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    31 Replies Latest reply on Sep 9, 2008 12:52 PM by Adducent

    What's it Worth?

    Basket_Guy Adventurer

      I am in the process of putting a bid in on the purchase a business. To give you a little background, it is an existing business and has been running for over 20 years. Last years net profit was just over $34K Gross just over $500K, the purchase would include business, building, land and vehicle. 2007 land appraisal $274,355, building appraisal $141,711 and their asking price is $1M. I feel their price is inflated some what and would like to know what some of you would offer them and how you come up with a fair price?
        • Re: What's it Worth?
          LUCKIEST Guide
          What's it Worth??

          Good question. With Real Estate it is Location, Location, Location.
          What do you feel the "fair price" should be??

          In one of your last posts you said that you have an Accountant.
          Since you are in Northern Florida you should start by asking your Accountant
          and then seek help from a local real estate agent.

          You are not just purchasing a business. You are also getting a building and more
          How long has the business been on the market?? Hopefully you have a Lawyer.

          Good luck, LUCKIEST
            • Re: What's it Worth?
              Basket_Guy Adventurer
              Luckiest thank you for your reply, The business has been on the market for 8 months now. It is located on the corner of one of the busiest boulevards in the city and a side street into a nice neighborhood and there is a stop light there also, I feel the business has great exposure and in an excellent location. I am working with a real estate agent but also would like to find out how others come up with their offers.
                • Re: What's it Worth?
                  LUCKIEST Guide
                  What's it Worth?

                  Thanks for all the additional info. Just remember that each piece of real estate (building) is different.
                  Also location plays a big role in value. If the building was in Jacksonville or Miami it would be a different
                  value. What does the real estate agent say is a fair offer??
                  You also want your offer to be lower than the asking price, BUT you have to make that decision

                  Again LUCKIEST
              • Re: What's it Worth?
                Lighthouse24 Ranger
                What type of business? What city?
                • Re: What's it Worth?
                  rlucisano Newbie
                  Boy a business that only gross $34k on $500,000 in sales doesn't sound that good. You want to see the books to see where all the money went. Your looking at a big monthly expense just on the cost of land and equipment unless you got alot of cash to put down. You can look on line on how to valuate a business and find a good accountant to help you on that
                  • Re: What's it Worth?
                    Bridge Navigator
                    "The business has great potential...."

                    It sound like you have great ideas for the business. I suspect these ideas will cost you both time and money. You do not pay someone else for your ideas to create value.

                    Does the $34 M net include owner adjustments? Would you have to work in the business or is management in place?

                    You need to evaluate your opportunity cost; i.e. what are you giving up. I am sure you could find another job that would net you $34 M a year - and you would not have to pay $1 MM for the opportunity.

                    Your have a RE asset value of $415 M. How old is that? RE has been declining everywhere!

                    I would suggest you work with a business broker rather than or in addition to a RE agent. It seems like your primary intent is to purchase a business not real estate.

                    In business transactions, you need to look at BOTH price and terms. Looking at just one is not sufficient. Again, an experienced business broker could assist you in properly valuing the business and structuring a offer with terms for your situation.

                    Greg Dupuis
                      • Re: What's it Worth?
                        Basket_Guy Adventurer
                        Greg
                        Thank you very much for your response. I want to give the current owners a fair market value on where it stands now and do not wish to pay them for its potential. The $34K is after expenses including owner salaries of $38K. I do believe this is a great business with excellent potential for growth, however I am not willing to pay a million for it but I am looking for peoples thoughts on what would be a fair price.
                          • Re: What's it Worth?
                            Iwrite Pioneer
                            I think the price is inflated with the limited information we have. I am really worried about the profit margins. How much are you going to need to invest in marketing and advertising to see a better return?

                            I think a price that is $150,000 to $250,000 above the real value would be fair but not nearly double the current figure.

                            With all the information we have that is the best I can do. But this is just my opinion, and I am not a numbers person. Consider the source.

                            derek
                            • Re: What's it Worth?
                              Bridge Navigator
                              My thoughts were closer to $100 M + real estate value.

                              You should get min. 3 years of financials + a LOT of other data (emplyees, customers, Phase I environmental study depending on business type, etc.)

                              Be careful, most real estate agents are "transaction brokers" which means they do not have a fiduciary responsibility to you.

                              If you have further questions, please call.

