Full Version: Selling A Business?
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