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 I've kind of moved on from purchasing this business with much of the input in this thread. Keep reading if you want to offer advice/criticisms on the other aspects I'm looking intoI'm looking at buying a (very) small business off the guy who is running it as a hobby. He's got a decent customer base but I feel it could do so much better with some direction, expansion and advertising. I've been hounding him about this for a while, and he finally came up with a number which I think is ridiculous. It is a small time computer repair "shop". He's been "running" it for about 8 years now under the name he's got. I worked for him recently as a manager, but he never let me actually manager or grow the business. His mantra for me growing the business was "Bigger is not always better". You'll probably fall out of your chairs when you see some of the numbers. I worked for him this year, and his income has increased over 50%, and he still didn't let me advertise, we kind of butted heads, and I offered to buy it. He's been flaky on this for a while but finally gave me a number, and I think it's way out of line for what the shop currently does. So here's his (basic) PNL for this year (As an aside, NONE of these labels I put on them. I think the "labels" are wrong, but I could be wrong too!): Ordinary Income/Expense (Almost no expense in here) Total Income: 139,397 (Fees + Sales + Service) - COGS (Cost of goods): 588 = Total Profit: 138.809 Total Expenses: 125,559 Net Income - 13,250 Now, that's just for this year as of the 11th. That's from his Quickbooks profile, and I know for a fact his taxes will not match up (They haven't for the past 4 years that I have his info from). Of what I understand, to buy a business, you take the average of the past 5 years of profits (Income - Expenses before taxes) and multiply that by 5, then you add on any additional inventory or whatnot from that. Am I wrong on that assumption? Here's his asking price: 100k + Inventory and equipment (about 20k worth). He got that number because of his "Gross profit" line which does NOT take into consideration of anything else (Payroll, Actual cost of goods, "hired labor" Utilities, etc). So he and his account have somehow gotten it into his head that he has profited 130k this year. His actual reported profits as stated on his tax forms to the government: 2011: -5931 2012: 2919 2013: -2659 2014: 13250 (Current according to his quickbooks) So according to that his average is 7579 profit. So that would be 37895 + 20k in inventory, so roughly 60k is what the offer should be? Should I even be including 2014 as he hasn't filed that? ----- A few answers to some questions that will probably crop up: Q: Why do you want to buy this (obviously) failing business? A: I don't think this would be a failing business if run even somewhat properly. There are currently 3 employees NOT INCLUDING the owner. There's 4 people in that shop and he still spent 47k on payroll. The owner works 4 days a week unless he has to work 5. He refuses to work on Saturday or past 5. He is constantly taking days off for random things. I would immediatly get rid of 2 of the employees and probably cut the other one down to part time, and run myself ragged 6 days a week for the first year or so until I pull a steady profit, then bring others in. He also never advertises, I would immediately do a few various ad campaigns to get more interest in the shop, as well as move to a better location. Q: Those numbers seem really loving low. A: They are. This is also a really small town and the cost of living is low. He has it off the main commercial thoroughfare and there's no real visibility except for the even tinier town he's currently in. If things go well with some of the expansions I"m planning and offering higher services, I'm thinking I can bring the yearly income to 500k. It's good to dream, right? Q: How do you know you won't fail? A: Even with the lack of advertising, the limited inventory he let me buy, I was still able to increase his income 50% in 7 months. Before I left, he had already made 70k, and last year he only brought in 90k (And still somehow found a way to pay FOUR employees). With proper advertising and a better location, I think I can make those numbers explode. Gothmog1065 fucked around with this message at 04:13 on Dec 23, 2014 |
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Dec 12, 2014 01:21
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Why do you need the business and the name? If you've been the manager (have the customer relationship) and are going to fire half the employees, why not just start your own business
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Dec 12, 2014 01:42
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Foma posted:Why do you need the business and the name? If you've been the manager (have the customer relationship) and are going to fire half the employees, why not just start your own business Customer base namely, he does have a decent one. Secondly, it is a running business, less worry about the first few months. Lastly, it's a shitload easier to get a loan on a currently running business.