                              Greg
                                • Re: What's it Worth?
                                  Basket_Guy Adventurer

                                  Greg
                                  What I did was take the appraisal values for the land and building, trippled the net revenue and added in $66,000 for the store inventory. I have gotten their returns for the past 4 years and felt $589K was a fair offer.

                                   


                                  Rick
                                    • Re: What's it Worth?
                                      Bridge Navigator
                                      Why would you tripple the net revenue?

                                      I have valued over 1,000 + businesses and have not heard of your method.

                                      Is all the inventory good? How as in the inventory valued?

                                      On the RE appraisal, how old is the appraisal?

                                      What would FMV rent be for a similar facility?

                                      Do you actually need the whole building or does it just happen to be for sale?

                                      Arte you in love with the property, the business, or both?
                                        • Re: What's it Worth?
                                          Basket_Guy Adventurer
                                          The triple net i had read somewhere along the way as a way to look at fair value. The inventory is good and that is the cost value of the inventory. The appraisal value was just updated last month. the building is a single stand alone structure with 2056 sq ft it sit on a lot 109 x 133. I like both the business and location and feel that it has pontential for opening multiple locations.
                                            • Re: What's it Worth?
                                              DMIGUY Adventurer

                                              I can't speak to the business assest as others can, but so far as the real estate is concerned, be sure to check the following:

                                              What is the property zoned for? And of course, does the current use comply? Many times, a business that's been around for a while might have gotten "Grandfathered in" or received a "conditional use" approval, either of which would diminish the property's value.

                                               

                                              Are there any restrictions on the property that would prohibit it from being used for any other business? Check the deed and title to be sure that in the purchase, not necessarily the seller's purchase, but even going back a ways, no one accepted any provisions that would diminish the access or use of the property?

                                              Be sure there are not unfulfilled easements of record. For instance the city may have the right to use some of the frontage for additional roadway. You may lose parking, or you may lose an accessway.

                                              The real estate assessment works for tax purposes only. You need to place a realistic market value on the property for yourself. That would simply be a matter of leasability and the rate of the lease. If the area is easily rentable (as in the business closes) that's good. In this economy, you could sit with that property for months. How many months? Those months add in as part of a vacancy rate that needs to be included in your valuation. How much could you rent the building for? That amount is your likely yearly income. Would someone buy the property from you if it were leased out? If they would, and they would quickly, then with their risk diminished, the value would go up.

                                               

                                              Unless the business itself will generate enough cash flow to cover all expenses and net you something, minimal though it may be, you're letting emotions get in the way of a business decision that should boil down to dollars and cents. If the seller is overemotional about his business and is unwilling to see the math, then walk away ... it'll still be on the market 8 months from now should you still feel compelled to jump in.

                                              Good Luck!
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                                                • Re: What's it Worth?
                                                  Basket_Guy Adventurer
                                                  Thank you all for the excellent information.

                                                  To answer some of your questions. The business is an S-Corporation and sells gourmet food and wine and also does catering. The business is located in a city where annual incomes are $68K +. If the building was to be leased out, in our area it would go for about $4000 a month. The current officers charge the business $1600 a month rent. The businesses revenue is able to cover all expenses. I do feel that if they are unwilling to come down on their asking price I will walk away, I wanted to get other opinions to make sure I was not being unrealistic on my offer. This is my first time buying an existing business.
                                                    • Re: What's it Worth?
                                                      Bridge Navigator
                                                      I am a professional business broker and I do have to agree with Lighthouse that location and type of business matters.

                                                      Some businesses trade for higher multiples than others. That being said, there are still "averages" that most small businesses fall in. Again, the more information you provide, the better responses you will receive.

                                                      From what you have posted so far, I see no indication that this is a "High" multiple business. High multiples typically go with high growth industries or companies. Neither of which were indicated or inferred by your posts (any company in business as long as this one with such small sales, it NOT high growth).

                                                      Now, on your last post you said FMV rent is $4,000 but they are only charging the business $1,600 per month. That means they are subsidizing the business by $28,800 annual - eating up most of the "profits". This is why it is so important to do a proper recasting of financial statements.

                                                      In my opinion, you have a very low value business. worth nowhere near the asking price. Did they provide you any indication on how the price was determined?

                                                      I hear all the time that owners want $1 million; it seems to be an emotional number regardless of what the business is actually worth.
                                      • Re: What's it Worth?
                                        BRMcHenry Adventurer
                                        Well I am no real estate or business (buy sell) expert but I have bought 3 businesses and sold 1 over the years so here is my take based on what you wrote.

