My husband and I own a small business (auto repair shop). Other than my husband, we have two additional employees.
Now that he’s being deployed to Afghanistan, we want to sell the business. We started the business from scratch so I have absolutely no clue how to go about placing a value on the business today.
Is there a formula that potential buyers look at to establish a value? Gross sales?How do I place a value on the equipment?
The owner of the small company I work for recently sold another company he owned. As people around the office were discussing the asking price, it was mentioned that there was some sort of rule of thumb where the buyer expects to earn back what he spent on the company within 5 years. That is, if you as the owner make $200,000 profit (not sales) a year, then $1M is a reasonable asking price. This includes any employees, facilities, and equipment.
This was for a technology company with about 70 employees in the midwest. The company’s annual sales had been averaging $14M and the company sold for $18M. I don’t have any profit numbers. Also, none of the people I talked to would have had any direct professional experience in selling a company. Neither do I, but maybe this can give you a ballpark number.
Good luck to you and your husband.
Valuing companies big or small is ½ science, ½ art, ½ BS, and ½ justifying your final value.
Earnings multiples is a good place to start, as RGillen said. 5-10X earnings is typical, especially if earnings are expected to grow. If earnings are flat, smaller multiples might be used. Maybe 2-3 X plus inventory value, if it’s substantial.
Then, you factor in the other things. Is your company in some way unique or more attractive than most? Do you have a well-recognized name in your area and a large, loyal customer list? Are you expecting future growth for some reason? Is there a hot market for auto repair shops in your area? If so, it’s worth more. Does your location suck? Has a giant chain built right down the street? If so, your business is worth less.
Here’s a guide to rules of thumb for some small businesses. Yours isn’t in the list exactly, but this might help you get an early number.
Ultimately, of course, your business is worth what you are willing to sell it for, and what someone is willing to pay for it.
Good luck!
IANYL etc.
I did this a couple of time in M&A, and I will confess that it’s almost total BS (at least the few times I did it). The posts thus far are right on, but it boils down to what the buyer wants versus what the seller wants. The ideal situation (for a seller) is to have two buyers go into a bidding war. The buyer(s - depending on what formula, (and how the bid is determined) is used, a buyer can actually bid against himself) will go to a more uncomfortable price position. Well, I’m heading in the IMHO territory, so I’ll try to answer your questions:
The way my firm starts valuations is to get a firm idea of what exactly the business has: so, you have to price inventory, equipment, property (including any favorable lease/rents, etc.), accounts (avg recurring sales, avg recurring business), and then have an accountant go over everything and factor in depreciation (if you’ve been using it). Depreciation is pretty key, b/c this is one of the few factors that will be common to buyer and seller. Then, you have to look into the value of your intellectual property (e.g. good business name, tms, copyrights, pats (if any)). This is where a lot of the “art” comes in, particularly good business name (btw, not really an IP issue, but it makes sense to talk about it here). If your auto shop has a good reputation in the community, that is obviously of some value, but how much is another question.
I’m sure there’s more, just let me tell you that this isn’t really an easy thing to do. Buying and selling bussinesses can be pretty complex even for “ma and pop” stores. My neighbors sold their printing company (even though they went to the library and the bookstore for most of their information), and heavily engaged an attorney and an accounting firm. I suggest working on a small set fee (maybe even hourly) if there isn’t a lot of value, rather than having them (particularly the lawyers) take a percentage of the selling price.
Thanks, everyone. This is certainly much harder than I thought. Having to liquidate everything is an enormous task, I’m finding out. He’s incurred a substantial amount of debt in the last couple of years, too, so I’m not sure where to go from here.
I think I may need the advice of a good lawyer.
There are accountants who specialize in doing these sorts of valuations. I would suggest that you contact one of those.
Ruby, Sunbelt Business Brokers is a company that specializes in brokering small businesses. Given that you’ll probably not be able to take a long time for the sale this might be the way to go. Here’s a link to a more general page on Indiana business brokers (look to the bottom of the linked page). Part of their job will be to review your books to help you value and price your business, find potential buyers, etc. I’m not sure what kind of commission they get, but in your case it’s probably at least worth a look. You’ll want to do some background research on the brokerage companies, for example, get references, talk to both buyers and sellers that used the company, find out what length of time it will take on average, etc.
Best of luck to you both,
Shibb
What I can offer will echo and re-emphasize some of what has been said already.
Speaking as an attorney and a CPA who has taught financial analysis, I can attest that there is no firm, generally accepted method or formula for appraising an ongoing business.
If a business is profitable and relatively stable, one can make an analogy to a bond. Suppose you think the business will clear $20,000 a year for the next ten years. What would a person pay for a bond which paid this return, given their personal cost of capital, (what they have to clear to pay for money they borrow) and the level of risk (uncertainty in the prediction) that is involved? This is, obviously very abstract, hypothetical stuff, but it does, at least, give you some kind of model to focus on.
If a business is going down the tubes one can simply appraise the fair market value of the inventory and fixtures. That is, you come up with a garage sale price.
If the business is successful, one can still start with this appraisal and mark up from it. In this connection, the accounting concept of “goodwill” is relevant. The new owner will attempt to list the items he has purchased at fair market value on his books and will record the excess he or she paid to acquire the business as an asset called “goodwill”. It is called goodwill because the rationale is that the new purchaser was willing to pay extra because he was purchasing your good name, the familiarity of your location, and the other things that go into the goodwill your current customers show you. Ask yourself how much you would be willing to pay to get a business like yours which is already ongoing and established rather than buying inventory and equipment, etc. in similar condition and starting from scratch.
Real estate agents get a feel for what a property can bring by looking at the prices for comparable properties. Would it be possible foryou to inquire what some other comparable business have sold for, or are being offered for in your broad geographic area?
When I was with a CPA firm we were called on to make estimates of selling price for businesses from time to time. You may wish to inquire among CPAs in your area and discuss what service they would be willing to provide in coming up with an estimate.