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Dec 12, 2014 01:45
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I don't know anything about business but you should check your math, his average profit has been $1900/yr suggesting a price of about $30k by your rule of thumb there.
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Dec 12, 2014 04:20
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slap me silly posted:I don't know anything about business but you should check your math, his average profit has been $1900/yr suggesting a price of about $30k by your rule of thumb there.
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Dec 12, 2014 04:56
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adorai posted:true.dat. the $8k or whatever was his total profit. If you make this kind of rookie accounting mistake, perhaps business ownership is not for you. And that's why all my numbers get double checked, and you are correct. However, is this "rule of thumb" a general rule of thumb? Am I completely remembering everything I've been told incorrectly? If he's serious about the sale, I might end up with a broker either way.
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Dec 12, 2014 05:22
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I work in business valuation. Your rule of thumb is nonsense.
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Dec 12, 2014 06:47
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mike- posted:I work in business valuation. Your rule of thumb is nonsense. Thank you. Is there a better way to determine how I should offer, is there a resource or link you can give me that would help or assist me in research?
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Dec 12, 2014 15:28
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If he's running it as a hobby he doesn't really need the income. From the sound of it he'll only give it to you if you overpay ridiculously because he values the fun of running the business more than the money it makes.
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Dec 12, 2014 15:37
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Seconding the rule of thumb being non-sense. Its highly dependent on what sector the business is in, and with small time businesses you rarely use profit for anything because books are too easy to manipulate. I've been involved in small time business acquisitions and operations and from my personal experiences, don't ever buy into a business with the hopes of increasing it's revenue by a factor of 5. You have the benefits of having worked in the business before offering to purchase but there will be parts of the operation you will be blind to till you're actually the owner + operator. Honestly, the business from the books look horrible. If you count for the cost of borrowing the 100k (even with small business grants and such) the cap rate looks dismal. If you do purchase this business it would be equivalent of paying 100k to get a slightly above average minimum wage job. Given small town computer repair really isn't a growth industry you'll have to resort to working insane hours in addition to drastic cost cutting measures for it to be remotely worth your time.
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Dec 12, 2014 15:38
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I'll add here that if you lay off half the staff and they don't get other jobs right away, they will probably become your competitors, since they know the people and they may be able to survive for a while on virus removal jobs etc if the cost of living is low.
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Dec 12, 2014 15:57
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SubjectVerbObject posted:I'll add here that if you lay off half the staff and they don't get other jobs right away, they will probably become your competitors, since they know the people and they may be able to survive for a while on virus removal jobs etc if the cost of living is low. Employees are also capable of simply being vindictive. "Hey Mr. Smith, I repaired your company's computer at Bob's Computer Shop last year. You know there's a better place to take it next time? Yeah they do a much better job and cost about as much maybe less" edit: For a small business like this I get the impression that profit is less important than how much he was paying himself. I don't think our company profits at all but only because the owners have really high salaries/rents and abuse business expenses for personal gain when they can. Sephiroth_IRA fucked around with this message at 16:54 on Dec 12, 2014 |
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Dec 12, 2014 16:48
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That isn't at all how you value a business. First, tax returns mean nothing as they don't provide enough data to do a projection. Second, you need to make a projection of future cash flows and apply a sector appropriate discount rate when calculating PV. Sounds like starting over would be best... You say his stated COGS aren't accurate? And he only pulls a couple grand a year? Not worth your time. Sephiroth_IRA posted:edit: For a small business like this I get the impression that profit is less important than how much he was paying himself. I don't think our company profits but the owners have really high salaries.
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Dec 12, 2014 16:52
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Why don't you just start your own computer repair business and use the 100k he wants as your seed money? He isn't going to sell you this shop for 30k until he is ready to retire from it. Steal his good employees and advertise the poo poo out of his customers when his bad employees ruin everything they touch.
