Business worth

[tloonya]

Spoke with long time businessman and he told me that selling price of the business is total sales for 3 years divided by 3.

He is selling his store at the moment for about a million dollars because that what is his yearly sales figures.
And this dude is in business since his childhood, one of those who's parents were in and he was born doing it.
He says he owes the building his store is at. But selling the business doesn't mean he is selling a property.
He can sell business plus property - then it will worth $1M plus property cost or he can remain a landlord.

Does this statement holds the truth?

[justme]

That can be true, but it depends on the business. Some are just cost of inventory/fixtures and maybe some goodwill. Or if it's like a restaurant you can buy the name and recipes.

Sales/revenue can be very misleading. I think most people look more at profits in determining value.

[NoNamePerson]

It is only worth what someone else is willing to pay for it.

He can asks what he thinks is good selling price though. He can use whatever formula he chooses to figure worth.

[tloonya]

May 13, 2014 9:29:06 GMT -5 justme said:

That can be true, but it depends on the business. Some are just cost of inventory/fixtures and maybe some goodwill. Or if it's like a restaurant you can buy the name and recipes.

Sales/revenue can be very misleading. I think most people look more at profits in determining value.

I forgot to mention, he said if buyer wants to see the books - he needs to put 20% down and then you show him The Book.
I am planning on asking him what if buyer changes his mind...he loses $20K?
I think when it is this tough - buyer gotta be really interested, right?

[Deleted]

I know nothing about buying a business, but I'd definitely want to see the actual books before considering it and 20% of a million is 200K not 20K.  Yikes.

[tloonya]

May 13, 2014 9:39:09 GMT -5 minnesotapaintlady said:

I know nothing about buying a business, but I'd definitely want to see the actual books before considering it and 20% of a million is 200K not 20K.  Yikes.

I think it depends on a buyers desperation. if business is HOT and there are a few interested parties - the one who puts out 20% gets to see the books.

[justme]

May 13, 2014 9:35:30 GMT -5 tloonya said:

May 13, 2014 9:29:06 GMT -5 justme said:

That can be true, but it depends on the business. Some are just cost of inventory/fixtures and maybe some goodwill. Or if it's like a restaurant you can buy the name and recipes.

Sales/revenue can be very misleading. I think most people look more at profits in determining value.

I forgot to mention, he said if buyer wants to see the books - he needs to put 20% down and then you show him The Book.
I am planning on asking him what if buyer changes his mind...he loses $20K?
I think when it is this tough - buyer gotta be really interested, right?

Looks like he'll be keeping his business for a looong time. No one in their right mind would agree to that. It just screams shady ass business you shouldn't touch with a 10 ft pole.

[tloonya]

May 13, 2014 9:50:22 GMT -5 justme said:

May 13, 2014 9:35:30 GMT -5 tloonya said:

I forgot to mention, he said if buyer wants to see the books - he needs to put 20% down and then you show him The Book.
I am planning on asking him what if buyer changes his mind...he loses $20K?
I think when it is this tough - buyer gotta be really interested, right?

Looks like he'll be keeping his business for a looong time. No one in their right mind would agree to that. It just screams shady ass business you shouldn't touch with a 10 ft pole.

Ahhhh, justme, not in this business...not in this neck of the woods.

[justme]

May 13, 2014 9:53:41 GMT -5 tloonya said:

May 13, 2014 9:50:22 GMT -5 justme said:

Looks like he'll be keeping his business for a looong time. No one in their right mind would agree to that. It just screams shady ass business you shouldn't touch with a 10 ft pole.

Ahhhh, justme, not in this business...not in this neck of the woods.

People just have $200k lying around to give to someone, with apparently no promise to get it back if he cooked the books?? Remind me not to move to that neck of the woods...

[hoops902]

Lots of people want earnest money to crack open their books.  If the books are cooked, then that's fraud and you could at least sue to get your money back if necessary.  Yes it's a pain to sue, but if they tell you it's refundable and then don't refund it, you have to sue anyways.  I assume you'd put it into an escrow account to be refunded if fraud was detected...but owners don't want to open up their books to anyone and everyone.

[justme]

I can see some earnest money. It just seems odd that someone would plank down $200k for a local business without having any idea whatsoever of whether the owner is realistic in his valuation or not. Maybe if it was a well known franchise or something?

[hoops902]

May 13, 2014 10:05:10 GMT -5 justme said:

I can see some earnest money. It just seems odd that someone would plank down $200k for a local business without having any idea whatsoever of whether the owner is realistic in his valuation or not. Maybe if it was a well known franchise or something?

The valuation would be done off of claims of sales, profits, expenses, etc.  Checking the books is an audit.  You would be able to determine if the valuation was realistic or not and negotiate a purchase price without looking at the books.  You look at the books to make sure they aren't just making up the numbers they gave you.

I'm going to tell you i had $1M in sales, $450K in expenses, average of 30 day turnover, etc all in the negotiation of the price.  But you don't want to just take my word for it, you want to see those sales and expenses.  Seeing the books is a truth-check for the buyer.  You should have already negotiated the price, you just need to make sure my numbers weren't fabricated.

[justme]

May 13, 2014 10:18:38 GMT -5 hoops902 said:

May 13, 2014 10:05:10 GMT -5 justme said:

I can see some earnest money. It just seems odd that someone would plank down $200k for a local business without having any idea whatsoever of whether the owner is realistic in his valuation or not. Maybe if it was a well known franchise or something?

