How to value a business that is for sale

[colin_mckellar]

I am looking to buy a business and have seen one that I think has prospects and currently has a full order book and definite room for further expansion.

I know I have to check the books, etc but how do I know that the asking price is fair?

The net profit seems to be around £45k per annum and the owner is looking for £55k. That net profit could rise quite a bit should the expansion go ahead.

The business is a franchise resale and is a well known brand and has been established for a number of years in the area.

 

[Allan123]

Business is only ever worth what you are willing to pay.

Many people on here will say 3.5 times annual profit, but again it all boils down to what you see is investable.

Lets be honest, if this business makes £45K a year nett profit, but you personally had to do 14 hour days 7 days a week, would you say that's a good deal for £55k? If it only requires 4 hours a day, 4 days a week for £55K what do you think then?

All down to personal opinions and what oppurtunities and strength's you believe you can exploit by taking over.

 

[PrestigeShopping]

I was always taught the value of a business was Net Assets + Goodwill

If you have access to this information have a look how far away from the Net Assets figure the valuation currently stands at and then question how the remaining goodwill was applied.

 

[ilclifford72]

In many respects the reply that stated what someone's willing to pay is certainly true!

You mention that the existing business is a franchise holder, have you checked into the costs of transferring the franchise and any relevant training that may be required? These costs are not always trivial.

There are websites specialising in franchise resales so maybe worth seeing what other franchisees are asking.

People tend to think buying a business can be quite a simple process, but to do it properly and ensure your buying a "clean" business is trivial.

You don't mention the business trading style, but if it is a Limited company, you do need to be careful since you will essentially be buying "shares" in a Company but you also take on all liabilities, present and historical, for that Company.

My personal recommendation would be to talk to an accountant, the advice while not free, can be invaluable.

Also consider the loyalty of the customers, maintaining customer loyalty is key in any business transfer. The best way is to do this is ensure the existing owner has a vested interested in you succeeding.

I would tend to always look at an assets and goodwill sale into a new company vehicle, with a staged payment mechanism based on an upfront payment and deferred compensation based on business performance. Stage this over 12-18 months with a quarterly payment profile.

Another consideration is to ensure that there is a non-compete clause to ensure the owner doesn't set up again in competition in the same or neighbouring area.

However, this enforceable in certain situations only, basically when it can be proved the person/business receiving the money are connected parties.

I hope this gives some ideas, but in summary:

Buyer beware!

 

[jim_gold]

A common pitfall when assessing a value to a smaller company is not to properly investigate what the 'net profit' actually is.

Often, the owner will not include his own time in the calculation.

Whoah! That might mean the NP is really only £5k! Do you want to be paying a premium just for a job?

Be sure to go through the figures with an accountant if you decide to move further down the track.

 

[thetime22]

Seems pretty good. If the company makes 45k profit a year and they are selling for 55k!! Buy it!

 

[colin_mckellar]

As it is a franchise that is for sale then staged payments are not possible. I'm presuming that audited accounts will be available. If not then I'll not be going any further.

Customers are long standing and mostly national accounts so should hopefully be safe. There is a week's training at head office then two weeks going round with the existing franchisee to meet all the customers.

It is a sole trader operation so share issues are not involved.

Franchise is offering a new 5 year contract and not what is left on the existing contract.

I believe that they are full members of all the relevant organisations so that is some comfort as is the fact that they have been trading for a considerable time.

I will still be looking for an accountant and suitable lawyer before I put my name to anything.

 

[Rhodes100]

There are some valid points on here.

How much is the franchise for a barren area?

Check out the franchisor, are the other franchisees happy with them or are they a pain and provide no support? A franchise is a business partnership and you have to work with them.

Are they members of the BFA? This is a less risky investment than a new start franchise.

Is the business going forward or backwards?

Is it a husband and wife team who are both working in the business? It may be a sole trader but does the other half work for technically no pay. In which case the £45k is before two wages. You need to calcuate pure ongoing profits not accounting profits before partnership drawings.

