value a business (chain of shops)

[murdoch]

Hi,
Im thinking of buying a chain of 10 pet shops with 3 other partners.
I and the 3 partners currently work there also. Im going to be equal share with the other 3 partners.
There is no owned property, its all leased.
The plan is the boss wants to sell 49% now then 51% to us in 3 yrs.
He will actually finance us with a loan to buy the business off him so we dont need to go to the banks.
He wants us to pay
-3.5x net profit
-fixed assets (computers, furniture etc) at original undepreciated price
- stock on shelves
- deposits pre paid on taxes, rent, electricity bills etc.

It comes to about GBP 1.8M for 100% of the company.
What do you think. He only wants to sell 49% now so he can still control it until he sells it all off 3 yrs later.
Im sceptical as he is a bit of a wheeler dealer guy and built it all up from scratch so is looking to extract the most now when he sells it.. its also all quite run down and needs new equipment. And he is very tight on expenses so I feel the profit is difficult to increase without investment.

Any thoughts?

 

[CassioAcc]

I would seek professional advice on the valuation of the company. If he wants you to pay for fixed assets at original price, then this is not a true valuation for the company - what else is is not valued a book value ?

You need to get an accurate valuation on the balance sheet, a few initial thoughts that come to mind are

How has the stock been valued, are there any debtors / creditors.
What are the terms of the loan?
Is the business self financing or will you also need to inject more capital?
What has the performance been over the last few years - is it growth, decline ?

 

[elaine@cheapaccounting]

If you are talking that time of money I really would suggest that free advice on an open forum would not be the best source of info.

At such a level of investment the fees for expert professional advice would be money well spent and a very small fraction of the funds which you will need to find.

Good luck with it.

 

[Mister B]

I agree with the previous posts...for that amount of money, seek professional advice.

For what it's worth though, I think that at £1.8M it looks overvalued. Merely the fact that he wants you to buy the assets at the original undepreciated price looks a little suspect.

The other thought that springs to mind is that, ten shops valued at 1.8M gives an average store value of £180k. I'm sure that you could start from scratch yourself and still make a large saving.

Just, as usual, my unqualified thoughts

Good luck with it though.

Mister B

 

[deniser]

I thought the general rule was that this sort of business is worth about double the net profits plus a premium for the fact that it is a chain if that means you have the market sewn up in a particular area.

You also need to have a close look at the terms of the leases. How many years are left, if they are close to expiry do you have rights to renew, are you close to rent review, by how much are the rents likely to rise etc. A business which is profitable because the rent hasn't been reviewed for 5 years might be a lot less so if the rent rises dramatically on review. You also say the shops are run down. The leases will require the shops to be kept in good condition and you need to factor dilapidations into the equation as a liability.

You want to be careful also how the 51% is valued. Is it at today's value or the value in 3 years time? A lot can happen in this time.

Finally, do you really want to go into business with someone who will keep control and block any decision making by the rest of you? And who holds power over you financially?

 

[murdoch]

yeah, thanks for all your input.
Ive run it by a couple of accountants but I still am interested in different input, hence I raised it on the forum here.

Stock is valued at cost bought. Yes there are debtors and creditors. There has been a decline in profits this year but the growth of the chain has been fairly rapid (1 shop/yr) and so maybe this throws out the figures a little.

Yeah, I dont think it makes sense he wants a profit multiple AND stock + assets, seems an odd way to value it... anyway cheers for inputs earlier...