Valuating a business for sale?

[Danny_Ocean]

I know this is a Porsche forum, but out of all the forums I belong to (Porsche, Corvette, TransAm & Pantera), this one seems to have the smartest mo-fo's.

So...Is there a simple formula for valuating a business? I own a service company (very little, if any, inventory) that I either have to sell, or find someone to run. However, I have no idea what the business is worth or how I would even go about selling it.

???

[Danny_Ocean]

Well...the business is basically me (and the gray matter between my ears). The client list is where I see the value. Yes, the business shows a profit and has been growing exponentially since I started up in '01. Very profitable and each years sales exceeds the last. The sky is the limit, as the business is based in hi-tech.

"Have to sell" = I am moving out of FLA (aka America's butthole) for greener pastures and can't take it with me.

[competentone]

Originally posted by Danny_Ocean
Well...the business is basically me (and the gray matter between my ears). The client list is where I see the value.

If you are the business, there is no "business" to sell.

The only value in the client list is to a competitor -- and even that is questionable. Once you're gone from the area, your current customers won't be incapable of finding someone else to perform the service you performed, will they?

If your customers are particularly loyal to you and a large percentage of them will use the person/company you give as "your replacement" your client list might have some value, but I still think it will be very difficult for you to find someone willing to pay you for it -- unless you have an established reputation in your field and the person/company buying your client list knows that.

[Danny_Ocean]

Originally posted by competentone
If your customers are particularly loyal to you and a large percentage of them will use the person/company you give as "your replacement" your client list might have some value, but I still think it will be very difficult for you to find someone willing to pay you for it -- unless you have an established reputation in your field and the person/company buying your client list knows that.

Yes. I am known as the "go to" guy in my field. I'd have to train someone with a similar background/attitude/customer skills to sucsessfully take over.

On the other hand, wouldn't any competitor be interested in a good client list? It doesn't really matter to me if they can't adequately service the clients after I'm gone (and their check clears).

[LeeH]

It's definitely harder to sell if you're a one-man show. Can you teach someone else to run it? If so, you may have something sellable. Call a few business brokers and see what they say. Be advised all business brokers are not created equal! We interviewed several. The guy we went with said he could sell for $500K more than the first two we talked to... and he did. The closing price was actually higher than we listed for.

Our business was a light manufacturing/service business (building products) with 25 employees including an office and warehouse manager. Our agreement with the buyer was 3.33 X verifiable prior year's cashflow. Sigh... the payments stop December of '08.

[Don Plumley]

I have a fair amount of corporate M&A experience and have privately advised a few companies.

Businesses are generally valued at a multiple of discounted cash flows; less frequently they are valued based upon assets. If you leave the business and the cash flow dries up, there's no value. If the asset is the customer list and name (goodwill), then you could come up with some sort of valuation metric based upon the acquisition and retention cost of the customer base, discounted for lack of conversion.

Frankly, for a one person show, you would be better off finding someone to train and run the business, and have them buy it from you on an earn-out basis over a few years. For example, you could establish that after training and by providing some remote support, you would take a declining percentage of gross revenues or gross margin (not profit, too many variables) over 3 to 7 years.

Most business brokers are just real estate agents in disguise - they don't actively market the business but sign you up on an exclusive contract hoping to collect their cut. While there are exceptions, you'd be better off either a) marketing it yourself and finding an attorney to advise the transaction or b) finding a strategic buyer (competitor) with an advisor.

You have put a lot of sweat equity into your business - finding the wrong broker can waste years of your life in the time it takes to sign your name.

[on2wheels52]

I could be in selling mode in five years. Definitely a one man show affair but have assets along with a customer base. Learnable in a month but not a job for everyone. The previous owner found some sucker to buy it, maybe I can too.
Jim

[Jims5543]

When I bought the land surveying company I own I was faced with this same problem. How to put a value on the business I was buying.

The widow od the previous owner liquidated all the trucks, computers and equipment. Then decided to sell the business which was basically Files, Clients and good faith.