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Dec 12, 2014 16:53
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Elephanthead posted:Why don't you just start your own computer repair business and use the 100k he wants as your seed money? He isn't going to sell you this shop for 30k until he is ready to retire from it. Steal his good employees and advertise the poo poo out of his customers when his bad employees ruin everything they touch. This. In my case my excuse is that there are distributor contracts that prevent me from doing what I do on my own. In the case of computer repair I doubt this is the case.
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Dec 12, 2014 16:57
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Gothmog1065 posted:Thank you. Is there a better way to determine how I should offer, is there a resource or link you can give me that would help or assist me in research? I wish i could give you a quick resource, but it doesn't really work that way. Valuation is a ton of work even in a small business. What I can tell you is don't listen to anyone who gives you an opinion on the valuation from the information you have provided. It isn't enough for anyone to really know either way so anyone telling you otherwise doesn't have a clue what they are talking about and is being incredibly irresponsible. Here's the deal though, a service business like that most likely derives virtually all its value from an intangible asset, it's customer relationships. The nature of these relationships (contractual?) is going to be the biggest determinant in how much it is worth and if the company is really even salable.
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Dec 12, 2014 17:19
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Thanks, that's kind of what I was looking for. I'll continue with the route I was taking before and starting up from scratch (going through the SBA), it's just going to be harder to get the money, but I'll work around that. I'll probably throw a counter offer of some nominal money (Probably 50k or something), and you're all probably right, he's not going to take it. He's been waffling too hard and is looking at even dumber numbers than I was. Either way, this is kind of what I was looking for, thanks.
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Dec 12, 2014 17:42
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Don't borrow money to start a computer janitor company. Just make business cards and work from home.
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Dec 12, 2014 18:07
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I know that this has already been addressed a little bit, but I'm jumping hard on the start your own business bandwagon. I have run my own candy company, and I have run two other candy companies. Starting from scratch is worth every penny. It is much easier to lay the groundwork for the business that you want to run rather than buy into a business where someone else that you don't seem to respect very much has been making decisions that will affect you for years. You want to work for yourself so that you can be frustrated by cleaning up messes created by your own stupidity, not so you can be frustrated cleaning up messes created by the PO's stupidity.
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Dec 12, 2014 18:27
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My Rhythmic Crotch posted:Don't borrow money to start a computer janitor company. Just make business cards and work from home. Here's the problem with that: I already know I can quickly outgrow my space at the house. ON top of that my wife isn't too keen on having people coming to the house all the time, and a LOT of the customers from the other place really prefer to have an actual shop to go to, and they've made mention of that many times. There are other plans in the works as well, but that will require a bit of steady money first.
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Dec 12, 2014 18:47
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Gothmog1065 posted:Here's the problem with that: I already know I can quickly outgrow my space at the house. ON top of that my wife isn't too keen on having people coming to the house all the time, and a LOT of the customers from the other place really prefer to have an actual shop to go to, and they've made mention of that many times. Sorry if you already mentioned, but what do average rents look like for a small shop in your area? I'm all for starting out lean, no employees, lowest possible costs with the highest customer satisfaction. If you really think you can do a better job then start your own business and follow through on advertising and brand-building. Eventually you'll acquire his clients who'd rather take their business to someone who's serious and not just dicking around as a hobby. If I were you I wouldn't dump $50k into this guy's lap just for a client list...and who's to say they won't stick with him after the fact as he moves shop down the street after selling to you? Computer janitoring isn't a growth business but there are plenty of technologically-retarded older people who will gladly pay a wizard to take care of that drat Obama-made popup virus for them.
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Dec 12, 2014 19:06
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First, I gotta say I really like how you are thinking. You have drive and energy. My concern is that this may not be the venue. However you are there, and it sounds like you have been running the business for a while. So you know better than me. This is a small town, so stuff is cheap, and they guy gets business without much advertising. What is his word of mouth like? Everyone knows everyone in a small town. Are people going to him because he is in Rotary, Elks, church, etc with them? If so it may be hard to compete with him if that is what you decide to do. What is your reputation in town? Are you From There? Are you able to partner with him? Obviously lawyers would be needed, but if you could work out something where you take over and after a combination of time and money you would get the business, that could work.
