Replies

1. 
   BobKovacs | Oct 03, 2003 01:57pm | #1

   Charles-

   It really depends on how well the business has done, and how it's been managed.   In most cases, with small operations, all you're selling is tools and trucks- there's little value beyond that if the owner has always been personally involved in all aspects of the business, and past customers (the "history" that you're buying with the company) expect to see said owner on their jobs.  Without that owner there, you're starting from scratch with any past customers, and the only advantage you've gained by buying the business is the fact that the past customers call you first, rather than someone else.

   Now, if the company was built in a fashion such as Michael Gerber describes in "The E-Myth Contractor", and systems have been put in place to allow the business to function in the absence of the "owner", there's some value there.   You now have a money-making operation, run by all the people involved, and you're stepping in to keep it moving.  

   How does one arrive at the value of such a business?  That's a tough one- you've got to look at yearly profit history, growth opportunity, etc.   There are business sales consultants that do nothing but analyze such things, but you've got to let your belly tell you whether the deal is right as well.

   Bob

1. 
   marv | Oct 03, 2003 03:56pm | #2

    How does one arrive at the value of such a business?  That's a tough one- you've got to look at yearly profit history, growth opportunity, etc.   There are business sales consultants that do nothing but analyze such things, but you've got to let your belly tell you whether the deal is right as well.

    

   Here are some outtakes from an appraisal I recently did. 

    

   Generally, there are several valuation techniques used to value the common stock of a closely-held corporation.  Following are the three basic methods that use adjusted historic financial information to value the operating company defined above:

    

    

   Adjusted Book Value - The first method of valuing the Company would be to determine the adjusted book value of the Company.  Since most of the Company's assets are represented by Inventories and Equipment, it would be necessary to estimate the fair value of the property and equipment and adjust the recorded book value of the net assets accordingly.  If we look at a value using estimated fair market value of trucks and equipment, the computed value is as follows:

    

   Capitalized Earnings - The second would be a capitalized earnings method.  Under this approach it is assumed that a buyer would be willing to acquire the Company at a price which would afford him a reasonable return on his investment, considering the relevant risk involved in the acquisition.  Based on the nature and activities of the Company, I believe that an investor would demand a 15% - 20% return in exchange for acquiring the Company.  Using this valuation technique, and considering the most recent year's (2001) operating earnings, an average of the last five years' (1997-2001) operating earnings, and a weighted average of the last five years' operating earnings, all on a pre-tax basis, results in a range of values as follows:

    

   Excess Earnings Method - The last method of valuing the Company is the excess earnings method.  This method is based on the concept that the value of a business is both tangible and intangible.  If the Company is capable of generating profits in excess of a reasonable rate of return on its net tangible assets, this indicates the potential existence of goodwill, going concern or other intangible value.  The underlying assumption is that a buyer would pay only the value of the net tangible assets unless the Company has exhibited above normal earnings capacity.  The ability to generate such superior earnings is the justification for paying a premium price.

    You get out of life what you put into it......minus taxes.

   Marv

1. 
   BobKovacs | Oct 03, 2003 04:03pm | #3

   OK.....can we have that in English now??? lol

   From what I read there, it sounds like those methods would work for a large manufacturing corporation or the like, but what about the small, say, $1 million/year remodeling company that the owner is retiring from?  How does one put a price on the difference between buying that business, vs. buying tools and a truck and starting from scratch?

   Did I miss something?

   Bob

1. 
   marv | Oct 03, 2003 04:11pm | #4

    

   OK.....can we have that in English now??? lol

   In English you say?

   You have to show a buyer that your business is worth more than your trucks, tools, and you.

   If someone had to pay a manager to replace you could the business still survive and prosper?  If it can, the business can be sold.

   If it can't, the buyer is buying a job.

   You get out of life what you put into it......minus taxes.

   Marv

1. 
   BobKovacs | Oct 03, 2003 05:08pm | #5

   That's better......lol.  That's Gerber's point, exactly-  if the business crumbles if the owner gets run over by a bus, it's not truly a "business"- it's a job for the owner.

   I guess at that point, if it can be proven that the business can be run without the ever-present owner, then it's a matter of determining what the net profit to the new owner would be, and using a cap rate to determine what the investment's worth based on the required rate of return (just like any other investment).

   Bob

2. 
   brownbagg | Oct 03, 2003 08:27pm | #6

   my boss sold his business to the employee, we are know employee owned. He went out got a loan for a certain amount and said when the company pays off the loan they can have the company. and we have 427 employees

3. 
   johnharkins | Oct 09, 2003 12:17am | #7

   probably a common course of action  but new & interesting to me

   was any part of that loan reinvested in the enterprise or was that loan a payoff to him ( i.e. sale price of company ) and  you ( and fellow employees ) are responsible for satisfying that loan

4. 
   brownbagg | Oct 09, 2003 03:18am | #8

   payoff to him