                                        A business showing a "net" profit of $34,000 to me is worth about 4x that much or maybe 5x if its "really' stable. At 5x (considering its a 20 year old business) that is $170,000.

                                        A red flag went up though when you mentioned real estate and here is why. If the land is owned it means there is no rent or lease payments on the land? What would the profit be with lease payments? I ask that because if you were investing $400,000 (ish) on land you would want a return (like a lease payment) for that investment. If your business is making a $1,500 a month "lease" payment is it still making $34,000 a year or is that suddenly much less?

                                        A few others have indicated and I can't say I disagree that $1m sounds like a "LOT" of money for this. If I were putting out $1m for a Baskin Robbins franchise (which I've bought) it would need to be enjoying a profit of $200,000 a year in net profit.
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                                          • Re: What's it Worth?
                                            Iwrite Pioneer
                                            I am learning so much from this post. I had to say this. These insights are great reference materials. I'm not sure if I will ever buy an existing business but this is good stuff.
                                              • Re: What's it Worth?
                                                Lighthouse24 Ranger
                                                I'm glad there's some benefit, Iwrite -- because the title keeps making me think of the opening lyrics of the old Stephen Stills / Buffalo Springfield song ("For What It's Worth"):

                                                There's something happening here.

                                                What it is ain't exactly clear.

                                                 


                                                I just don't see how to offer any really useful input without knowing what and where this business is. A gas station, strip bar, ice cream store, and advertising firm all have different operating models, different acquisition and management challenges, and therefore different valuation formulas/variables. Put any one of those businesses upi for sale in downtown Austin a block from the UT campus and you have a radically different deal on the block than if it's sitting on the outskirts of Pecos.
                                                  • Re: What's it Worth?
                                                    DMIGUY Adventurer
                                                    Lighthouse, I disagree.

                                                    If I told you the property was on Bragg Street in Brooklyn, would you know more about it? Of course not. The formula should always remain constant. It's up to those using to formula to input the appropriate data. If they can't do that, then there are those in the community who can help.

                                                    By the way, I've seen your posts, and you input as a mentor, be it specific or generic, has been educational, insightful, and I think valuable to these discussions.
                                                      • Re: What's it Worth?
                                                        DMIGUY Adventurer
                                                        And I now have to agree with the posts that called for editing. Every time I look back and see my errors in spelling or grammar, it makes me cringe.
                                                        • Re: What's it Worth?
                                                          Lighthouse24 Ranger
                                                          Well, yes, I feel like I'd know a lot more about it with that info and the type of business it was (and not just because I once had a command at Rockaway and happen to know where that is). Anyway, that's just my opinion/perspective as a business owner and a consultant who sometimes deals with the aftermath of a bad purchase decision. If those of you who are professional advisors on commercial property and business acquisitions say the type of business and its location are totally irrelevant to it's value and purchase price, so be it. ( It's still relevant to me, if I'm the buyer).

                                                          Thanks for the compliment. I appreciate that, and am glad we're still getting knowledgable newer members (like you) joining in. Best wishes.
                                                    • Re: What's it Worth?
                                                      Bridge Navigator

                                                      I have bought/sold over 200 businesses valued at ober $500 million. A business this small typically does not demand a 4-5 X cash flow valuation.

                                                       


                                                      You bring up an excellent point though about rent payments. We do not know based on the limited information provided if some type of lease/rent expense is built into the P&L.

                                                      I still have NEVER heard of 3 x revenue for valuation. 3 X cash flow is more in the ball park.

                                                      Again, you would do well to get some professional advice.
                                                    • Re: What's it Worth?
                                                      Tracker

                                                      I read through this post and Bridge and others have given you some good guidance on this. I'll chip in some questions and my opinion, which is similar to Bridge's feedback.

                                                       


                                                      Their asking prices is unrealistic but before I give you my two cents on what would be a reasonable offer (price and terms) to make there are a few things:

                                                       

                                                      In today's market I would not use a 2007 appraisal ... I think there is too much chance of a value variation based on when it was done (earlier in 2007 or later 2007) and where things stand right now for real estate in many areas of the US. So step 1 would be to get a new appraisal done or see if the appraiser will review the old appraisal and amend/update based on today's market.