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Dec 12, 2014 19:24
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fruition posted:Sorry if you already mentioned, but what do average rents look like for a small shop in your area? I'm all for starting out lean, no employees, lowest possible costs with the highest customer satisfaction. If you really think you can do a better job then start your own business and follow through on advertising and brand-building. Eventually you'll acquire his clients who'd rather take their business to someone who's serious and not just dicking around as a hobby. If I were you I wouldn't dump $50k into this guy's lap just for a client list...and who's to say they won't stick with him after the fact as he moves shop down the street after selling to you? There is a 1200 sqft store front beside a grocery store directly next to what is going to be a growing interchange (Right off an interstate). I talked to the guy, the first two months are free (!!) and $900 a month for the first year on a one year lease, then 1000 a month after that with a 3-5 year lease. Hell, if I could talk the Chinese place into moving a shop either way, I could probably double that in the future, but I'd probably end up moving if I needed that much room. quote:This is a small town, so stuff is cheap, and they guy gets business without much advertising. What is his word of mouth like? Everyone knows everyone in a small town. Are people going to him because he is in Rotary, Elks, church, etc with them? If so it may be hard to compete with him if that is what you decide to do. What is your reputation in town? Are you From There? He's on one of the town's volunteer fire department, but it's all for show. Most of his customers come to him because (when they find out he exists) he's the only shop in town that does this stuff. 99% of his clientele is word of mouth. Well, there is that one other place. The Computer and Cellphone Repair/Auto Mechnaic/Car Sales/Hair salon. Not joking in the slightest. The other thing is I'm pretty sure we could steal most of his client list (Again, it'd just be easier to buy it and get him to sign a non compete, but he's not going to take my offer). Getting the money is going to be the hardest part of that. I've already mapped out starting inventory, equipment lists, and tools we'd need to buy, and have price ranges from "barely enough, but can get started" to "Let's buy that $2000 desk we really don't need but man that fucker will look nice", as well as a few midpoints in between.
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Dec 12, 2014 21:14
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Gothmog1065 posted:The other thing is I'm pretty sure we could steal most of his client list This is definitely what you should do and in no way could backfire on you in a small community. I would also highly recommend taking out an unsecured loan of $100,000 to start a mom and pop computer repair business in an economic climate where it is often less expensive for consumers to buy a new computer than it is to have one repaired. I think you have a very strong grasp of finances and the market you're trying to enter, so this is definitely a sure thing. Good luck!
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Dec 12, 2014 22:18
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How much money can you afford to lose? That's how much you should spend to startup
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Dec 12, 2014 22:48
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Bugamol posted:This is definitely what you should do and in no way could backfire on you in a small community. I know you're being a sarcastic rear end in a top hat with this post, but "steal his clients" might be the wrong phrase here. By "steal his clients" I mean woo them over with better service, etc. Not actually call them up and say "Hey look, other dude is a bitch. I am not a bitch. Come throw wads of cash at me instead!".
