Business Valuation

[Aaron Jones]

Hello All.....
I am planning to buy a post office with convenience store. Being new to business I am not sure how to calculate the lease value of the same. But asking price for the same is way too high when compared to the same size business property which is on the market. Is there any way to calculate the lease value of the business or is there anyone to give some tips about it. Please help

 

[LancashireMan]

Go to a local commercial estate agency and ask them for square foot prices on retail properties in the area. Ultimately, if the deal does not make commercial sense i.e. if you don't think you are going to make money, walk away.

 

[Aaron Jones]

Hi there
That was helpful. But not sure if that alone is needed to calculate. I heard from some other people that the turn over, net profit and things should be taken into account, but none of them have any clear idea of those. so i am in middle of everything. Do anyone have more ideas to it? Please help

 

[LancashireMan]

Net profit is the number to focus on. The turnover is relevant but you can have massive turnover and no profit. The key aspects when looking at whether you buy that business are:
Gross profits: broadly: turnover less the cost of buying stuff,
Net profits: gross profit less yr gross salary, fixed (recurring) costs - insurance, rent, etc. Make sure you think of everything ( or try to)
Should be fairly straightforward with a one site post office store.

 

[Aaron Jones]

ya that's right. Their net profit is coming to 48k after all expenses and tax etc. But the amount they are asking is 120k for lease hold. That is what I am stuck at. Do you think its that worth? Anyway thanks a lot for replying. Appreciate it

 

[LancashireMan]

So they're asking for about 2.25 times annual net profits. I can't answer your question if it's worth it - but if I had all the numbers in front of me, there is a chance I'd find some stuff to talk about and establish that the net profit is less than 48k. Condition of building, falling footfall at postoffices as people use the internet more and need post offices less. I'd use that to "devalue" that type of business. Have you done your own forecast for the next 3 years? I know forecasting is crystal-ball gazing but it's worth doing it in detail and see what figures you come up with. One thing is for sure - at some point in the future you'll be selling that business and you'll have some pushy awkward bugger like me pushing you down on the price

 

[Aaron Jones]

I have made an offer for 60k which they declined anyway. But i am not willing to pay any more than that. The plus point is that its near by my house, and i know the area well. I don't know if this will be of any help to you but want to say that their son is an accountant who is taking care of the shops accounts as well. when coming to post office business its mostly parcels and people taking pensions. I understand that on a weekly basis there is a transaction of around 50k in the post office. And the reason for their sale is also seems to be genuine as his parents are old now and selling it after 26 years of running it.

 

[Christine Hough]

Check out the situation with the post office. I know that may have been offered closure packages which are valid for a number of years.
The Post Office are replacing them with in-store post offices for which they pay a lot less. (space rental rather than a business premises/operation)
So you do need to make sure the operating basis of the post office you are looking at and what contract you would have with the PO, how long term it is and what remuneration will be.

 

[Vectis]

I have made an offer for 60k which they declined anyway. But i am not willing to pay any more than that........

I think you've answered your own question there. If they've declined your offer and you don't want to pay any more, then you need to move on to somewhere / something else.

Post offices are closing all over the country. Are you sure it's a good move? Just because it's close to your house doesn't make it an attractive proposition on its own.

 

[Aaron Jones]

Thanks Lancashireman, Christine and Vectis for your valuable advice. The more i research on it, i get more of drawbacks. So i am considering dropping it down. Just cant get enough of positive points to go forward. Will keep you updated about my moves regarding this.

 

[Bob]

Do you understand how sub post offices work? Lots of information here. Your income will consist of 2 elements. Firstly a sub post master's salary from the Post Office. This is normally reviewed annually based on throughput. In addition any profit that you make from the attached shop. Post Office business won't affect your income until the salary is reviewed. You will also be liable for any cash shortages in the post office. It isn't your money

 

[Christine Hough]

Have a look at this
http://www.ipsos-mori.com/Assets/Docs/Archive/Polls/nfsp.pdf

and this too although with a pinch of salt as it is dated 2010

"In a letter to Royal Mail chairman Donald Brydon, Mr Thomson warned that subpostmasters, who are self-employed, felt ‘totally abandoned’ by the firm. He revealed more than 50 per cent take home less than £1,000 a month, according to a poll of 755 federation members.

Read more: http://www.dailymail.co.uk/news/art...ces-squeezed-death-pay-cut.html#ixzz343uo8juY
Follow us: @MailOnline on Twitter | DailyMail on Facebook

 

[Aaron Jones]

Thanks for that article. Now on an outer look i understand the people running this postoffice are making money but when i read article like this, it somehow puts me off. I am still researching very deeply into this. Its proving to be a tough decision.

 

[Moneyman]

err I think someone might have the wrong end of the stick. The lease value has nothing to do with profitability. that would value the company not the lease unless the business and the lease are part of the same.
If you have say a 25 year lease with a 5 year rent review at £10k per year and after two years the rents in the area have gone up to £15k then there is a value to the lease of £15k (3 *£5k) as that is what the discount to the market rate is for the remaining 3 year until the rent review.

 

[KeithGreen]

I'm a bit late to this thread but here goes.

If the buyer and seller can't agree a price then the deal is dead in the water anyway. If they can agree then the buyer will need to apply to the Post Office for approval and training. The approval process takes some time and, on my last involvement in a post office sale there was also a 3 day training course.

On top of this you have the legal transfer of the business and assignment of the lease with attendant costs and process.

Moneyman is right, the value of the lease is different from the value of the business. I would focus on the net profits as the basis for valuation. I'd also consider that this is a 6-7 day a week business and whilst the CTN store may be your business, the post office is really like a franchise, except it is more regulated and with greater management interference.

 

[Talay]

I have made an offer for 60k which they declined anyway. But i am not willing to pay any more than that. ..

Do you know how you came up with the figure of £60k ? One hopes it was related to the business and not to how much you could afford.

£120k is OTT for this and as rightly pointed out, a connected accountant (son) is going to be pushing up the £48k net profit. I'll hazard the previous years showed nothing like this and that this is simply window dressing.

 

[businessfunding]

To add to the above, always look for a 3 year spread and look t the trends, not just the final numbers

Also, look closelly at what the owners are taking from the business - dividends/salary/drawings - the type of income will affect whether it come pre or post profit

Not the most reliableguide, but also look at how the owners live - do they appear well off or 'on the edge'