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
Sam Varn, President
Awards4U
1387 E. Lafayette Street
Tallahassee, FL 32301
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