Since it's so labor dependent the typical "two years profits" won't apply. There's no established client lists or contracts that can add to value, so it's simply a percentage of reciepts, land and equipment. If you're serious about it, keep the present owner around as a "president" for the next few years - on a salary and make sure there's a contingency saying he can't open anything else within a 50 mile radius as long as you can get away with at least to protect yourself.

[911Rob]

Congrats! I've bought and sold a few businesses, as well as ran a few. I say "goodwill" - "smoodwill". It's worth nothing.

$450K/gross per year? That's also nothing. Overhead expenses alone can eat up half of that.

Building expenses
Specialized equipment
Bodyman
Managment
Secretarial
Accounting
Legal
Office expenses/ phone, supplies,furnishings, etc.

A good accountant won't allow much for "goodwill" in an appraisal, may be best to bring in your own independent accountant to appraise value too.

Be very careful about extended liabilities. In fact, best to buy just the assets and name, no company, no liablility. Tax liabilities are the worst. Buy the name and then just change it slightly so customers wont really notice. such as Als Autobody to Als Autobody and Repairs.

As far as goodwill, you will be shocked to see how much business is actually based on the management/ownership of the company now, and when it changes so does the goodwill.

My approach to buying existing businesses is ZERO for goodwill. I'll buy the hard assets, throw in a bone for the backyard inventory that'll never sell or such, but no goodwill. Take it or leave it. They usually take it.

Personal Story:
My very good friend, Martin, who now owns part of Star Autobody in Vernon, BC. Used to work down at the coast for an autobody shop, worked as an insurance appraiser for them for years and years. One day he had the gracious opportunity to buy the whole business; so he borrowed and borrowed and bought it, goodwill and all. Six month later the government seized the bank accounts and foreclosed the business, he lost everything (bankrupt) and had to pay the gov't off too. Took him years to get back on his feet.... which he's done now.
Look him up, he knows more about the autobody business than anyone I know.

Good luck, my two cents

[Milu]

Quick and dirty calculation for this one:

Realisable value of the assets plus one years profit, deduct debts and liabilities.

[Paul T]

Originally posted by 911Rob
Be very careful about extended liabilities. In fact, best to buy just the assets and name, no company, no liablility.

That's an excellent point I forgot...always just buy the assets, never the stock (assuming a corporation). Check out bulk sales provisions for your state..

[Shaun @ Tru6]

Originally posted by john walker's workshop
the value of a business is in the person that runs it. when he leaves, it's just a building, land and equipment.

Raw assets like building, etc. are easily assessed. The name (goodwill) in hte community and existing customer base are difficult to value, but extremely important to consider. if the shop has a good name, you may not be able to quantify that, but it will help in the purchase decision. If the shop has a bad name, also tough to quantify, but good for negotiating the price down "I'll have to spend X dollars in marketing/advertising" to prop up the reputation of the company.

[Jims5543]

Originally posted by Wolf1
He is currently working with his accountant and an appraiser. I'm just curious as to how you establish a value.

His people will give an inflated value, be careful.


FWIW

When I was approached by my friends widow to buy his business whe wanted me to pay 500K for it. It was pulling in 800K a year.

I talked to her accountant and he assured me it was worth every penny. I called an appraisal company that we were about to hire and they appraiser said the price csounded about right.

Then I went to my bank president to see about a business loan. That was the smack of reality. He asked me about 5 different times what I was getting for 500K. What it came down to was, equipment, files, client list and good faith.

He looked over what was on the table and told me to offer 25K and not a penny more. I made my offer and she countered with 125K. (500K to 125K? I think she knew she was setting me up) At that point I told her to sell to someone else I was not interested. 2 weeks later I bought it for 25K.


I am sure there is a lot more machinery, tools, etc. involved here so you need to value that. But you cannot put a value on the clients theyt are fickle and some will leave when they find the ownership has changed hands.

[Dantilla]

Originally posted by Wolf1
he will possibly be willing to carry the contract.

That would be good. Then it's to the sellers advantage to make sure there is a smooth transition.

If the seller insists on getting cashed out, does he know that the business is going to fail, and wants to get out quick?

[Paul T]

Originally posted by 911Rob
I say "goodwill" - "smoodwill". It's worth nothing.

I don't agree with that completely, though I do think goodwill should not be too large a portion of the purchase price (has tax implications too). Without goodwill, it's just an asset sale, not a business sale. If the business is making a profit and generating cash flow goodwill is completely appropriate I think. Assuming that the success of the operation is not tied so much to the owner or one significant employee that if they left the whole operation would collapse. Depends alot on the type of business. Just my opinion.

[Superman]

Several methods. Apart from RE value, the only "real" way to value a business, in my humble view, is to discount the expected future net cash flows. Basically, you take the expected profits, extended out a few years, and bring them back to a present value using some sort of interest rate assumption. This, again in my humble view, provides a "real" present value of those earnings. And if the business owner has understated profits.....bummer. That's a double-edged sword and he knew it.

[Wolf1]

All good points guys, Thanks.

I talked with him a little more today, trying to get an idea of what he is thinking. Off the top of his head he said he would like to get $250k for everything.

This includes ~1 acre of ground. A 3 bay shop with 3 hoists. And all the usual shop equipment, scanners, etc. As well as the name, a no competition clause and the customer base.

