Business value
Discussion
I know this topic has been raised before. Pie in the sky talk- but looking at a business (retail) for sale- for approx 350k. Broken down to 175 for the property (freehold 2 storey shop unit)- 75-100 for stock and 75-100 goodwill. The stock and goodwill amounts are negotiable.
The business has a turnover of approx- 250-300k. Profit margin of stock approx 30-40%. Unsure of actual profits- probably on break even line.
PH thoughts? Massive scope for increasing efficiency/ and scope for increasing turnover. What else do you need to know? Sound price for a company breaking even? The business does have established customer base and owning the freehold is attractive.
The business has a turnover of approx- 250-300k. Profit margin of stock approx 30-40%. Unsure of actual profits- probably on break even line.
PH thoughts? Massive scope for increasing efficiency/ and scope for increasing turnover. What else do you need to know? Sound price for a company breaking even? The business does have established customer base and owning the freehold is attractive.
Two ways.
Firstly go over with a fine tooth comb and work out what realistically YOU can make out of the business profitability.
The other way, is look at HIS situation. If margin is say 30% on 300k let say gross profit is £100k per year. However there are going to be staff costs, rates, yada yada, so the owner is likely going to be left with no more than £50 grand before tax. So, if he is lucky he might be left with 35 grand in his pocket.
From that, his mortgage might be £250k on his own house for example, so after mortgage payments he might be left with 18k a year in his pocket.
He wants £350k. Tax on selling the business would be a lot less than a salary. He could pay his mortgage off and still be left with a lot left.
However effectively if he was actually earning his £18k a year, what he is asking for is coming on towards 20 years wages.
What I am saying is £350k is quite generous from what you have said, and a lot less than that would make it still very useful for him.
Firstly go over with a fine tooth comb and work out what realistically YOU can make out of the business profitability.
The other way, is look at HIS situation. If margin is say 30% on 300k let say gross profit is £100k per year. However there are going to be staff costs, rates, yada yada, so the owner is likely going to be left with no more than £50 grand before tax. So, if he is lucky he might be left with 35 grand in his pocket.
From that, his mortgage might be £250k on his own house for example, so after mortgage payments he might be left with 18k a year in his pocket.
He wants £350k. Tax on selling the business would be a lot less than a salary. He could pay his mortgage off and still be left with a lot left.
However effectively if he was actually earning his £18k a year, what he is asking for is coming on towards 20 years wages.
What I am saying is £350k is quite generous from what you have said, and a lot less than that would make it still very useful for him.
Say you purchased for 275- 300k. What kind of gross/ net profit would you expect from a business selling for that price? It seems good to me due to the freehold and stock, and fairly low goodwill. To set up another business you would need stock/ freehold.
Next question- what business loans are avaliable for me to purchase? Mortgagte on the property and separate loan for stock costs? What kind of repayments would I need to make (what would a typical repayment period be? 10 years? 25?)?
I can work out potential profit levels I can achieve- but am unsure of outgoings.
Next question- what business loans are avaliable for me to purchase? Mortgagte on the property and separate loan for stock costs? What kind of repayments would I need to make (what would a typical repayment period be? 10 years? 25?)?
I can work out potential profit levels I can achieve- but am unsure of outgoings.
A bit lost.
I would look at the following;
What do the accounts show for the last 5 + years of net and gross profit? To get a base income figure.
Does the business have repeat business and why do they repeat with you? Why will they stay? to get a goodwill figure
Forget the building out of the equation, its no use having that if the business is no good. - whats the building worth irrespective of the business, would anyone else want to rent it if that particular business was not in there. - to get a market figure.
How much would it cost you to buy your own stock and start on your own? what sort of income and how long to repay you? -v- cost of buying into an existing business.
If im reading right you would make about 30-40% on the turnover of stock? thus 30-40% of £300k? less overheads and tax?
I would look at the following;
What do the accounts show for the last 5 + years of net and gross profit? To get a base income figure.
Does the business have repeat business and why do they repeat with you? Why will they stay? to get a goodwill figure
Forget the building out of the equation, its no use having that if the business is no good. - whats the building worth irrespective of the business, would anyone else want to rent it if that particular business was not in there. - to get a market figure.
How much would it cost you to buy your own stock and start on your own? what sort of income and how long to repay you? -v- cost of buying into an existing business.
If im reading right you would make about 30-40% on the turnover of stock? thus 30-40% of £300k? less overheads and tax?
n428 said:
Say you purchased for 275- 300k. What kind of gross/ net profit would you expect from a business selling for that price? It seems good to me due to the freehold and stock, and fairly low goodwill. To set up another business you would need stock/ freehold.