                                                       


                                                      Some Questions:

                                                       


                                                      Who owns the real estate ... the business or the business owner (as an individual or through another entity)?

                                                       


                                                      Is the real estate "free and clear" or does it have a mortgage on it?

                                                       


                                                      If it is mortgaged, how much equity (based on a new appraisal) is there in the real estate?

                                                       


                                                      I ask the above because there may be some ways to use the real estate in the deal in different ways to help you with cash and deal structure components of an offer to the seller.

                                                       


                                                      What is the trend in their financials over the last 3 to 5 year period (revenues and net income going up, down or are they flat?

                                                       


                                                      If there are big drops or increases ... find out why. You don't want to buy the business based on an aberrant high net income number that is not sustainable or repeatable.

                                                       


                                                      How strong stable is the local economy?

                                                       


                                                      Gourmet food, wine and catering - may be discretionary spending purchases that could drop if the economy affects your customers and they cut back spending. Again, you may buy the business based on its current situation/historical performance but what happens in the future is what pays for the business. Factor that thinking into your decision making process.

                                                       


                                                      You have to look hard at their financials (income statement and balance sheets over at least the last 3 years) to get a decent feel for the business. I would also ask the business owner if they have any projections for the next year or two. In a business this size they probably do not but you need to ask. If they don't have them then you should run and re-cast the numbers your self or have someone help you do that so you can get a "forward look" at things as if you own the business for the next year or two.

                                                       


                                                      Now to my opinion on offer price/terms:

                                                       


                                                      Bottom line and in simplest fashion ... simple businesses are generally valued at a multiple of net income/earnings with an allowance/adjustment for asset values included in the deal.

                                                       


                                                      A business this size is not going to command a high multiple. Perhaps 3x net income. That would put a value of $102,000 on the net income of $34,000. Add to that your real estate value (at current appraisal) would give you a reasonable offer price.

                                                       


                                                      I also feel that you should never offer to totally cash an owner out (unless you are getting a deep discount in pricing for doing so); I believe you should see if they will carry back some of the financing. I would start by asking for them to carry back 75% of the offer price and ask for a 5 to 7 year term for any carry back on the balance of sale by the owner at current market rates.

                                                       


                                                      Before you think "they'll never accept that" ... remember you are trying to negotiate a deal that is suitable for you. You don't know unless you ask or try and you need to have a starting point for discussions. The business has been on the market for 8 months ... the owners may feel that if they work with you to negotiate to where you each can accept the deal ... then it is better than waiting for another buyer. These terms and if the real estate can be leveraged/utilized by you as the buyer, could help you create the cash and terms to buy the business and minimize how much of the down-payment comes out of your pocket.

                                                       


                                                      Of course the specifics of what you offer regarding the terms, amount, term and rate need to be looked at by you in advance to be sure that that business cash flow can support that debt. This is very important if you are looking at this from the standpoint where you do not have a lot of your own money to put into the deal and need to try and make this work based on the business itself, its assets and deal structure with the current owner.

                                                       


                                                      I (and others that have relied to your post) obviously cannot know everything about the deal and give you comprehensive advice but the above (and posts from others) in general should give you some food for thought and things to consider. There are a lot of moving parts even to a transaction as small and straight forward as this one should be. As Bridge suggested, you might want to talk with an experienced business broker to help you work through the details to make sure that you make an informed decision and come up with the best offer/deal structures that is right for you.

                                                       


                                                      Good luck with your efforts on this deal.

                                                       


                                                      Dennis Lowery

                                                       

                                                      Adducent, Inc.
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                                                        • Re: What's it Worth?
                                                          Bridge Navigator
                                                          Adducent,

                                                          Excellent post.

                                                          I agrre with your 3 X and seller financing.

                                                          One thing to consider though - 3 X what number?

                                                          The business has been subsidized by below market rents to the tune of about $28,000 annual! Make profits closer to $5,200....

                                                          Put a 3 multiple on that!