She initially asked for $475K. I spoke with my local bank president and my accountant both offered the same advise.

What are you buying (selling)? Client lists, good faith, files? What are they worth? They have the potential to make money of course but how does that happen? Is it because of you? Will the clients stick around when your gone? You get the picture.

I was then offered a discound on the company, it was reduced to $175K then after 3 weeks and the company now loosing clients. (I was actually running it while we negotiated giving it more value than it really had) Then she wanted $125.

The bank president told me that it was worth more like $10-$15K but since I was friends with the owner (not his wife) offer $25K.

She balked, freaked out, called me names and insulted me. So I told her to find another buyer, my little 2 man company was making me good money.

She took my offer at $25K. I lost about 50% of the clients in the transition, mostly because when other Land Surveyors hear one of their own die they fly in like vultures and scoop up the clients. It was tought for me to keep them when that was happening and we were still negotiating the sale.

There are companies the do appraisals and put $$ values on companies. I would seek one out and have them put a value on it. That was my next step when we were negotiating.

There is one of these appraisal companies next door to my CPA's office, I can get the contact info for it if you want.

[Jims5543]

BTW - Once word gets out your selling your competitors will start marketing your clients killing what little value you have.

Its a very tricky stunt to pull off, selling to a competitor.

Good luck!!

Where are the greener pastures?

[berettafan]

Originally posted by Don Plumley

Frankly, for a one person show, you would be better off finding someone to train and run the business, and have them buy it from you on an earn-out basis over a few years. For example, you could establish that after training and by providing some remote support, you would take a declining percentage of gross revenues or gross margin (not profit, too many variables) over 3 to 7 years.

Most business brokers are just real estate agents in disguise - they don't actively market the business but sign you up on an exclusive contract hoping to collect their cut. While there are exceptions, you'd be better off either a) marketing it yourself and finding an attorney to advise the transaction or b) finding a strategic buyer (competitor) with an adviser.

my experience is as a CPA working with smaller clients (bsns valued in the area of $50k to $3m or so) but i find the above advice to be absolutely spot on.

while there are exceptions (ie stupid buyers) to this i believe your best value is to find somebody who will get excited about your business and wants to come on as a manager (w/ maybe combo of % of profit) over a period of time while you stay on via phone/fax/email as an adviser. the promise from the start is that your new guy will eventually have an opportunity to buy you out for $$xx (maybe 1x's yrly profit? nothing too greedy) at no later than xxx date. YOU retain the right to fire the guy if he doesn't run the bsns right. Kinda like a rent-to-own.

you are looking for the guy that is fired up to do whatever work you do but doesn't have QUITE the level of entrepreneurial spirit it takes to start it all from scratch.

[72doug2,2S]

Originally posted by berettafan
my experience is as a CPA working with smaller clients (bsns valued in the area of $50k to $3m or so) but i find the above advice to be absolutely spot on.

while there are exceptions (ie stupid buyers) to this i believe your best value is to find somebody who will get excited about your business and wants to come on as a manager (w/ maybe combo of % of profit) over a period of time while you stay on via phone/fax/email as an adviser. the promise from the start is that your new guy will eventually have an opportunity to buy you out for $$xx (maybe 1x's yrly profit? nothing too greedy) at no later than xxx date. YOU retain the right to fire the guy if he doesn't run the bsns right. Kinda like a rent-to-own.

you are looking for the guy that is fired up to do whatever work you do but doesn't have QUITE the level of entrepreneurial spirit it takes to start it all from scratch.

+1
It's a bit risky training your replacement who will buy you out. They can take what they've learned and walk away before the deal is done, but I don't see a better solution.

[You could set up a sort of modified ESOP plan with a vesting period to cover the transition period]

[Tobra]

If you are training your replacement, you have to have a non-copete type contract in case he bails. Different businesses have differerent retention rates on change of ownership. I bought my practice, primarily to have access to certain managed care contracts in an area without any openings. I lost like 2 or 3 patients out of thousands.