Next question- what business loans are avaliable for me to purchase? Mortgagte on the property and separate loan for stock costs? What kind of repayments would I need to make (what would a typical repayment period be? 10 years? 25?)?
I can work out potential profit levels I can achieve- but am unsure of outgoings.
Again, there are two ways of thinking about this. The overriding thing will be whether this business is the right one for you financially.Next question- what business loans are avaliable for me to purchase? Mortgagte on the property and separate loan for stock costs? What kind of repayments would I need to make (what would a typical repayment period be? 10 years? 25?)?
I can work out potential profit levels I can achieve- but am unsure of outgoings.
If you are looking to raise funds, you will most likely have to back these up with equity as security on property you already own.
If we assume this is possible at this stage, and we assume you can borrow 300k at an overall rate of 7% then just the interest is £21,000 per year. How you run the business will be the deciding figure of how it works for you. Everyone has their own idea on how much they want to 'make' each year. Usually and logically this will be a bit more that what they could earn doing something else - as unless the new business venture offered a radically different quality of life then it would be pointless.
Also look long term. If it is a shop by itself, are the profits ever going to be enough that you could expand it enough to make it considerably more value than it is now? The answer is probably no, or not much. If that is the case then we are looking at it as an earner whilst you have it.
Are you going to be working 40 hours per week or will it be more like 100? It would be a bit sickening in that situation to work 100 hours per week and only be left with 10k per year. So set your target of what you are worth.
If you want to earn £50k per year, then of course this is the amount of profit that needs to be left at the end after *all* of the other costs have been pad for.
The simple equation is if the business is never going to make what you want, then its not a good investment of your own time, let alone your own money.
My gut reaction is why is the owner selling. You have mentioned that the shop might be barely breaking even. If that is the case then you will have to look long and hard if the situation is going to improve. For example, if it is a little hardware shop and B&Q have a new store a mile down the road, then the options dont look good.
Whilst I dont want to appear mercenary (on your behalf), I am a businessman. His valuation of stock might be on the potential value of it when sold. Indeed, it might be what he paid for it - but neither of those mean it is still 'worth' that now at is only worth that when it is sold in the shop - which is a lot of work, costs, and overheads away.
If the company is barely breaking even, or even losing money, then 'goodwill' isnt really the main factor to consider, it is whether the owner can at least claw back some of the money he has paid out for the stock, so my gut feeling it is overvalued.
What it will come down to, and there is no point going over more hypothesis like this until you have gone over the books with a fine tooth comb and worked out *if* the business can be turned around. If it can, then by how much exactly, and how long will it take for you to see your investment back with profit, and how much work will you have to put in to make it happen.
If it can't be turned around, how much is the stock worth to flog, and what else could you do with the property!
It probably wouldn't hurt to tell us what type of business this is, it's not as if one of us is going to rush round and grab it from under your nose.
One thing to consider is the staff. If it is some kind of general store then you are going to need staff and they can, potentially, rob you blind.
With any business, though, it's either a good deal at the price or it isn't, and you haven't given anything like enough information for anybody to be able to provide any useful insight. Don't be so coy.
One thing to consider is the staff. If it is some kind of general store then you are going to need staff and they can, potentially, rob you blind.
With any business, though, it's either a good deal at the price or it isn't, and you haven't given anything like enough information for anybody to be able to provide any useful insight. Don't be so coy.
The shop is selling fairly specialist sport goods, in both the locality and some mail order/ internet sales. Staff levels are usually around 3 (including the owner)- but have fluctuated from 6 to 2.
Owner is selling due to retirement and has been there a long time.
When extra staff are working summer turnovers have gone up to 7/8k a week.
On the basis that I'd be looking to pay myself ideally 40k (not straight away) it looks difficult on the basis that I would need to find 20k for finance. However I do see the potential for spending 3 years on it and then re-selling with good books etc.
Owner is selling due to retirement and has been there a long time.
When extra staff are working summer turnovers have gone up to 7/8k a week.
On the basis that I'd be looking to pay myself ideally 40k (not straight away) it looks difficult on the basis that I would need to find 20k for finance. However I do see the potential for spending 3 years on it and then re-selling with good books etc.
turnover..... but what is the net and gross profit?
Could you set up the same around the corner for less costs?
£40k out of it for the risks you have to put in and finance sounds too low to me. Sounds like you will be working all hours and financed up to the hilt in a static at best if ot receeding business.
Could you set up the same around the corner for less costs?
£40k out of it for the risks you have to put in and finance sounds too low to me. Sounds like you will be working all hours and financed up to the hilt in a static at best if ot receeding business.
My boss recently sold his sports shop, it was making fantastic money (more than this accountancy practice was bagging him) however the arrivals of JJB, Sports World and some other big brand shop over the last few years had a massive impact. He said in the end they couldn't even buy gear as cheap as Soccer World (or whatever it was) was selling for.
