Need some help with a business valuation

[r200mgr]

Hi guys,

I've been offered a business for sale, from being in the industry for many years I know that the gross profit is roughly 70% and the net profit 40%. It is currently turning over £10k per month with a profit of £4k.

From advertising, introducing new product lines and utilising my network I am confident that I can increase turnover to £20k with a net profit of £8k. The business has a 9 year lease and benefits from a recent refurbishment at a cost of >£50k.

I was just wandering if anyone is able to give me an insight to what it may be worth in terms of good will.

Thanks in advance

[LordHaveMurci]

Bit more involved than that I'm afraid!

[Jockman]

What value on Assets, Cash at Bank, Reserves? Is it limited, if so how does the owner remunerate?

[Eric Mc]

How important is the proprietor to the business. If he goes, whither goest his customers?

[r200mgr]

I would estimate the stock and equipment to be valued conservatively at £15k. The owner does not take a wage (works roughly 40 hours a week) he takes profits in the form of a dividend. It is a limited company.

The current owner is important with regards to the existing clientele but has offered to stay on for a transitional period. I am confident we will be able to retain the majority of customers and have also factored in the loss of some existing customers with regards to future projections.

Apologies that the information I've provided does not give the whole picture, the owner wants £100k goodwill and as I have never bought a business before I unsure of what value to place on it.

Any help would be greatly appreciated

[Eric Mc]

r200mgr said:

I would estimate the stock and equipment to be valued conservatively at £15k. The owner does not take a wage (works roughly 40 hours a week) he takes profits in the form of a dividend. It is a limited company.

The current owner is important with regards to the existing clientele but has offered to stay on for a transitional period. I am confident we will be able to retain the majority of customers and have also factored in the loss of some existing customers with regards to future projections.

Apologies that the information I've provided does not give the whole picture, the owner wants £100k goodwill and as I have never bought a business before I unsure of what value to place on it.

Any help would be greatly appreciated

How much dividend did he extract each year over the past three years?

How did HE arrive at £100,000?

[audidoody]

Agree a multiple of net profit adding back the expense of retaining the owner

[r200mgr]

Eric Mc said:

How much dividend did he extract each year over the past three years?

How did HE arrive at £100,000?

I don't know the exact dividend taken, I am also under the impression that his accounts aren't a true representation of how the business is actually performing. From spending time in the business and from previous experience I do believe he is making a profit of £4k though.

His valuation is based on his current profits, the cost of the recent refurbishment and the stock included. Rather than a real basis for the valuation I feel that this is the price he feels it is worth selling for.

[Eric Mc]

I don't think he is telling you enough. I presume his formal accounts were prepared by a competent accountant and they would have been expected to have been "true and fair". You seem to be stating that he is openly admitting to you that he knowingly falsified his accounts.

I would ask him to provide you with

a) full statutory accounts as submitted to HMRC with full detailed profit and loss account for the pat three years (you'll see the dividend amounts in those accounts)

B) a written explanation from him explaining in detail how much these formal accounts understated the true situation

[r200mgr]

Eric Mc said:

I don't think he is telling you enough. I presume his formal accounts were prepared by a competent accountant and they would have been expected to have been "true and fair". You seem to be stating that he is openly admitting to you that he knowingly falsified his accounts.

I would ask him to provide you with

a) full statutory accounts as submitted to HMRC with full detailed profit and loss account for the pat three years (you'll see the dividend amounts in those accounts)

B) a written explanation from him explaining in detail how much these formal accounts understated the true situation

Thanks for the input

[INWB]

Get a broker because what youve written so far makes me think it could end in tears. 5% of purchase cost.

If I was doing this then I would be looking at a earn out /consideration for the seller

(PS I know a good broker if you want to PM)

[rog007]

And don't forget to ask the customers to corroborate any value/risk, including the issue that Eric mentioned.

[anonymous-user]

Also ask yourself how much would it cost to replace the current owner on a like for like basis.


If it will cost 3k pcm then the business is only generating 1k pcm "profit" -

[jonby]

r200mgr said:

I would estimate the stock and equipment to be valued conservatively at £15k. The owner does not take a wage (works roughly 40 hours a week) he takes profits in the form of a dividend. It is a limited company.

The current owner is important with regards to the existing clientele but has offered to stay on for a transitional period. I am confident we will be able to retain the majority of customers and have also factored in the loss of some existing customers with regards to future projections.

Apologies that the information I've provided does not give the whole picture, the owner wants £100k goodwill and as I have never bought a business before I unsure of what value to place on it.

Any help would be greatly appreciated

If the majority of the clients use the business because of the involvement of the current owner, the goodwill is worth relatively little

Will the owner of the business have some form of bar-out clause post-sale ? If not, is there anything to stop him starting in the same industry and poaching the clients after a handover period ?

What are the costs of entry into the market if you didn't buy this existing business ?

Is there any strategic advantage to others in the industry buying this business to take a competitor out of the marletplace and stop anyone else entering the marketplace relatively cheaply ?

