Valuing A Business

[MooreToolsPlease]

Evening all,
The guy who runs the company I have been working at for a few years now has decided to call it a day, he's got another business interest and has asked whether or not I would be interested in the business.
I'm currently self employed, so I would carry on under my trading name, but I would be dealing with the customer base he has grown over 20 years in the industry.
The main product is timber subframes for aluminium windows to be fitted into. We have one range which is PAR timber with beads, or a newer one which is double rebated to fit a slim line steel window.
As well as this we do undertake general joinery jobs, doors, casement windows and the like.
The business is breaking even at the moment, but not making a huge amount of money, I have identifiewd a number of key areas where I know money can be saved, and more proffit made.
I've spoken to the guy at length and he has said he will be looking for 1.5% of the turnover for 2 years.
Does this figure sound about right for a business which is barely breaking even?
The machinery and stock are easy to calculate their worth, but the customer base is proving to be tricky.

Many thanks

Matt

 

[wizer]

I think you need to get your accountant involved. When I was looking at buying a business last year, my family accountant did a full assessment of the business, looking back through the books and valuing the companies assets. I guess you could do it yourself but an accountant will do it quickly.

 

[Karl]

Hi MTP

It is tricky to put a value on the customer base (or goodwill) of a business. It is normally calculated as a multiple of a company's profit (not turnover). ie if you are making nothing, the goodwill is worth nothing! Your bosses offer of selling it for a slice of the turnover is deceptive - he is guaranteed to get something for the business, irrespective of whether it is worth anything or not. And in the meantime you will be slaving away trying to make a profit.....

Why not just make him an offer for the assets, and a lump sum for the customer base. If he doesn't like it, could you take it anyway? ie contact the customers and set up deals with them? Your contract of employment may stop you from doing this (in theory).

A good accountant is what you need.

Cheers

Karl

 

[CNC Paul]

Matt,

I would agree with Wiser about getting an accountant to look at
the books, my thought is that the sub frames for aluminium windows
would be a declining market.... you would have a better idea by looking
over the sales figures on this part of the business.

Who does he sell the wood sub frames to ?

Paul

 

[BradNaylor]

Given that the business is barely breaking even and that current economic conditions are looking questionable at best, I would offer no more than the market value of the machinery and stock.

A business that is making no profit is basically worthless; if you can see the potential however, it could be an excellent buy and would save you the hassle and expense of setting up from scratch.

A major factor is the premises. What sort of lease is there?

And of course, debtors and creditors.

An accountant's advice is needed.

Good luck

Cheers
Dan

 

[MooreToolsPlease]

Thanks for the views so far gents,
I've got an acountant looking over the whole thing this week, hopefully he will shed some light as to whether it is viable or not.
The lease on the premises is a rolling one, just a one month notice if I wish to leave etc.
Any debts that have accumulated he will be taking with him.
The only finance agreement I will be taking over will be for a pair of machines purchased 4 months ago.
The sales figures are very consistent for the ali subframes, the bespoke frames are fairly regular, but recent months have seen an increase in sales.
All of the work we do is for trade customers, we may have one domestic customer every 2 months.

Thanks

Matt

 

[Bodgit]

The usual way to value goodwill is on the basis of super profits. Super profits are those profits in excess of a reasonable return for effort and a reasonable return on capital employed. In other words, if you have 25,000 and could get 5%, that would be 1250. If you would earn 30,000 doing the job running the business, working in it and buying the equipment and stock cost 25,000, the profits would have to be more than 31250 before there was any goodwill. After all, if they weren't you'd get a job and earn 30,000 and put the cash on deposit at 5% and take no risk. The customer list, name, reputation etc are worth nothing on their own. They only have a value as a means of making profits. If the business has a huge and loyal customer base and an excellent name, but makes no money, it has no value. Why pay anything to acquire something that makes no money, no matter how well regarded by how many customers. The only value, apart from goodwill is the stock and equipment but you could go and buy that anyway. Be careful and listen to your accountant not the sales agent.

 

[BradNaylor]

If the business has a huge and loyal customer base and an excellent name, but makes no money, it has no value. Why pay anything to acquire something that makes no money, no matter how well regarded by how many customers. The only value, apart from goodwill is the stock and equipment but you could go and buy that anyway. Be careful and listen to your accountant not the sales agent.

This is very true.

However, you should also consider the alternative, which is to find suitable premises, buy and install the equipment, and go out and find work from a standing start.

While this can be an exciting process, it is also time-consuming and very expensive. If you can buy an existing set-up for not much more than the value of the stock and machinery I would suggest that it might be a good idea.

The other advantage of buying an existing business is that you eliminate a major competitor!

None of these factors have a 'value' that should influence the negotiations - but you should consider them when making a decision.

Cheers
Dan

 

[Digit]

I would have thought that you must know many of his repeat customers, if that is so, and he just walks away after selling the machines, you would only have to see his customers and explain that you were the one actually making what they bought from the company.
That's how I started.
I think he's trying to sell you what you need not buy.

Roy.

 

[Anonymous]

I don't think you should pay anything for goodwill or give 1.5% of turnover to anyone. You are quite at liberty to pursue his customers for business. The rest, tools etc, I wouldn't offer the market worth for, is he going to take them with him if you don't buy? I think not, so he would have to sell for the best price he can get, which may be less than you offer him. Consider what it is that you are 'actually buying', it ain't much on paper when you think about it, all IMHO of course.

 

[Chris Knight]

A business plan/strategy based simply on saving money in an ongoing concern is at best a recipe for the short term. There needs to be scope for growth ( and you need to be able to see it for yourself and be sure it's something you can do and wish to do).

 

[BradNaylor]

A business plan/strategy based simply on saving money in an ongoing concern is at best a recipe for the short term. There needs to be scope for growth ( and you need to be able to see it for yourself and be sure it's something you can do and wish to do).

Not necessarily...

Plenty of woodworking businesses are one-man bands or partnerships that have no intention of ever employing any staff. This kind of business can make the owner(s) a very nice living but have no scope for 'growth' other than increasing prices as the order book gets fuller.

'Growth' is not the be all and end all.

Profit is!

Cheers
Dan

 

[Chris Knight]

Dan,

Perhaps my choice of the word growth was not very good. What I meant was that one has to have potential to modify the business according to the times/needs etc - as buggy whip manufacturers found out.

By all means stay a one man band - I think the red tape these days for any small business is criminal.