Worth considering
But you say it's specialist, the only other similar shop survived by selling Fishing/Ski and Walking gear. Fortunately my boss didn't really care, he sold the freehold for a small fortune.
Worth considering
But you say it's specialist, the only other similar shop survived by selling Fishing/Ski and Walking gear. Fortunately my boss didn't really care, he sold the freehold for a small fortune.
n428 said:
The shop is selling fairly specialist sport goods, in both the locality and some mail order/ internet sales. Staff levels are usually around 3 (including the owner)- but have fluctuated from 6 to 2.
Owner is selling due to retirement and has been there a long time.
When extra staff are working summer turnovers have gone up to 7/8k a week.
On the basis that I'd be looking to pay myself ideally 40k (not straight away) it looks difficult on the basis that I would need to find 20k for finance. However I do see the potential for spending 3 years on it and then re-selling with good books etc.
As superlightr and thewave have said, for £40k in a potentially falling or uncertain market you are exposing yourself to a lot of financial risk, and a long time to break even at that rate.Owner is selling due to retirement and has been there a long time.
When extra staff are working summer turnovers have gone up to 7/8k a week.
On the basis that I'd be looking to pay myself ideally 40k (not straight away) it looks difficult on the basis that I would need to find 20k for finance. However I do see the potential for spending 3 years on it and then re-selling with good books etc.
I am willing to bet that if he is currently just about breaking even, then if he didnt have the internet sales then he would be losing money. Logically as internet sales have risen, shop sales have fallen.
That tells me two simple things. The shop isnt making money. The internet sales *are* making money.
If that is the case, then logically, thinking 'out of the box' you know a shop loses money with a lot of initial outlay and financial risk. A website makes money with comparitavely little financial risk. You can even run it from home, work your own hours, and only employ staff when you need.
So... why buy his business at all? If you are dead set in working in the same field make your own site. If you are feeling particularly ballsy you could even put in a cheeky offer for his own site name only (for residual customer value) and use his existing site, or even just put in a 'fire sale' type offer for his remaining stock so he can sell the property as a separate venture and you can start your own website.
If the sport is something like cricket, there is emerging markets for UK goods in the US and subcontinent. As always, look for the opportunity and strip away anything that doesnt make you money.
I would only buy a business if
1. the customer base was stable and not reliant on the owners/directors, if it's not then when they leave so does the business and you're left with very little
2. it has something that you could not get yourself by simply starting a similar business in a similar location
3. whatever you borrow you can clear within 5 years and also make a decent living at the same time, it's all well having to reduce salary to cover financing the purchase, personally I think any borrowing should be paid out of profits, not from salary, but when the finance is paid, will that final salary and or profit in the company be more than what you would have lost by paying 5 years worth of finance to buy it in the 1st place, if not then don't bother
4. you are sure you can develop it beyond where it is now, if so, why has the current owner not done so
1. the customer base was stable and not reliant on the owners/directors, if it's not then when they leave so does the business and you're left with very little
2. it has something that you could not get yourself by simply starting a similar business in a similar location
3. whatever you borrow you can clear within 5 years and also make a decent living at the same time, it's all well having to reduce salary to cover financing the purchase, personally I think any borrowing should be paid out of profits, not from salary, but when the finance is paid, will that final salary and or profit in the company be more than what you would have lost by paying 5 years worth of finance to buy it in the 1st place, if not then don't bother
4. you are sure you can develop it beyond where it is now, if so, why has the current owner not done so
n428 said:
I know this topic has been raised before. Pie in the sky talk- but looking at a business (retail) for sale- for approx 350k. Broken down to 175 for the property (freehold 2 storey shop unit)- 75-100 for stock and 75-100 goodwill. The stock and goodwill amounts are negotiable.
The business has a turnover of approx- 250-300k. Profit margin of stock approx 30-40%. Unsure of actual profits- probably on break even line.
PH thoughts? Massive scope for increasing efficiency/ and scope for increasing turnover. What else do you need to know? Sound price for a company breaking even? The business does have established customer base and owning the freehold is attractive.
How long has it been on the market for? Is anyone else interested in buying it apart from you? If not, then you're in a strong position. If there is interest from other parties then you'll have to make a judgement. If I were you I'd make a really cheaky offer - maybe the value of the freehold plus 50% of the stock, then see how he / she reacts. The business has a turnover of approx- 250-300k. Profit margin of stock approx 30-40%. Unsure of actual profits- probably on break even line.
PH thoughts? Massive scope for increasing efficiency/ and scope for increasing turnover. What else do you need to know? Sound price for a company breaking even? The business does have established customer base and owning the freehold is attractive.
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