Full Version: Selling A Business?
From: Boz (CHEDDARHEAD) [#1]
10 Apr 2007
To: ALL
I need a little help to satisfy my curiosity. How do you price a business to sell? Here is an example
An established 10 year old laser engraving/ laser marking incorporated job shop. They do $2 million in gross sales with a $300,000 gross profit per year. Probably carry 35 to 40 employees, many of which have been with the company at least 7 years. They have a healthy mix of industrial, ad specialty, medical parts and recognition awards business every year. Probably has slowed to 3% to 5% growth per year. They might have $ 100,000 in older equipment, laser engraving machines, Nd:YAG markers, pad printing machine, some silk screening equipment, in their shop. New value of the same equipment might be $ 400,000, but I am sure most of it has been depreciated. The company has an owner, 8 or 10 office personnel, 5 - 6 in the art department, the rest work in the shop running machines, cleaners, assemblers/ packaging, shipping & receiving, and a truck driver. I would guess the hourly rate of the shop employees would be about $ 14/ hr. They are located within a half hour of a major metropolitan area.
How would business like that be priced for sale.
The building would be extra, but probably would be market pricing +.
From: Engravin' Dave (DATAKES) [#2]
10 Apr 2007
To: Boz (CHEDDARHEAD) [#1] 10 Apr 2007
Boz,
When considering the purchase of a business there are so many things to evaluate, all the way down to the trend of the moral of existing employees.
Is the building owned by the company and paid off? How many square feet is required to operate? Does it need to be in a high-visibility location?
Was there an owner's salary built into the expenses, or was that backed out to get to the $300,000 in gross profits?
How actively does the current owner participate in the day-to-day operations? Does he or she have an uncompensated spouse who is involved in the day-to-day operations?
What is the average inventory level maintained and what is the current level on hand?
What are the existing payables and receivables and how will they be handled during the sale?
Ignoring all of the important details and looking simply at the gross revenue numbers, a realistic value for this business would be in the $1.25 to $1.3 million. This is under the assumption that there was no owner salary.
The owner will get a much higher price for the business if he or she finances the sale themselves. Of course, he or she would also take the risk of losing everything if the new owner manages the business into the ground.
It will be interesting to see what others come up with and how they stand behind their numbers.
David Takes
Expressions Engraved
http://www.expressionsengraved.com
EDITED: 4 Jul 2010 by DATAKES
From: Boz (CHEDDARHEAD) [#3]
10 Apr 2007
To: ALL
Was there an owner's salary built into the expenses, or was that backed out to get to the $300,000 in gross profits? The owner draws a salary and I'm sure plenty of expenses.
How actively does the current owner participate in the day-to-day operations? Does he or she have an uncompensated spouse who is involved in the day-to-day operations?The current owner is President and pretty actively involved. He has grown to hate it. Burned out.
What is the average inventory level maintained and what is the current level on hand?You would think a laser job shop would have very little inventory. However, I guess we would all be surprized as to how much inventory they actually had.
From: LaZerDude (C_BURKE) [#4]
10 Apr 2007
To: Boz (CHEDDARHEAD) [#1] 10 Apr 2007
Robert
The purchase price of a business can be arrived at in many different ways, with many different formulae.
I have a mentor who usually values a business at 50% of the GROSS sales.....which would put you pretty much in line with David T.
Perhaps the consultation of an accountant and an attorney would be in order...?
From: Mike (MIKEN) [#5]
10 Apr 2007
To: Boz (CHEDDARHEAD) [#4] 10 Apr 2007
1. the building. If it is worth a million and is included with the business then that obviously raises the value beyond just the business and equipment.
2. Why does it take so may people to do that volume. It seems to me like three times as many as needed.
3. What is the makeup of the business? Is it plaques and awards; trophies; marking; custom work; ad specialties? How much of the business is retail traffic? Location would seem to limit that.
4. What is the "good will" value? Can existing customers be retained?
Somebody else mentioned inventory. What about liabilities?
The building is what it is. For the business, I'd have a hard time going over $5 or 6 hundred thousand. And that would depend on inventory.
From: Boz (CHEDDARHEAD) [#6]
11 Apr 2007
To: ALL
2. Why does it take so may people to do that volume. It seems to me like three times as many as needed. It always amazes me as to how many people it takes to do stuff. From management, sales, accounting, art department, customer service, laser operators, packing and unpacking, silk screeners, shipping and receiving, QC,.... I would think the number of employees could be reduced if the business just targeted one segment of the industry, but when you throw in the high tech stuff, documentation rears its ugly head. Can personnel be reduced, sure, but we have to include the current number of employees as part of the formula.
