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Need Formula to Calculate Business Market Value

My partner (auto repair business) wants to sell out to me. He has the majority stake. What; if any basic formulas exist to determine current market value. This would be for business and equipment only. There is a short term lease on our building so no real estate involved.

Thanks
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Old 09-28-2009, 12:01 PM
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You can hire a business valuation specialist for situations like yours. Probably worth it.
Old 09-28-2009, 06:34 PM
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Question. What does your partner intend to do after exiting your partnership?

If he plans on doing the same thing independently then the most valuable asset, the repeat customers, needs to be addressed before anything else.
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Old 09-28-2009, 06:38 PM
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The simple answer is, based on historical performance and some reasonable assumptions, you project your free cash flow for the next few years and discount them back to today. It's called a discounted cash flow model. As mentioned, it is probably worthwhile to have a third party provide a valuation for you.

You probably want a non-compete agreement signed, otherwise, stomachmonkey has a great point.
Old 09-28-2009, 06:59 PM
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I was once told 3 years profit is the value of a going concern. Can't remember if it was gross or net. Plus of course assets, receivables, etc. No idea how reliable this is.
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Old 09-28-2009, 07:19 PM
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Various approaches to estimate "theoretical" value of a business. One would be cash flow C, divided by discount rate r minus growth rate g. C / ( r - g ). C should be after tax net cash flow after every expense is included. r should be the business' cost of capital, for example what interest rate a bank would charge on a loan secured only by the business, not by the partners' other assets. g is the rate at which the business will grow forever, so make it zero since nothing grows forever and we're keeping this simple.

Another approach would be what "comparable" businesses sell for. If you can get the info. Chains of auto repair shops might sell for 1/3X annual revenues or 4X annual EBITDA, but a two man operation should be worth a lot less.

Remember that what businesses are actually selling for is what matters since you want "market" value. Theoretical value is secondary.

Okay, suppose the business is worth $X. Doesn't mean he should get 1/2 of $X. Because when he leaves, the business isn't going to generate cash flow C anymore. You'll presumably lose his labor, or have to hire someone to replace him.

There is also a "liquidity discount" for a partners' interest. Because he really can't sell out to anyone but you. If he wants to sell more than you want to buy, the price has to be low enough to make it attractive for you.

Ultimately it all comes down to who wants a deal more, and who has a better alternative to making a deal.

And, as mentioned already, you wouldn't want to buy him out and then find him competing with you, selling your customer list to another shop, bad mouthing you, etc. A contract with a non-compete and a payout over time would seem worth considering.

Hiring a business valuation consultant could make sense, depending on how much $ is involved. So would some research in the library or business bookstore, there are probably books that would give you some ideas.
Old 09-28-2009, 08:21 PM
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JYL hit most of the high points.

First, let's separate two things: The value of the business and how to structure the deal.

The rough value of this kind of business is relatively easy to determine as there are thousands of auto repair businesses bought and sold. Look at the local/regional business broker listings to get a thumbnail view as a multiple of earnings or Net Profits. Don't compare to EBITDA as it hides the cost of capital equipment which is important in this kind of business.

To determine today's value of this specific business takes a little more work. I'd value the equipment separately at replacement cost (what you could buy comparable, used equipment) plus something for discounted cashflow plus something for goodwill (name, customer list).

Another way to look at this is to candidly ask yourself, "Self, if I started from scratch, how much start-up capital plus how much time would it take to have a business of this size and reputation?" Figure the value of your time plus that startup capital and you get a rough idea of what the business as a whole is worth to you.

I'm not sure I'd hire a valuation guy for a business this small - unless they are a specialist in small companies and come with some recommendations. If the two of you have a trusted CPA, consider asking them to come up with a simple, independent valuation analysis.

Once you come up with a reasonable figure that you both agree upon, the real work is in structuring the deal. Since you may not be able to write one check, the former partner is taking a note on the business. It works like an earn out which encourages him to speak kindly about the business and makes a non-compete (in a defined geographic region) reasonable.

You want a competent deal attorney to represent you to structure the deal. But you should come up with a one page term sheet that defines the key items you both agree on in principle or you'll be writing big checks to the attorney to do what you and your partner should be able to agree upon over a six pack.

I've not structured deals for a small biz, but happy to give you my $0.02 if you want.

Don
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Old 09-28-2009, 09:22 PM
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How much is it worth to you with out him.

How much is it worth him with out you?

Is the lease worth anything? would you be better off in another building in town?

Whats the "vibe" of the place.

I learned a very valuable lesson on someone elses dime. Don't pay good $$$ for someplace that's known for it's owner. I had wanted to buy out a dealer of mine, but got out bidded by someone else. He wasn't as known as the person he bought it for. He would have been better off building his own place.