The valuation would be done off of claims of sales, profits, expenses, etc.  Checking the books is an audit.  You would be able to determine if the valuation was realistic or not and negotiate a purchase price without looking at the books.  You look at the books to make sure they aren't just making up the numbers they gave you.

I'm going to tell you i had $1M in sales, $450K in expenses, average of 30 day turnover, etc all in the negotiation of the price.  But you don't want to just take my word for it, you want to see those sales and expenses.  Seeing the books is a truth-check for the buyer.  You should have already negotiated the price, you just need to make sure my numbers weren't fabricated.

Oh, I get that in a realistic world that's how it works - give all pertinent information, negotiate, and then fact-check. But based off of what Looney said, with just the $1M in sales claim and no other info that just seems shady since expenses could be $1.2M. Though the expenses, turnover, etc could have been lost in translation since we've gone around the "what is profit" loop with her several times. 

[alabamagal]

When we sold our business last year, we gave the interested party a general idea of sales and expenses.  When got an initial offer, negotiated more money, and once we agreed on the price, let the other party review our books.  He was satisfied and we made a deal.

But the purchaser was not in our business prior to buying ours, so we were not worried about giving information to our competitors.  He also bought a local competitor with a somewhat different clientele and combined the businesses, and has since bought out 2 other competitors.  We got the best deal as we had the most recognizable name and best customer base and good location.

[Abby Normal]

My company just bought another facility.  However, we only bought their assets, not the company.  If you buy the company you take on their liabilities as well.  They were doing alot of questionable things that we found out about after. Since we were buying the assets, we didn't need to look at the books. Thankfully, we've been able to say- you need to go talk with XX company.  It's their responsibility. 

[dannylion]

So this guy apparently has three years' worth of actual records to show a prospective buyer.  

[tloonya]

May 13, 2014 11:25:04 GMT -5 dannylion said:

So this guy apparently has three years' worth of actual records to show a prospective buyer.  

I do too! it is my income tax papers! Can't lie on those, can you?
You show them 3 years of consistent sales and voila!

I do think thought that if this business is so busy - buyer will not have to wonder.
Produce store is not an insurance company - you can SEE who comes and goes. And you can spend a week watching store 'in action'.
So, maybe that is how it is working.
makes my mouth water...I sell a lot!

[NancysSummerSip]

May 13, 2014 11:43:02 GMT -5 tloonya said:

May 13, 2014 11:25:04 GMT -5 dannylion said:

So this guy apparently has three years' worth of actual records to show a prospective buyer.  

I do too! it is my income tax papers! Can't lie on those, can you?
You show them 3 years of consistent sales and voila!

I do think thought that if this business is so busy - buyer will not have to wonder.
Produce store is not an insurance company - you can SEE who comes and goes. And you can spend a week watching store 'in action'.
So, maybe that is how it is working.
makes my mouth water...I sell a lot!

Your income tax records are not what a prospective buyer is looking at. Not that they won't want to see them, but they don't tell the story about your sales, assets, operating costs, liabilities and payroll. And just because you "sell a lot" doesn't mean you are making a profit.

[Rocky Mtn Saver]

May 13, 2014 11:43:02 GMT -5 tloonya said:

I do too! it is my income tax papers! Can't lie on those, can you?

[hoops902]

::I do think thought that if this business is so busy - buyer will not have to wonder.
Produce store is not an insurance company - you can SEE who comes and goes. And you can spend a week watching store 'in action'.
So, maybe that is how it is working. ::

Buyer will still wonder.  If I open a produce store and sell everything at a loss which makes it cheaper than everyone else around, I will have LOTS of customers and lots of sales.  But no one will want to buy my business.

[tloonya]

May 13, 2014 12:04:52 GMT -5 hoops902 said:

::I do think thought that if this business is so busy - buyer will not have to wonder.
Produce store is not an insurance company - you can SEE who comes and goes. And you can spend a week watching store 'in action'.
So, maybe that is how it is working. ::

Buyer will still wonder.  If I open a produce store and sell everything at a loss which makes it cheaper than everyone else around, I will have LOTS of customers and lots of sales.  But no one will want to buy my business.

Checking out neighbors will take an hour. I am not cheaper, I am better!!!

[milee]

If you can convince someone to buy your business for a valuation equivalent to roughly a year's revenue, you should take that offer immediately.

[hoops902]

May 13, 2014 12:21:57 GMT -5 tloonya said:

May 13, 2014 12:04:52 GMT -5 hoops902 said:

::I do think thought that if this business is so busy - buyer will not have to wonder.
Produce store is not an insurance company - you can SEE who comes and goes. And you can spend a week watching store 'in action'.
So, maybe that is how it is working. ::

Buyer will still wonder.  If I open a produce store and sell everything at a loss which makes it cheaper than everyone else around, I will have LOTS of customers and lots of sales.  But no one will want to buy my business.

Checking out neighbors will take an hour. I am not cheaper, I am better!!!

My point is that the amount of traffic in a store you're looking to buy is pretty irrelevant unless it translates to profit.  Not about your store in particular, you're not selling yours (that i know of).

[tloonya]

May 13, 2014 12:54:42 GMT -5 hoops902 said:

May 13, 2014 12:21:57 GMT -5 tloonya said:

Checking out neighbors will take an hour. I am not cheaper, I am better!!!

My point is that the amount of traffic in a store you're looking to buy is pretty irrelevant unless it translates to profit.  Not about your store in particular, you're not selling yours (that i know of).

Oh, I would in a heart beat! For my yearly sale figure!!! Come anytime bring the money.