Value of a small business

[mr2mike]

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

Given the OP, probably a leather works or specialty wall anchor company.

[TomcoPDR]

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Given the OP, probably a leather works or specialty wall anchor company.

An art gallery?

[B.Spilner]

Mega art gallery

[Buster]

- Unless the industry has enough previous comparable sales to establish a convention of multiple of revenue, you work off of multiple of normalized cash flow (not EBIDTA).
- multiples of cash flow are a way to establish the value of the intangibles (goodwill) of the business, then inventory and other assets are added on top
- goodwill is determined by any number of things and doesn't have to be connected to contracts. In fact it is probably better if it is not. Things like overall customer loyalty, competition, potential for competition, barriers to entry, proprietary IP, access to patents, brand recognition are all factors which will determine what the buyer and seller might agree on as the price.
- for relatively niche small businesses you might see valuations in the .5x cash flow to 2.5x cash flow. More robust small businesses can fetch 8-10x cash flow, but this doesn't sound like one of those industries.
- Payout for the purchase does not need to be in cash, it can be financed by the vendor (ie payments to the vendor) which can include performance holdbacks
- non-competes are tough to enforce and can easily be circumvented, buyer beware, although easier to enforce in these circumstances
- asset sale over share sale if you can

blah blah blah, i could go on.

[suntan]

That’s all great but fact is the annual revenue is the cash flow. It’s basically a personal services business with a couple of employees. There is zero goodwill because the business is ad hoc based.

It’s not even as complicated as a construction company, where your model makes sense because 90% of the revenue is cogs.

I’d be stunned if revenue was even 300k. You guys are way overthinking this.

[tonytiger55]

Another way to determine the value in lazy form is to ask this question. What exactly are you purchasing?

He does not own the land or building.
What is the cashflow of the business, how many years, what is generating the cash. What is the volume goods/services sold? Is one vendor/supplier product more profitable than another?
Ask for the business insurance documents. See if he has Business Interruption coverage, what has the insurance company valued it? What is the machinery valued on the replacement?
Relationships with vendors take various forms. Are there any contracts on this? What is the cost of business? Tax, lease, rentals, employee wages, insurance, banking fees etc.
If you were to set up the business from scratch what would be the costs? Is it cheaper to lease a different building? Which leads to the other question...
Given the employees are unskilled labour, are you purchasing knowldge or is there a loss of knowledge?
After going through that thoght excercise.. I think the value is determined by the knowledge of the owner. If he leaves, how much can the business run on its own? Does the owner have specialized knowledge...? The value is then determined on the owner relative to the net profit. How easy is it to replace him?

[ThePenIsMightier]

And let's not forget the ol' non-compete clause...

[killramos]

If a business has no expenses then Revenue is Cashflow.

In which case cash flow is still the correct metric for valuation.

[riander5]

Id offer 50k, and tell the guy he still has to work the next 5 years, however he only gets half his current wage.

[Buster]

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That’s all great but fact is the annual revenue is the cash flow. It’s basically a personal services business with a couple of employees. There is zero goodwill because the business is ad hoc based.

It’s not even as complicated as a construction company, where your model makes sense because 90% of the revenue is cogs.

I’d be stunned if revenue was even 300k. You guys are way overthinking this.

Goodwill is determined in retrospect.

If ES and his consortium determine that they want to buy the business for $xxx over it's book value, then that's the goodwill.

It sounds like this business is an appealing acquisition for more than book value so the goodwill is by definition non zero.

[ExtraSlow]

This is all very helpful.

Again, the team I'm working with has a deep background with this type of transaction. I'm just trying to educate myself, and these comments have been extremely helpful.

[killramos]

Let me know where to send the invoice for my work fee

[ThePenIsMightier]

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Let me know where to send the invoice for my work fee

I recall that make-up guy being there when I took that oath thing in the dark room holding those chains.

[arcticcat522]

I've often pondered something like this where I work. What would it be worth to sell? The thing that I always get stuck on is if there isnt anything proprietary, and no real barrier to entry, let her buck and go at it with out purchasing another company. I find it hard to put a price on a name with any small business. Figure out what the assets are worth. Pay that.

Have you ever heard of someone who purchased a portion of a company and gave it back to them after a few years. I have.......money well spent??

[schurchill39]

When we bought our new house we got all of the carpets professionally cleaned. My wife had it arranged way ahead of time with a guy who was recommended to her by a ton of people and he had a very good reputation for quality work. When the day actually came for our carpets to be cleaned it was someone completely different who showed up and said he just bought the company and we were his first clients on his own. He didn't do anywhere near the job we thought we were getting when we first booked in and had I known it was going to be a completely new guy I would have gone with a different company with some experience.

That being said, I have always wondered how the original guy valued his business consisting of a van and the cleaning equipment and how much was put on the jobs that were prebooked in that 1 month time frame. I find it hard to believe that it would have been for much more than the value of the vehicle and equipment plus some sort of training retention fee. In talking to the dude who was actually doing the work it sounded like he was just buying himself a job which was even more confusing to me.

[zechs]

The joke of small business is that at least 50% of them you are buying yourself a job, except you have all the additional responsibilities and time requirements of being the boss vs working as a cog in the machine somewhere.

Everything that ES has said indicates to me, based on my experience on being involved in the buying and selling of a few small businesses, that the business has zero value.

The owner has value as an employee. Without him, I'd expect the "business" to crater within a year or two. Might as well just start your own business and cold call his clients.

[Tik-Tok]

No value at all?

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- Some expensive capital equipment, all fully owned, but nothing custom or unusual. Probably $500k to buy new replacements

[themack89]

Sounds like Bitcoin mining XD

[ThePenIsMightier]

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Sounds like Bitcoin mining XD

LoL!!

[muse017]

What is "Small Business"?