Are any of the customers committed to this business or can they cheaply and easily move to another 'supplier' ? Do other 'suppliers' (I don't know what this business does) exist or is the product/service unique ?

Are there one or two key clients that dominate income/ profit (not necessarily the same thing of course if some customers are more profitable than others)

These are all questions that will impact upon the valuation however on the face of it, I'd suggest it sounds high. £4k per month net, if it is true net profit, is £48k per annum. Am I correct in assuming that's pre-divi ? Assuming there is a wage or divi equivalent of say £30k, that leaves £18k. This is all very back of a fag packet of course, without taking into account corp tax, income tax, divi vs salary advantage, etc but the point is, after taking into account the monies required to pay yourself a relatively ordinary wage it doesn't leave much surplus, hence thinking the valuation sounds high.

[sideways sid]

Really good points above.

Also, what are the terms of the lease? Does the current business owner (or associates, or his pension fund) own the property that the business leases?

[DSLiverpool]

You know the market, know the business and if you ask yourself the question that the owner is out the business does it still work?

If yes then you have a good little investment, if no its a lifestyle business

Any business that is so dependent on one person is not the best of investments so low ball him .......

[jonby]

DSLiverpool said:

You know the market, know the business and if you ask yourself the question that the owner is out the business does it still work?

If yes then you have a good little investment, if no its a lifestyle business

Any business that is so dependent on one person is not the best of investments so low ball him .......

I think to add to both your post and my earlier post, at risk of stating the obvious, there is a world of difference between an owner that for whatever reason needs/wants to get out and an owner that says if someone offers him 6 figures he will leave and if not, he'll happily keep the business

That in turn dictates whether they accept a low ball offer. IMHO, in the real world, with relatively small buinesses, the price paid often has little to do with a valuation as such, especially of goodwill, instead being more down to negotiation, timing, who needs the deal most, naivity or knowledge of buyer, etc

[r200mgr]

Wow just checked back on this thread and these are some really good points/questions.. Thank you all!

jonby said:

If the majority of the clients use the business because of the involvement of the current owner, the goodwill is worth relatively little

Will the owner of the business have some form of bar-out clause post-sale ? If not, is there anything to stop him starting in the same industry and poaching the clients after a handover period ?

What are the costs of entry into the market if you didn't buy this existing business ?

Is there any strategic advantage to others in the industry buying this business to take a competitor out of the marletplace and stop anyone else entering the marketplace relatively cheaply ?

Are any of the customers committed to this business or can they cheaply and easily move to another 'supplier' ? Do other 'suppliers' (I don't know what this business does) exist or is the product/service unique ?

Are there one or two key clients that dominate income/ profit (not necessarily the same thing of course if some customers are more profitable than others)

These are all questions that will impact upon the valuation however on the face of it, I'd suggest it sounds high. £4k per month net, if it is true net profit, is £48k per annum. Am I correct in assuming that's pre-divi ? Assuming there is a wage or divi equivalent of say £30k, that leaves £18k. This is all very back of a fag packet of course, without taking into account corp tax, income tax, divi vs salary advantage, etc but the point is, after taking into account the monies required to pay yourself a relatively ordinary wage it doesn't leave much surplus, hence thinking the valuation sounds high.

I have no concerns about the current owner setting up in competition, there is a lack of available premises that are suitable within the local area. The reason for the sale is because the current owner is looking to leave the country within the next few years.

I would estimate the cost of opening a business to this standard would be around the £100k mark with the risk of going over budget. It would also take a significant amount of time to complete the work and would involve overcoming planning and licensing issues.

Although it is geographically close to other competing businesses the premises benefits from its own local demographic of students, the current owner has not targeted this market which we see as our main area of growth. Due to the size/location I could not imagine it will have a noticeable effect on any of the competition.

The business is a niche within the food/beverage industry.

Yes pre tax divi of about 48k. The business is currently being run very casually, the owner relies on small group of loyal customers, there is no advertising or social media presence, the range of products offered is quite small restricting the amount of potential customers, on top of this only about half the space is being utilised. I am confident that I can double the turnover and profit to about £8k and would not entertain the idea of buying the business if I didn't think it was realistic.

[r200mgr]

sideways sid said:

Really good points above.

Also, what are the terms of the lease? Does the current business owner (or associates, or his pension fund) own the property that the business leases?

The current business owner has no affiliation with the landlord. The current lease has 4 years remaining but the landlord is prepared to agree a new 9 year lease pending references, 3 year rate reviews.

[r200mgr]

DSLiverpool said:

You know the market, know the business and if you ask yourself the question that the owner is out the business does it still work?

If yes then you have a good little investment, if no its a lifestyle business

Any business that is so dependent on one person is not the best of investments so low ball him .......

I believe that the business would still work and we would retain the majority of existing customers. This is due to the transitional period with the existing owner, we would continue to employee the existing staff, I am confident our level or service would exceed that of which is currently being provided, some of the existing customers have expressed a desire for the new products we are looking to introduce.