I bought out a guy that I had worked for for 10 years. I asked him wht he wanted. it was fair. I paid.

There's a saying "first person speaks loses. ASK him what he wants!

Oh and you can't write off "blue sky" get him to list a price on EVERY nut, bolt, gasket,screwdriver etc. that you buy from him and lower the "blue sky" or as I call it GO AWAY $$$$
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Old 09-28-2009, 10:08 PM
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If this does not work out. You should open an independent repair shop in Middleburg. They are dying for something reliable. People there will pay 1.5X$ to not have to drive into the city...and they still have the money around there.
You should really give this some thought...it would be an easy commute for ya. I know the area well...You would clean up.
I know the last guy that had a place did well enough to retire...he made a fortune just buying and selling clients cars.


Also-JYL what does EBITDA stand for?
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Old 09-29-2009, 01:49 AM
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Earnings Before Interest Taxes Depreciation and Amortization.
Old 09-29-2009, 03:45 AM
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WOW !! Thanks guys! An abundance of info ! I do plan to hire an expert(s) to ar least first determine market value. He would absolutely do an anti-competition agreement. He bought this business 7 yrs ago, and he had almost zero experince and has had his a$$ handed to him ever since. He's burned-out and is very motivated to move on and back to his area of expertise; mechanical engineering,.

This business is currently profitable with a net of @11% Gross income for this year is projected to be @$750K - He has indicated he would sell for @$200K minus my interest stake which is @$40K and he would be willing to hold back a small portion (has not said how much) at @ 5% rate - 7 years
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Old 09-29-2009, 04:55 AM
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Quote:
Originally Posted by Don Plumley View Post
JYL hit most of the high points.

First, let's separate two things: The value of the business and how to structure the deal.

The rough value of this kind of business is relatively easy to determine as there are thousands of auto repair businesses bought and sold. Look at the local/regional business broker listings to get a thumbnail view as a multiple of earnings or Net Profits. Don't compare to EBITDA as it hides the cost of capital equipment which is important in this kind of business.

To determine today's value of this specific business takes a little more work. I'd value the equipment separately at replacement cost (what you could buy comparable, used equipment) plus something for discounted cashflow plus something for goodwill (name, customer list).

Another way to look at this is to candidly ask yourself, "Self, if I started from scratch, how much start-up capital plus how much time would it take to have a business of this size and reputation?" Figure the value of your time plus that startup capital and you get a rough idea of what the business as a whole is worth to you.

I'm not sure I'd hire a valuation guy for a business this small - unless they are a specialist in small companies and come with some recommendations. If the two of you have a trusted CPA, consider asking them to come up with a simple, independent valuation analysis.

Once you come up with a reasonable figure that you both agree upon, the real work is in structuring the deal. Since you may not be able to write one check, the former partner is taking a note on the business. It works like an earn out which encourages him to speak kindly about the business and makes a non-compete (in a defined geographic region) reasonable.

You want a competent deal attorney to represent you to structure the deal. But you should come up with a one page term sheet that defines the key items you both agree on in principle or you'll be writing big checks to the attorney to do what you and your partner should be able to agree upon over a six pack.

I've not structured deals for a small biz, but happy to give you my $0.02 if you want.

Don

Very sound advise ! I could not have answered better.
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Old 09-29-2009, 07:28 AM
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Quote:
Originally Posted by asphaltgambler View Post
WOW !! Thanks guys! An abundance of info ! I do plan to hire an expert(s) to ar least first determine market value. He would absolutely do an anti-competition agreement. He bought this business 7 yrs ago, and he had almost zero experince and has had his a$$ handed to him ever since. He's burned-out and is very motivated to move on and back to his area of expertise; mechanical engineering,.

This business is currently profitable with a net of @11% Gross income for this year is projected to be @$750K - He has indicated he would sell for @$200K minus my interest stake which is @$40K and he would be willing to hold back a small portion (has not said how much) at @ 5% rate - 7 years
So he's asking price is $160k.

This is your starting point. figure EVERYTHING that you can to make it worth less.

How hard is it for you to make $160k ? that's how hard it should be to figure out how to pay less.

Get a CPA to go over the books in PRIVATE. Do not involve your future former boss.

Is the company worth $160K to you? Could you do better elsewhere?

Are you ready for all of the problems to be yours? As you said he's burnt out he won't fight as hard.
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Old 09-29-2009, 08:40 AM
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1) I would be concerned with the short-term lease. You should get options for renewal long-term before you buy business. If you need to move, you may as well start over.

2) You're his only viable buyer. And he is a motivated seller. That lowers the price. Any other sale for him is likely to be a 'fire sale' and will be low in this economy.

