What would you pay for this business

Discussion in 'Growing and Managing a Business' started by signal5, Aug 20, 2012.

  1. signal5

    signal5
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    I'm in need of some advice about the purchase price of a business. I know this is more art than science but I thought I would get some good non-biased opinions here.

    Ok, so here it is:

    - It's an existing legal services company (specializing in locating debtors and serving court summonses).
    - The company has been in business for 34 years (small operation, 2 employees, 6 contractors)
    - The business generates US$200,000 - 250,000 of revenue per year. With profits of about 95K-110K
    - The business comes with virtually no assets: a few desks, outdated computers and telephones.
    - The current owner would agree to sign a non-compete, surrender his license and stay on for free for the first 180 days.

    He is asking $120,000 for the business. I consider this to be awfully high. I would be purchasing, in essence, goodwill and a client base but no real assets. If I didn't run the business I would have to hire a licensed individual which would cost $55-65K a year.

    I want to make an offer of $75,000 for the business.

    What would you pay?
     
  2. Thanoz

    Thanoz
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    With profits of 95-110k/years it's actually pretty reasonable to ask for 120.000 dollars.
    If you spend 120 now and 55K/year for the employee then:
    In 1 year your balance will be minus 65-80K dollars.
    In 2 years you will have paid 175K spent and 190-220k income which makes a profit of 15-40K dollars
    In 3 years you will have spent 120K(buyout fee) +110K(the licensed indivudual fee) = 230K and you will have 3x 95-110K(the yearly profit)285-330K => 55-100K profit.
    and keeps going.
    Of course you must at least keep the profits at the same level or try to increase them.
     
  3. signal5

    signal5
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    I see what you are saying - I guess my concern is that competition is robust in the area, this year he is on pace for a 10% reduction in revenue and he has 3 clients that each account for 15-18% of revenue apiece. With the decline in revenue, coupled with a lack of diversification in client base I am concerned that I would be purchasing an unpredictable revenue stream.

    Does that change the outlook for you or does it still seem fair?
     
  4. noreturn

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    Exactly I personally coudn't have sadi it any better.

    @Signal I would say it does seem pretty fair. I think if you could get it for $75k that would be a good deal.
     
  5. Jay

    Jay
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    Based on what you have written regarding the company, it seems like a reasonable price that the seller is asking for. Now your offer a $75,000 would be considered a lowball in which the seller would completely ignore or ask you to re-offer. The company seems to be making a reasonable amount of profit yearly, and personally you would be able to make up the costs of your purchase within two years. I agree that there are no real assets to be earned here, but hey, if the company is still able to generate profits of $95,000 to $110,000 per year, that seems pretty good to me. Think of it this way, it is easier to purchase assets than it is to gain clients. I mean if the company has a good client base, why not jump on it? I'm sure you can operate the business and make use of the current assets included for about a year or two, and once you make a reasonable profit you can then go about upgrading the business.

    A good offer in my opinion would be something around the $110,000 to $115,000 range, this way you still acquire the business and both sides are happy. Wish you luck with your purchase!
     
  6. ArcSine

    ArcSine
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    Signal, you've been doing your homework; those are indeed risk factors to be reckoned with, particularly the concentration of half the revenues in 3 clients. In addition, you'd want to analyze how critical those employees and contractors are: should one or more of 'em decide now would be a good time to seek other opportunities, • how much of an immediate hit to revenues and net cash flow might you expect? • what's the time frame and difficulty of replacing them (unique skills or not; special licensing)? • do any of the customers have particular loyalty ties to these employees?

    Your other point is also extremely well-placed: Of that 100K or so bottom line, more than half of that is either just compensating your for your time running the show, or paying a licensed hired hand to run it for you. That leaves $40K or thereabouts as the pure investment return on your purchase price, and that's IF the bottom line doesn't take any dives at all. The purchase price should be based on this latter, net figure.

    One device you might consider working into the deal terms is some variation on a so-called earnout arrangement. It's popular in scenarios such as the one you have in front of you, as it's designed specifically to address uncertainties such as you've described. Google the term if you're unfamiliar with it, but the gist is that you'd make a down payment based on a smaller, more conservative price---i.e., some price that reflects a reasonable allowance that the Seller's rosy projections don't quite pan out. Subsequently, your ongoing installment payments are adjusted northward if, when, and as the Seller's projections prove themselves true.

    If things end up playing out, profits-wise, the way the Seller is asserting they will, then he'll eventually receive a price that's a fair return to him on that performance. But if some of your concerns actually materialize post-purchase, then your total eventual payouts to the Seller will have been adjusted accordingly. Might not keep you from overpaying, in hindsight, but it'll possibly put a reasonable cap on your downside.

    Of course, it's frequently a two-way street, and the Seller might insist on some upside for him getting built into the earnout terms. That is, if things go even better than projected, then he eventually receives a commensurately higher price.

    I hope the negotiations go well, and that it proves to be a nice investment.
     
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  7. Thanoz

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    In addition you can ask to pay him in 2 year time. Half the price now and the rest in 6 months(you will be obliged by contract) That way you can get a better deal in my maths above(You will have profit from the 1st year, larger profit the second year and probably neat balance the third).
     
  8. rangrage

    rangrage
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    Firstly, my advice would be never to buy any business on estimated potential, I see so many people making this mistake.

    Its good that you are doing market research and looking at the business from all angels, thumbs up to you ;-)

    You also have to admit that having the list of clients is indeed an asset, you may well have all the expertise and skills, but what benefit will that be if there are no clients, so treasure that.

    The next challenge is that you will have to develop a relationship with the existing clients in order to keep them, so consider that as well.

    Regarding the price for the business, if it is an amount that can be recovered within 10-12 months then I would consider it an excellent ROI, therefore if you are considering $75,000; that in my opinion would be more than fair based on the information you have provided.

    Wish you everything of the best :)
     
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  9. jackflaming

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    I think the offer he made is quite reasonable. the business looks worth of $120000. Still if you are confused and want to offer or less, you can take help of a broker or a business firm that deals in selling business issues. They can deal with such cases more efficiently and you will be able to get a right deal.
     
  10. rangrage

    rangrage
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    Hi Jack,

    Can you share with us the advantages of using a broker and how one can eventually get a better deal by using a broker in this case? Also, who is resposible for the brokers fees, is it the buyer or the seller?

    Thank you so much.
     

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