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Dec 13, 2014 00:07
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I know you say that you would immediately advertise, but you can't forget this comes with a cost as well. It's not a 0-risk thing. Advertising can also be kind of a long game thing, and may not show very much om terms of immediate results. How you responded to Bugamol gives me a little insight on myself, as I sometimes respond similarly. He was being a little sarcastic, but he makes a good point. Check out what Leroy said. Then you can make the name, the brand, build up your company goodwill, etc all how you want to do it. You've done some math, but how much will an unsecured loan run you over time? How much will that eat your profit? What if there are no profits and you're in the hole for a few months but you're still paying interest and the loan payback. For a little anecdote: my uncle purchases a flooring business from someone about 15 years ago. When asked about it now, he's mad that he overpaid @ $75,000, and it was pulling in far more money than the shop you're interested in taking over. Another way to perhaps approach this is to offer the current owner a monthly stipend in exchange for a lower selling price. An old coworker of mine sold his bagel shop for some decent sum of money, but I think what really convinced him to sell was a guaranteed $1,500-$2,000 a month by the purchaser. If you cut a couple guys on payroll that might more than pay for itself. I would advise putting a term limit on that of course. Edit: and I'm also not saying that $1,500-$2,000 a month would be a good estimate for you. That would become crazy expensive over time for a company with such low profits. Knyteguy fucked around with this message at 01:04 on Dec 13, 2014 |
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Dec 13, 2014 00:59
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quote:I don't think this would be a failing business if run even somewhat properly. There are currently 3 employees NOT INCLUDING the owner. There's 4 people in that shop and he still spent 47k on payroll. The owner works 4 days a week unless he has to work 5. He refuses to work on Saturday or past 5. He is constantly taking days off for random things. I would immediatly get rid of 2 of the employees and probably cut the other one down to part time, and run myself ragged 6 days a week for the first year or so until I pull a steady profit, then bring others in. I dunno, this guy sounds like he knows what he's doing. He's making enough to employ a few people from the community. He does whatever hours he wants and takes time off whenever he wants, and he enjoys what he does. I might be on his side..
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Dec 13, 2014 01:23
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moana posted:I dunno, this guy sounds like he knows what he's doing. He's making enough to employ a few people from the community. He does whatever hours he wants and takes time off whenever he wants, and he enjoys what he does. I might be on his side.. If only he enjoyed it. He actually makes no money from the shop, except what he can slip out the side (I know it's his, and he can't even account for it properly), I think he pulled 7k out last year total. He's called me numerous times for advice and is kind of wanting me to come back and help him part time again, but I'd have to sit down and hammer out a contract of sorts, not going to get screwed by him again. He's easily frustrated and is at the point he's threatening to close doors repeatedly. But that's neither here nor there. I think I'm probably not going to buy the business, I'll probably just be bull-headed and compete with him and shut him down. Hell, I might just go directly into the small business side of it and work on contracts with them and just let him have the residents.
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Dec 13, 2014 04:56
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Just for shits and giggles, here is a 3 year PNL of what I'm working on so far to see if my numbers are reasonable. A few notes. The Labor includes myself and one other employee, full time. This is my "Let me buy that gold trimmed $2000 executive desk" over budgeting. That's 10 years on the 100k. I ran those numbers early in the process, will probably drop that to a 5 year loan.
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Dec 13, 2014 05:11
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What is 'previous profit/startup' and what are the terms on this loan you've been quoting? I think your utility costs are low, as are your future capital improvements, insurance, licensing, janitorial, security, CC service fees (one of the accounts I see pays about 600/mo on 30k income *IIRC*, I can look Monday - most of your biz will be via CC too), etc. What growth rate are you using? I like to use 2-3% for income and 3-5% for expenses. I like my projections conservative, but I'm an accountant not an entrepreneur  Do you have financials for the old company you're basing these numbers off of? I could make you a proforma projection pretty easily.
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Dec 13, 2014 06:02
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SiGmA_X posted:What is 'previous profit/startup' and what are the terms on this loan you've been quoting? I think your utility costs are low, as are your future capital improvements, insurance, licensing, janitorial, security, CC service fees (one of the accounts I see pays about 600/mo on 30k income *IIRC*, I can look Monday - most of your biz will be via CC too), etc. Yes, this is based off the other company's numbers. The 130k total income is basically what he is scheduled to do this year. (I think he'll hit 140 by the time December's through though) Utility may go up, but I don't think it will be by a lot. Electric may go up, but we're going off his old numbers, and he had 3k total utilities, not sure if there is more than Electric/water (no gas will be used). So if they're low, it's not by much, but that could always change. CC Service will probably be low, but that was going off numbers from 6 months ago. He's reporting just over $700 for his current CC. Not really sure what we're going to be spending in Janitorial TBH. I figured most of the cleaning supplies will go into office supplies, and we might have the floors done rarely if we have tile, if we even do that. The company he uses for security systems is actually really reasonable. That's directly from his numbers. It's actually 144/year. Installation I'm not sure of. Growth is based on 10% per year or so. Mind you, I increased his sales by almost 100% while I was there. Overall his sales were about a 70% increase over last year, and I still think that's small time. PM me or email me if you'd like to actually do this in more detail. I'll give you some of my other stuff that I have from the other business so you can see what my numbers come from. I'd be glad to have someone else look over the numbers and help me make them more realistic. I always welcome more help. Gothmog1065 fucked around with this message at 21:53 on Feb 2, 2015 |
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Dec 13, 2014 06:26
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What is the owner's salary?