Can you maintain your present income level, and pay him off in 3-4 years at that price?
What is the current value of the equipment and inventory?
Old 09-29-2009, 09:08 AM
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So the biz nets about $80K per year? 11% of $750K? Does this include your pay and his? If he is gone, will that revenue and income change? Does the biz require investment that is not being done? When the lease is up, will the new lease be worse? Are the trends of the business stable or declining? is that projection conservative? Are you up for the hassles of running the business? Is the cash flow steady or are there big seasonal/other swings? Looking ahead, is there anything on the horizon that could hurt or help - local economy, competition, regulatory? Are there key employees, customers, suppliers to worry about? Are you sure his numbers are correct and complete? Any lurking debt including trade payables?

In general it seems to me that in the teeth of a recession would be a good time to buy a business that is going to make it through the storm. The more he carries as an earnout the better, shifts more risk to him. 5% is a low rate.

You are an independent auto repair biz? I hear that all the dealer closures and the high average age of cars on the road are generally favorable for those biz. But I don't know much.
Old 09-29-2009, 09:40 AM
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All very good advice........................I'll reply to most all of your questions from above.

1) Yes he is very motivated, has lost a fortune over the last 7 years. Mostly, MO, is that he was too naive and inexperienced when he started. Also his personality is too trusting and passive. This is a tough business and people in it are like sharks...........................when they smell a weakness, it will be exploited by employees, vendors, landlord

2) The business is profitable but still there's a lot of money left on the table from inconsistant billing practices, too many small give-aways for no reason other than laziness

3) He has accumulated a mountain of debt (over $300K) related to the business but @75% of that is from his family members with no paper

4) We have a great customer base, but it isn't being "grown"

5) No current advertising what-so-ever, just a basic website

6) I'm pretty sure I'm his only viable option to get out, I have a lot of leverage

7) I'm not sure If I I had $160-200K that I should buy a different business. I know that is not a lot of money, but there may be other business opportunities that would provide better net with less hassle

8) I have owned a small auto repair shop about 25 yrs ago, made all the classic mistakes and learned a lot. I am ready to own again .................I don't think I would be content ever again working fopr someone else
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Old 09-29-2009, 10:01 AM
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Sounds like you have some experience, so take below as another data point.

I have bought, sold, owned and operated shops of your size (revenue wise). What he is asking is the most I have every paid for a going concern shop. I would never pay anything more than the value of the used equipment in the shop minus your own current investment in the equipment. If you are in contact with your customers, then you already own them relationship wise, so no additional value there.

This isn't as much about valuing a business in a generic sense, but valuing the fact that for $50k you most likely could setup this business from scratch. I have done it, and I have seen it done. In fact, after I sold my last one, my lead tech started his own from jackstands and his tools. Not even an air compressor! 2 yrs later he has a fully equiped shop with alignment rack, 3 lifts, tire machines, etc. I put him in contact with my good customers and he built it from there.

Seriously, if you own the customer base, let the lease expire, make him a deal to buy the equipment and buy a building/plot with that kind of money. Just move the business to another location, keep building it steadily, then when you are tired of it, sell the business and lease the building to the new owner, keeping the building/land as a long term investment.

Also, make sure your pricing is right. You should be at least 70% margin, better if closer to 80% on average (more on low priced tickets, less on high price tickets). That is parts cost and labor paid on the job vs gross ticket sale amount. If you see that it's below 70%, figure out why and decide if your customers should be ok with a price hike. If not, then you will be in financial trouble. Your total labor and parts costs should not be more than 50% of the total business expenses, or you will be better off working for someone else and not owning. These 2 items of due diligence alone will tell you if the business is in good shape or if you will have a lot of work to do. Also, you should be netting at least 20% before taxes, if you aren't selling many tires, like under 50 tires per month.
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Old 09-29-2009, 11:44 AM
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Good advice, please keep 'em coming
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Old 09-29-2009, 01:54 PM
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I will say that what equipment we have needs to be replaced. Tire changer, balancer, wheel alignment machine is too old to be updated, software not supported anymore. Some basic diagnostic equipment is pretty good. We probably have at best $3-5K of inventory.

There is no real phone "system", all the computers are too old and all need replacing with modern Network. In short the "equipment" is not worth much.

The shop has 7 bays / lifts with one outside
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'72 Yamaha CS5 200 Twin - Sold to fellow Pelicanite
Old 09-29-2009, 02:00 PM
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'77 Sportster Pro-Street Drag Bike w/93ci
'72 Yamaha CS5 200 Twin - Sold to fellow Pelicanite
Old 09-30-2009, 06:29 AM
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