Not sure what the real estate will appraise for yet. But atleast I have a rough number to think about.

It will be interesting to see the appraisal, I, like many, don't feel good about buying "good will". I understand that some customers will leave when he leaves, but also some will return.

And we do have a fairly consistent flow of new customers, he currently does zero advertising, so I think this could improve with some effort.

[nosubstut]

A few points to consider:

- As an employee you have the benefit of already knowing what weaknesses the business has and if you are capable of correcting/improving them to increase profitability.
- It sounds like it is early in the process, however, your boss just shared his thoughts on pricing. Just a thought but if he has an idea of price, why is he paying his CPA and an appraiser to value the business?
- As stated by others it is probably in your best interest if he holds the note (assuming that he offers reasonable terms - this is another point of negotiation). If you were to borrow from a bank, chances are you would be required to pledge your house (if you own) as collateral.
- Carefully evaluate the appraiser's report. First, he is being paid by your boss and therefore could be expected to produce a report that is favorable to your boss (not necessarily the best interests of a buyer). It is likely the appraiser will use different methods to value the business and summarize his report with one concluding value. One method may simply be a multiple of gross sales - from a buyer's perspective, I would be skeptical about value derived from a sales multiple. While there are many schools of thought, the bottom line is that cash flow will repay your loan, not the level of sales. Can you run the business as efficiently as your boss? Or perhaps more efficiently? This will impact the level of profitability you can expect. Another method an appraiser will most likely use is an adjusted cash flow in which he will start with the net profit and add-back expenses that are discretionary or that a buyer might not have. For example, the business may pay for the owner's personal car, which is cash flow that would be available to a buyer.

You indicated that you perform many of the management responsibilities. Was the owner absentee? What duties did he perform? And can you absorb his duties? If not, will you need to hire someone? What would the salary be? (this would be an adjustment to the cash flow as well).

You say that the business has been around for ~ 20 years. How old is the major equipment (lifts, alignment equipment, etc.) This is an important consideration because if the equipment is old and getting towards the end of its useful life then the buyer could expect capital expenditures to replace old equipment (I wonder if the appraiser will disclose this). Similarly, what is the age/condition of the building? You also need to know what (if any) property/ assets are excluded from the sale.

Another issue to consider, how are hazardous materials (used oil, antifreeze, solvents, etc.) disposed of? Are there any environmental concerns - leaking hazardous waste drums on site, previous oil spills? You certainly don't want to take on responsibility for cleanup of any hazardous conditions created by a previous owner.

- As mentioned above, (I think it is worth repeating) I cannot think of any reason why you would want to structure the transaction as a stock acquisition - a contract whereby you purchase everything including assets, goodwill, liabilities; everything (most contracts will exclude some items, for example, cash). I strongly suggest that you have this structured as an asset acquisition.

- Do you have a lawyer who will represent you? Your attorney should ensure that the contract includes clauses like (among others):

- non-compete
- indemnification against liabilities from business activity prior to your purchase of the business
- transition assistance provided by the seller
- representations and warranties – you want the business transferred free and clear of all liens; any business loans and leases to be paid off.

I’m not an attorney, not offering legal advice…

Something else that is every bit as crucial for you to consider. What is your source of working capital?

Ultimately, you need to be comfortable that whatever the price is represents a fair investment for you. Use your knowledge of the business (9 yrs working there), your relationship with your boss (has he been honest and fair in the past? Even so, he is not a valuation expert and may not know what is a fair price other than what he is told. If not, I would not expect him to change now!) to evaluate the situation.

One final thought – how much (if any) contact have you had with customers? Is this something you are comfortable with and have the time to handle?

I’ve gone beyond what you asked for – if I can be of any help send a PM. Good luck.

[M.D. Holloway]

3 bays = $500,000? Something smells fishy and it ain't my shorts! Well, maybe it is.

The raw numbers still seem wack. Did you guys have a wait of was there always a free bay or two?

[kycarguy 935]

I had a friend that had a Cadillac repair shop in So. Cal. and the couple were getting a divorce and when they split it up the business was valued at $500k with a continuation on the lease on the building. The lease had about 15 years left on the lease and the building was greatly discounted to them for renting the whole building which had 4 rentals on the other side. The 4 rentals paid the rent for the whole building including theirs, so essentially rent was free for the shop. She wanted to keep the business and he didnt. His name was the name of the business and he was leaving the company. I know they were grossing over $500k a year in parts sales and service. 4 bays with 3 techs, 1 service manger/writer, 1 parts manager, 1 shop/delivery boy and the lady and her new husband worked a few hours a day. She paid him $250k for his half and a few years later she said she paid way too much. With the guy leaving {her ex} that started the business and with a local aerospace semi-closing because the contracts moved out of state the customer base dropped fast. I would guess the equipment would be worth about max. 10k and then somebody bought the building and said their existing lease was no longer valid. After a ongoing court battle they gave up and moved, more loss of customers. So that turned into a zero They are still in business today and make a decent living because they are honest and thats pretty rare today. She had the money to pay cash for her half and she didnt have to think as hard as somebody that would have to finance the business.

I would want think it over well and see where the business is headed and real estate value. Get some comps from a commercial real estate person and go from there.

Good luck on your endeavor.