Value of a small business

[ExtraSlow]

Looking at an opportunity for a group of investors, who may be interested in purchasing a local small business. It's an industrial service business that's been in operation 40 years by the same owner. I know the invstor guys know how to do this, but I want to educate myself. How would you value this small business?

- Owner operated with 2 unskilled laborers
- Steady work, lots of repeat business, but likely no long term contracts.
- Some expensive capital equipment, all fully owned, but nothing custom or unusual. Probably $500k to buy new replacements
- Doesn't own the land/shop he operates out of.
- Good potential of increasing the business, as he hasn't been putting much effort into that.
- No local competition, although several companies in other cities that do this service.

If his Annual revenue is X, his costs are Y, and the depreciated value of his equipment is Z, what's his business worth? Thanks in advance, beyond university.

[suntan]

1X revenue at best, lower if there's substantial debt.

Is the business at least break even?

Does the business want to sell?

[ExtraSlow]

The owner wants to sell, and is open to consulting back if required.
Does better than break even.

[pheoxs]

Not much IMO. The key issue is owner-operator means once he’s out of the picture you’ve lost the main guy doing the work. Lots of your existing clients may not be happy to have different people show up for the next service work.

Also it says 2 unskilled workers, can they do the owners job or are they just shop grunts that help out here and there?

End of the day you’re basically just buying the equipment and the client list since you’re losing the main worker when he leaves. What’s your plan? Train the other 2 workers? Or can you find a replacement guy to do the work? If he’s the only one doing it in Calgary, is finding a replacement guy going to be hard?

[cycosis]

Value is in the client list/contracts. Largely depend on his ability to convert his current business into formal contracts. How to value future cashflows if theres nothing agreed upon? Handshake deals with the owner himself are moot once hes out of the picture.

[suntan]

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The owner wants to sell, and is open to consulting back if required.
Does better than break even.

1X then. Anything higher than 1.2X is being extremely generous. Pay 50% now, keep him on at salary, don't pay him the rest of the buyout until he's fully trained two successors.

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Value is in the client list/contracts. Largely depend on his ability to convert his current business into formal contracts. How to value future cashflows if theres nothing agreed upon? Handshake deals with the owner himself are moot once hes out of the picture.

Zero value. Zero. You as the buyer have to do the work. So what are you paying him for?

[riander5]

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1X then. Anything higher than 1.2X is being extremely generous. Pay 50% now, keep him on at salary, don't pay him the rest of the buyout until he's fully trained two successors.

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Zero value. Zero. You as the buyer have to do the work. So what are you paying him for?

Paying for any long term contracts that are in place and will stay with the business after it sells? You put zero value on this? Interesting....

[suntan]

OP says no long term contracts in place.

[ExtraSlow]

I'm liking the thoughts here. Agree that handshake deals with an owner who is leaving are not worth much if anything. That being said, there's a certain amount of inertia to industrial suppliers. It's often a pain in the ass to find, qualify and start-up with a new supplier.

And this guy has little local competition, I happen to know because I was looking for an alternative to his services and came up empty. Shipping parts to facilities out of town is a pain in the ass too, but people could do it.

EDIT: I should clarify, right now I THINK there are no long term contracts, but I will obviously verify this. The glimpse I have into his work says each "job" is a a new informal agreement.

[riander5]

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OP says no long term contracts in place.

I would edit my comment, but reading > me so I will leave it as a reminder for all who tread after me.

No contracts, No skilled labourers. Im agreeing with Suntan on this one. The seller sounds like he has the ability to generate a good income for himself, but has he created a good, saleable business? Doesn't sound like it.

[suntan]

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I'm liking the thoughts here. Agree that handshake deals with an owner who is leaving are not worth much if anything. That being said, there's a certain amount of inertia to industrial suppliers. It's often a pain in the ass to find, qualify and start-up with a new supplier.

And this guy has little local competition, I happen to know because I was looking for an alternative to his services and came up empty. Shipping parts to facilities out of town is a pain in the ass too, but people could do it.

EDIT: I should clarify, right now I THINK there are no long term contracts, but I will obviously verify this. The glimpse I have into his work says each "job" is a a new informal agreement.

Gotta crack open those books, look through his emails, papers, whatever. No contracts on paper = no money for him.

Never do handshake deals. You never want to get into a he/she said with this sort of shit. Have lawyers that have experience in M&A draw up the paperwork.

[mr2mike]

Investment only or do we need steel toed Blundstones?


Business sounds like my ex's family business but then again... Like every small, family run business.
Creative accounting and not worth more than the last successfully bidded contract.

[ExtraSlow]

Yeah, we have "real" investment guys, and real lawyers who would do the actual deal. This group knows their shit. I'm advising on a couple technical aspects, but I don't want to be uninformed about the valuation part of the deal. Always want to add to my toolbox, you know?

Might end up with steel toed blundstones too mike. you want a pair?

[ThePenIsMightier]

I believe it's usually sold on a multiple of EBITDA, isn't it?

[killramos]

It really depends on the type of business.

But yea if you are going to quote multiples I’d do some kind of cash flow (EBITDA, DACF, AFF, FCF or whatever jumble of letters gets you Randy) over revenue.

Revenue multiples only fly in “tech” where no one actually makes any money.

All of the above is just lazy proxy for discounted cash flow analysis anyway, usually by people who don’t know what their cost of capital is.

[suntan]

For these sort of small owner operated businesses revenue works better because they're sucking everything out of the company as a dividend/wage, so the only way you can convince them to sell is to give them that amount.

[ExtraSlow]

This is all super helpful. you guys are the best.

[Tik-Tok]

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Pay 50% now, keep him on at salary, don't pay him the rest of the buyout until he's fully trained two successors.

While I certainly have no personal experience in this type of thing, when my aunt and uncle sold their trucking business a decade ago (for 7 digits numbers) the written deal was that they receive 50% up front, and were paid the rest as monthly salary for one year (from a fund). That was enough time for them to train the new owners/staff, and make good solid connections between their existing clients and the new people.

There were some problems, but after a year everyone was happy and the business was a well oiled machine.

[BavarianBeast]

If it’s pipe coating I’d consider buying the business myself

[suntan]

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While I certainly have no personal experience in this type of thing, when my aunt and uncle sold their trucking business a decade ago (for 7 digits numbers) the written deal was that they receive 50% up front, and were paid the rest as monthly salary for one year (from a fund). That was enough time for them to train the new owners/staff, and make good solid connections between their existing clients and the new people.

There were some problems, but after a year everyone was happy and the business was a well oiled machine.

Yup those kinds of arrangements are very common.