Are you paying the franchisors transfer fee/training in addition or is the seller paying?

If you let us know the name of the franchise perhaps others have some knowledge of it.

 

[IANL]

As it is a franchise that is for sale then staged payments are not possible. ....

Why not. The current Franchisee is selling and he can agree what terms he likes for the benefit of bis business. Any fees the Franchisor may not be able to be staged though granted.

In essence the seller can 'lend' you the funds and you have addition of making the payments conditional on business being maintained (clients remaining) always a difficult one. Depends on the type of business and how much interaction the seller had with clients.

 

[Rhodes100]

Why not. The current Franchisee is selling and he can agree what terms he likes for the benefit of bis business. Any fees the Franchisor may not be able to be staged though granted.

In essence the seller can 'lend' you the funds and you have addition of making the payments conditional on business being maintained (clients remaining) always a difficult one. Depends on the type of business and how much interaction the seller had with clients.

The franchisor has the final say in the sale, if he doesnt like your buyer he can veto them.

If a buyer needs to pay by staged payments the probablility is that the franchisor will be concerned that the buyer doesnt have enough working capital to successfully run the business and will refuse to transfer the franchise.

 

[IANL]

The franchisor has the final say in the sale, if he doesnt like your buyer he can veto them.

If a buyer needs to pay by staged payments the probablility is that the franchisor will be concerned that the buyer doesnt have enough working capital to successfully run the business and will refuse to transfer the franchise.

I understand that the franchisor can decline the transfer but surely he is not, or doesn't have to be, party to the agreement and any payment arrangements can remain confidential.

I can counter that argument by saying if the Franchisor wants to ensure working capital arrangements then staged payments to the seller are better than dropping all your cash to buy and then being left with less cash for working capital to cash flow the business.

I am not saying your wrong just putting a different slant on this. Banks are less likely to lend to businesses these days and when they do they want cast iron tangible security. You house!! (if you have one) and crazy interest rates that put further pressure on working capital

 

[Rhodes100]

The transfer of a franchise is always done through the franchisor so they will know all the financial details, many of them are very stringent on their criteria.

For example you cannot sell a Cartridge World franchise for less than you bought it for or less than they are selling them for regardless of how much it is actually worth.

It would be clearly up to the franchisor however it is in their best interests (if they are a good franchisor) not to allow a transfer with a staged payment deal, if they dont want a record of franchisors failing.

Of course if they dont mind whether the incumbent fails due to lack of finance (so that they can sell the area again) they may allow it.

 

[IANL]

The transfer of a franchise is always done through the franchisor so they will know all the financial details, many of them are very stringent on their criteria.

For example you cannot sell a Cartridge World franchise for less than you bought it for or less than they are selling them for regardless of how much it is actually worth. ........

Interesting.. What happens when a franchise only has a year left to run. The value of the business is less than if it had 10 years to run. Do they then have to set up a new agreement with the Franchisor.? To maintain the value of the sale.

I know some franchise agreements are tighter than a duck's bottom!!

 

[colin_mckellar]

The franchisor is offering a new 5 year contract so am not buying the remainder of existing contract. All equipment is also supplied new and there is a franchise fee to pay on top of the price of the business. The £55k includes this fee but not VAT.

The company is a well known franchise and they require me to visit their headquarters before any decision is made on either side.

Like a previous respondant said this is another way of the franchisor making money as I am having to pay a franchise fee that the current owner paid just over a year ago.

The territory is well established over the years and there is no reason to believe that any contracts would be lost due to a change of owner.

 

[Rhodes100]

Are you telling us that every 5 years you have to repurchase your business?

Or is this just a case of the franchisor selling the small amount of goodwill because the previous franchisee failed?

In either case you should tread carefully, find out the failure rate, is it because the franchisors model simply doesnt work.

 

[colin_mckellar]

The franchise agreement is for a rolling 5 year term. Current franchisee wants to emigrate after just over a year for personal reasons.

Franchise has been fully operational for 15 years and is worldwide.