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Dec 19, 2014 02:10
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scuzzy pumper posted:What is the owner's salary? $0.00 e: This is even after months of me trying to get him to pay himself a salary. He never wanted to be "properly" paid so he could evade taxes (What he did get out of the shop were cooked "cost of good" reimbursements).
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Dec 19, 2014 04:17
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Well if the business makes no profit and he really isn't taking anything out of it (you sure he's not getting something? cars, cash?) then you're paying 100 grand for goodwill. To be worth that kind of money the business would have to have some kind of intangible assets like a good name, customer loyalty etc You have to ask yourself if you think the essence of the business is worth that much because it isn't on paper.
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Dec 19, 2014 08:56
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scuzzy pumper posted:Well if the business makes no profit and he really isn't taking anything out of it (you sure he's not getting something? cars, cash?) then you're paying 100 grand for goodwill. Like I said before, the only money he pulled out was minor things for "reimbursements" and just not even recording cash at times, and just pocketing payments from customers. He DOES have goodwill from customers, and does have a small recurring clientele, as well as a good sized list overall, and he does have a running business which is the only other reason I'm looking at his business is to make the loan process easier. The problem lies in this statement here: Nail Rat posted:If he's running it as a hobby he doesn't really need the income. From the sound of it he'll only give it to you if you overpay ridiculously because he values the fun of running the business more than the money it makes. Even though he makes jack poo poo from salary, and only pulls minuscule amounts of money out, he once told me that he thought it was worth 300k. He basically pulled that number from he felt he should be making. When talking he keeps going on and on about how we both know it could be profitable. I told him that doesn't matter because he won't be doing the work to make it that way. I'm gathering a list of questions for him, however. I'm pretty sure he can't prove the growth he thinks he's getting (He keeps quoting how he now has money in the bank, which is because he won't hire decent help at a decent wage to make that next step up). He's down to demanding $85k for it though, which I feel is still astronomically high. It probably wont' happen either way though. I'm getting him to give me a monthly PNL statement for the past year. He thinks he's had huge growth and I'm going to have to prove it to him he hasn't. I'm going to get him to somehow give me a statement of how much money he's pulled from the shop legally (very little) as he'd be a loving moron to tell me how much he's pulled otherwise. He doesn't want to prove to me why it's worth what he thinks he does, and I'm letting him know that straight up front.
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Dec 19, 2014 14:26
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So this business makes no money, is poorly run, the owner is committing tax fraud to compensate himself and you know about it, remind us all again why you have any interest in it whatsoever?
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Dec 19, 2014 17:34
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A business making no money because it is run poorly could be a great reason to purchase it.
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Dec 19, 2014 17:39
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mike- posted:A business making no money because it is run poorly could be a great reason to purchase it. It's poorly run, but that's it. It has potential, and it's not like I will really even have to work all that hard to bring the potential out. He's just not going to let it go at a reasonable price.
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Dec 19, 2014 17:53
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Gothmog1065 posted:It's poorly run, but that's it. It has potential, and it's not like I will really even have to work all that hard to bring the potential out. He's just not going to let it go at a reasonable price. This could entirely be true, and no one here could possibly know because we don't have enough information. But with that being said, I have heard that same line so many times and I would say it's a pretty rare scenario in my experience that you wouldn't have to work extremely hard to turn around a poorly run business.
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Dec 19, 2014 18:02
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