Business valuation

[larkfield]

hi, I am looking at buying an old long established plumbers merchants.

Sales are £1.2m. Net profit £75k
Asset value is around £400k

He wants offers...... He s******ed at £500k which is what I thought it's worth. I could set my own up, but with this you hit the ground running.

 

[The Byre]

And your question is . . . ?

 

[larkfield]

What would you value it at. At first glance?

 

[The Byre]

Zero - I do not want to open a plumber's merchant shop - and if he does not want to sell, there is no point.

We get offers to buy all the time and sometimes these numpties can be quite annoying. They seem to think two things -

1. Everything is for sale.

2. There is some magic formula for working out the value of a business.

 

[The Byre]

P.S. If you really want an easy formula, just to get a handle on the possible value, try looking at the current and possible future interest rates and work out how much you would have to set aside to earn £75k p.a. in shares or savings - less the value of your work as manager. Now add to that figure, the value of the physical assets.

That would in this case, come to (at 5% interest and £25k for the manager) £1.4m.

 

[STDFR33]

hi, I am looking at buying an old long established plumbers merchants.

Sales are £1.2m. Net profit £75k
Asset value is around £400k

He wants offers...... He s******ed at £500k which is what I thought it's worth. I could set my own up, but with this you hit the ground running.

If the assets are actually worth £400k, and that isn't the NBV, and it also makes net profits of £75k, then they will see a £500k as not worth it.

They could work for 16 months and sell the assets and get what you are offering.

I'm very surprised you made an offer of £500k without taking any advice, but we get allsorts on this forum I suppose.

 

[Clinton]

I'm very surprised you made an offer of £500k without taking any advice, but we get allsorts on this forum I suppose.

And, going by the types of "help I screwed up" threads on this forum, it appears that buyers of small businesses vastly over-estimate their own skill, knowledge and ability when it comes to investing a large chunk of money on buying a business.

Oh well, it takes all sorts as you say. Including people who make an offer first and then try to ascertain value!

 

[Talay]

Most sellers haven't a clue and vastly over value their business, mostly because their simply don't value the replacement cost of their time and crucially, because they are too close to the business to see that it isn't making the numbers produced on their spreadsheet.

I'm talking to one now. Originally wanted £900k. I valued circa £300k. We are within touching distance of a number but I haven't moved an inch.

 

[larkfield]

an offer is just that, its not set in concrete, he came back and said he wants £750k. I see that as not worth it, as its a 10% return on my investment which I can achieve in property, without the hassle of running a business. I just thought there maybe an accountancy formula or desktop valuation formula to purchasing businesses.

 

[Clinton]

There is an art to doing these deals.

I avoid telling the seller that I don't agree with his valuation. That only serves to put him on the defensive and reduces the chances of finding common ground. You're insulting his little baby. Why would he feel motivated to do business with you?

With large M&A deals it's one group of lawyers and accountants battling it out with another group of lawyers and accountants. With the small transactions it's very much a person-to-person thing. And people do business with people they like.

Too often buyers go in believing that they are somehow superior - they confuse their position with that of a consumer in Tescos. Some buyers go in with a "I'm the customer and the customer is always right" approach and they almost always fail to seal the deal.

A better approach is to start by accepting the seller's valuation... but managing the process so that you end up paying only what you feel the business is worth.

And there's a knack to squaring that circle. That's where the professional smarts come in. Here again amateur buyers make grave mistakes. They try to reduce the price by finding fault/s with the business and use these faults (or perceived faults) to discredit the seller's valuation. And that's the worst way to do it!

I just thought there maybe an accountancy formula or desktop valuation formula to purchasing businesses.

There isn't. And, to be honest, if you're asking that question in the first place IMO you're top of the list of people who need to get professional advice* before even starting negotiations like these.

*Just for the record: I'm not talking up my importance in order to get some business. While I do advise on these deals, I'm fully booked up at present and not taking on new clients for the time being.

 

[larkfield]

There is an art to doing these deals.

I avoid telling the seller that I don't agree with his valuation. That only serves to put him on the defensive and reduces the chances of finding common ground. You're insulting his little baby. Why would he feel motivated to do business with you?

With large M&A deals it's one group of lawyers and accountants battling it out with another group of lawyers and accountants. With the small transactions it's very much a person-to-person thing. And people do business with people they like.

Too often buyers go in believing that they are somehow superior - they confuse their position with that of a consumer in Tescos. Some buyers go in with a "I'm the customer and the customer is always right" approach and they almost always fail to seal the deal.

A better approach is to start by accepting the seller's valuation... but managing the process so that you end up paying only what you feel the business is worth.

And there's a knack to squaring that circle. That's where the professional smarts come in. Here again amateur buyers make grave mistakes. They try to reduce the price by finding fault/s with the business and use these faults (or perceived faults) to discredit the seller's valuation. And that's the worst way to do it!


There isn't. And, to be honest, if you're asking that question in the first place IMO you're top of the list of people who need to get professional advice* before even starting negotiations like these.

*Just for the record: I'm not talking up my importance in order to get some business. While I do advise on these deals, I'm fully booked up at present and not taking on new clients for the time being.

Thank you, I have always started businesses from scratch, but I do see the benefits in buying an established business and adding value to it. I have instructed a firm of chartered accountants /business advisors to value it, and have agreed with the vendor, that we will both revisit the selling price once we have this information to hand, the seller is a gentleman and understands that we will have to negotiate to come to a deal.

 

[Alan]

Asset value is around £400k

Be very careful on this one. If the company went bust tomorrow and wanted to sell the assets, would they achieve anywhere near £400k? Its likely they would achieve 10% of that at a guess.

Also are the net profits of £75k after paying the owner manager a decent wage?

Personally I'd want to earn £75k a year wages to manage a £1.2million turnover business, so that mean possible zero 'profit' and with the stock worth just £40k in fire sale, so my personal offer would be £40k.

But then I have been burnt and bought a business with stock and am one of those numpties

And, going by the types of "help I screwed up" threads on this forum, it appears that buyers of small businesses vastly over-estimate their own skill, knowledge and ability when it comes to investing a large chunk of money on buying a business.