3. What is the makeup of the business? Is it plaques and awards; trophies; marking; custom work; ad specialties? How much of the business is retail traffic? Location would seem to limit that. There is probably very little "retail" traffic, but the facility is important to some of the large industrial and medical device manufactures who like to come in and see the brick and mortar facility.
4. What is the "good will" value? Can existing customers be retained?With almost any exchange of ownership of a business, you have to hope MOST of the current business stays with the business. It is for the new owners to screw up. As far as the good will aspect, I'm not sure what you mean. IF you mean, because the current owner is such a good guy, I'll give him a little more, that won't come into play. Our attournies of Dewie, Screwem and Howe would never let that enter the equation.
Somebody else mentioned inventory. What about liabilities? Liabilities, do you mean debt? I do not think there is a tremendous amount of debt.
From: Mike (MIKEN) [#7]
11 Apr 2007
To: Boz (CHEDDARHEAD) [#6] 11 Apr 2007
Boz
There is a legal and financial definition of good will. But what is important is whether you can retain the business that you're buying and whether all matters relating to the defined "good will" are in order.
You could find a negative good will situation causing a lower value for the business.
I know of 2 businesses with about $2 million in volume, both with less than 10 employees including the owner.
EDITED: 11 Apr 2007 by MIKEN
From: Stunt Engraver (DGL) [#8]
11 Apr 2007
To: Mike (MIKEN) [#7] 11 Apr 2007
Mike,
I've always wondered about the "Under New Management" or "New Owner" banners in front of businesses.
I suppose that's supposed to come as good news, to the buying public. <shrug>
It somehow comes across as a scathing indictment of the previous management or owner, before the new management proves they're any better. :/
EDITED: 11 Apr 2007 by DGL
From: Mike (MIKEN) [#9]
11 Apr 2007
To: Stunt Engraver (DGL) [#8] 11 Apr 2007
From: Sam (SGVARN) [#10]
11 Apr 2007
To: ALL
I have to agree that it seems like there are way too many people employed here, especially and still generate a 15% bottom line.
That really puzzles me and throws up a flag. I'd want to know what percentage of sales is represented by salaries and benefits. Since this appears to be more of an industrial operation I'm guessing that his prices are two low, generating lots of labor intensive work requiring more people. One indicator that a lot of people look at is what the average sales per employee is. In this case it looks like between $50,000 and $57,000 per. In my opinion, that is too low. According to my business mentor you should shoot for $100-125K per person.
The most popular way to determine value is to use the EBITAD method. EBITAD stands for Earnings Before Interest, Taxes, Amortization and Depreciation. It's also called recast earnings and gives a clearer picture of the real earning potential of the business. Typically a business will sell for a multiple of this number, but that can vary widely.
The owner's compensation is a real important number to know. Depending on how much he is paying himself (including key man insurance, car expenses, football tickets, etc.) you may have enough right there to handle the debt service. In the case of one company that I bought that was exactly the case. The owner's compensation paid for the company all by itself. This is important because you will be adding debt to the company's cash flow obligations and you have to know if it can carry it.
As to the actual purchase I strongly recommend that you buy assets only. If it is a corporation you do not want to buy the corporation. There may be unknown liabilities which you will also acquire. You only want to buy the assets of the corporation.
My experience is such that, as of the date of closing, all receivables and payables belong to the previous owner. All receivables and payables put on the books after the closing date are the responsibilty of the new owner. It is also important to determine what happens to work in progress. Typically the old owner will want to deliver as much as possible to maximize the receivables he takes with him. But any jobs left in progress will be yours after closing. And along those same lines, it is highly likely that you will be collecting his receivables for him, since the customers will continue to mail the checks to the company. It is not uncommon to charge a fee for this and it can range from 2% to 4% typically. This really covers your cost of processing the payments, tracking, and sending the old owner a check once a month.
There is lots of due diligence to do so take your time and be thorough!
Hope this helps,
Sam
From: JHayes55 [#11]
12 Apr 2007
To: Sam (SGVARN) [#10] 12 Apr 2007
EDITED: 12 Apr 2007 by JHAYES55