                                                          Again, a full recast would be in order here. I am sure we do not have all of the facts.
                                                            • Re: What's it Worth?
                                                              Tracker
                                                              Hi Bridge,

                                                              Thanks. You're posts in this thread are "dead-on" correct. You are right regarding "3x what number?". I did not see the post regarding the rent differential. I think all offers should be based on a complete recast of the financials. So in this case as you said, if the rent they are paying is artificially low ... then that affects the bottom line net income number used. And you have to have all the facts in front of you to make a good decision on what your offer should consist of. I have seen a lot of buyers (after the fact) realize that they overpaid for a business because they didn't dig into the deal deep enough ... they went by the 'seat of their pants' and got too emotionally attached to the deal.
                                                            • Re: What's it Worth?
                                                              Basket_Guy Adventurer

                                                              Adducent

                                                              Thank you very much for the information. I will try to answer some of your questions.
                                                              The appraisal was updated July 2008 and those are the most recent numbers I have.
                                                              The property is owned by the business.
                                                              They did take out a loan which they state will be paid off at the time of purchase.
                                                              Revenue dropped in 2006 and are currently on an upward trend.
                                                              Our area economy is faily stable with new growth in the area.
                                                              I will look into carry back financing.
                                                                • Re: What's it Worth?
                                                                  Tracker

                                                                  You're welcome. Then you should be able to rely on the recent appraisal numbers. Do you know the balance of what they owe on the real estate? If they have not told you or won't tell you, you should be able to find out by checking records at your courthouse to see what is owed on the property. The amount owed is important to know so you can see if there is any room for leverage and for tapping the real estate equity for part of your deal structure and financing.

                                                                  Its going to be very important for you to look at recasting the financials. The rent differential of market rate and the artificially low rent payment they have been making is something you need to allow for impact to the bottom line. From a real world standpoint; if the real estate is valued at $416,046 and you got a 80% LTV (loan to value) that would come to a $332,836 mortgage. At 7% over 30 years that is a $2,214.37 Principal and Interest payment per month. That is $614 over what they pay in rent ... and will actually be somewhat more when you add in Taxes & Insurance. That is an additional $7,368 annually off the bottom line that you will have as the new owner. If that brings net income down to roughly $27,000 from $34,000 ... then you should be looking at an offer of roughly $81,000 plus real estate value.

                                                                  If the real estate is out of the deal and you had to pay the market rate rent of $4,000 per month ... then that is $2400 more per month than they pay and would reduce net down to $5,200 per year. And an offer should be only 3x $5200 or $15,600 for the business operations. From a practical view that hardly makes operating the business of value unless you want to "own" a job. You have some risk that you would expose yourself to, and to consider if you overpay for this since most of the real value appears to be in the real estate. So you need to look closely at all the numbers and try to get the seller to carry back as much financing as possible to make this a viable deal that might be worthwhile to you to pursue.

                                                                  I think you get the point how important it is to look at even a basic transaction like this, from all angles to help you make a good decision.

                                                                  I hope the above helps you in some way.

                                                                  Dennis Lowery
                                                                  Adducent, Inc.
                                                                    • Re: What's it Worth?
                                                                      Basket_Guy Adventurer
                                                                      Dennis

                                                                      Thank you again your reply has helped me to look at another side that I have yet to consider. This is the RT breakdown if I understand you correctly. Being that this is my first purchase of an existing business I am learning alot proir to moving forward preventing some major mistakes making my first purchase a disaster. From what I can find out it looks as though they still owe about $28,000. The ordinary business income is $43,635 after all deductions including the rent. The floor space is 2065 sqft average rate in our area is $16/sqft = 33,040 they pay $23,100 difference of $9,940. $43,635 - $9,940 = $33,695. 3 x 33,695 = $101,085 for the business.

                                                                      Land Just Val $247,355
                                                                      Building $133,503
                                                                      Misc $ 8,208
                                                                      Sub Total $389,066
                                                                      Amount owed -_$ 28,000_
                                                                      Total $361,066
                                                                      Business $101,085
                                                                      Net Value $462,151
                                                                        • Re: What's it Worth?
                                                                          Tracker
                                                                          Hi,

                                                                          You're welcome. Sorry for the delay in replying to your post. An upgrade in high-speed DSL yesterday morning caused some technical issues and just got them resolved to get back online. Before the problem I was able to reply to the email that you sent me outside this forum on this subject.

                                                                          Regarding your post below. Its probably better if we talk about this at this point; to make sure I have the "thread" of things correct on the business you are looking at buying that has been discussed in this series of posts.

                                                                          I'm tied up today catching up with online things and have meetings most of the day tomorrow but if you want, give me a call Thursday or Friday. I'll be in the office from 10:00AM to 2:30PM Eastern and then from 4:30PM to 6:00PM. My contact info is in my profile and also in the email reply that I sent you.

                                                                          Dennis Lowery
                                                                          Adducent