what is a business worth?

[john@AEC 37]

G'day All

I just received a letter from a local pressure washing business, they are wanting to sell. It's a one person operation, working part time (20 hrs/wk) doing commercial & industrial concrete cleaning (long term repeat jobs). I've been wondering how to get more (regular) comm/ind work, so this appeals to me.

But of course, the big question is "what is a business worth?"

Equipment - sale price - as is, where is.

Pre-paid advertising - proportion of paid amount remaining.

Good will/booked jobs/expected jobs - a % of last years turn over. But what percentage? Consistent repeat jobs (obviously ?) make it worth more - but what guarantee is there that they will continue with me? .....

If you were to sell, what would you want?

The owner has no idea (that he will say) and is waiting for offers to consider - obviously hoping (gambling?) for the maximum. But of course I don't want to offer more than needed, or so little as to make him laugh/cry. I realise that it's like valuing art or real estate - it's only worth what some-one will pay for it.

What % am I thinking?... still thinking

[PressurePros 249]

John, this may upset some people but, owner ran service businesses are basically worthless. Having contracts in place is somewhat of a help. If I were "scouting" this business here would be my methods for valuation.

Using a Y-T-D numbers analysis of his books.

1) All non contractual cleanings would be tossed unless they were done for a year or more.

2) I would first look at each and every job for profitability. Factor in the cost of paying someone to perform these jobs or use your own operation cost model to see how profitable they are for you. Toss anything that doesn't meet your margins.

3) I would factor 30% shrinkage for walking in the door. Owner operators secure work and keep it. When a new face steps in, shrinkage will happen. This also factors for normal account loss that occurs in business.

4) Subtract your expenses to perform the work (direct and indirect)

5) Take 35% of the dollar amount remaining (the company net profit you stand to gain) .

6) Factor what your company would make during one year and multiply by 1.5.

6) Add equipment (at liquidation pricing), prepaid advertising you would use (phonebook).

Example in American dollars and measurement

Company cleans 8 accounts per week with an average of 5000 s/f per account. Average rate is $.07 per s/f.

1) Only four of those accounts are on contract, have been done for more than a year and/or are profitable enough. $1,400/week gross

2) Minus payroll to perform work: $400 (even if you are the employee doing the work, John you can't count this as profit, otherwise you are paying for the privilege of owning a job)

3) Minus Shrinkage: $420

4) Minus expenses/materials: $130

You are left with $450 per week

5) 35% (company net profit) of what remains is $157 or about $7500 per year if you work steady. Multiplied by 1.5 that is $11,250.

6) 6 gpm hot water rig on trailer with surface cleaner $1500-$2500.

So the reality is this company shows $135,000 per year gross earnings and its worth less than $15,000.

Reality check.. I'd say most one man shows are NOT grossing anywhere near $135K working part time. Plug in your numbers, John.

[MMI Enterprises 289]

The devils advocate/differing view would be that profitable contracts/customers are saleable regardless if main entity is not or is not marketable.

Many field have basic multipliers used everyday in sales of contracts. Can be x3 monthly gross, can be x6, can be x** in these fields depending on contract quality. Such figures transferred to the whole entity, assets and all, would rely on much more as Fenner talks about...

But sticking with just contracts...If taking $135k yearly example ya get $135k/12 mon.=$11250 gross per mon. x minimum multiplier of 3 = $33750. This is if all contracts of said gross are profitable. Fenner's whole entity example is not mind you.

Add to this the fair market/wholesale value of all assets and ya got pretty much a good deal/great deal if ya want to go there. Maybe not in the eyes of a large company into aquisitions but for sure in the eyes of either an existing small business or a newbie looking for priviledge of job ownership.

I'll explain..

Ok let's base each contracts profitability off industry standards say anywhere from 30-40% .

Most would agree, as well as goobermint entities or financial entities, that if you can pay off business startup costs within 3 years then yer ahead of the game and of most new business owners. So let's first take the figures of just the contract purchases to see how long they take to pay off.

$11250x30%=$3375 net profit x 10 mon. = $33750...now you still have over 2 years to pay for the used assets you also bought..very, very doable.

Fact is if you can't keep an account for 10 mon. then you suck anyways and should crawl away.

Add fact that you will likely be growing same time while servicing them contracts the risk is nill to none.

Finally let's delve slightly into the whole entity purchase at 3x monthly gross + asset value.

Add fact that the assets are liquid and resellable the risk doesn't equate to loss. You could be buying a real good used truck, washer, etc. for 2 times that $33750 contract buy figure and as long as it was fair wholesale price there is no risk.

In summary.. good luck in the real world at finding a good small business with nice paid for rigs and equipment worth $67500 that can show $135k of good accounts that is willing to sell to you for $101K. :)

[Tegrey 121]

I agree with Ken. Your business is only worth what you can prove it is worth. The amount of money you brought in last year is worthless this year. A friend of mine sold his business. He had to show what customers were guaranteed, where his money is and basically what he is worth. Having 100 jobs lined up this year are only worth what you complete of them. Unless provisions are set in place, the jobs I retain from buying your business are worthless. You need lots of paper work, signed and approved for a different owner. Being able to prove what you are worth is probably the hardest thing you can do as a company owner. I would work with a professional in this area if I were serious about buying or selling a business. I'd hate to spend $100.000 and find the business is only worth $100. We tell our customers to hire a professional, but we sometimes forget to do this ourselves. Thank You.

[john@AEC 37]

Thanks Terry, Kev & Ken

Selling a business is such an emotional thing, it's good to have some maths to get started with.

The other thing I had forgotten to ask myself is "how long/much would it take to build up this level of income myself?"

If I made 25% in the first year, 50% in the second and 75% in the third then 100% in the fourth year it has taken 3 years and in that time I have grossed 150% or 1 1/2 years income; so it has cost me 1 1/2 years income (that I didn't earn by not buying the business). So, is this what I should pay for the privilege of a full income? In working this out, do I use gross income or net profit? (If I was the seller I know which I would use!!!!!).

Taking a big picture outlook - is this the best use of money? what return would I get on my investment if bought shares/bonds/property?

Thanks again for your thoughts and wisdom.

[Ron Musgraves 240]

Over the last 24 years I have sold portion and bought business.

The ratio is about five times the amount of gross revenue.

call a business broker, get the answer. Mant other things factor in of course. Years in buz, contracts and how long your willing to stay on over the transition.

[PressurePros 249]

Ron, PressurePros, Inc is for sale :lgmoneyey

The standard number for a bricks and mortar retail location is three-five times the annual net or I have also heard one time the annual gross. I have never heard anyone paying 5 times the gross of any business. I'd sell everything tommorrow if I could get that. The above numbers are not for service businesses.. those are difficult to sell.

[MMI Enterprises 289]

When it late Ron leaves words out..Surely he meant to add 'monthly' gross?

I speak of monthly figures as that is usually how maintenance contracts are contracted and paid. The 5 figure of Ron's is pretty much right on what pro business salesmen have discussed with me. Usually includes a minimum of well used equipment assets almost as a gimmie as the contracts is what is of value in the immediate and long term for the buyer. Ron's extra 2x multiplier for the whole entity over the minimum 3x I mention for just the contract goes well together.

[Beth n Rod 1,279]

I am no expert in this question but a great deal can be found on the net to answer this type of question.

How Much Is My Business Worth - A Primer on Business Valuation - Entrepreneurial Resources - Tips for Entrepreneurs - Gaebler Ventures - Chicago, Illinois

Business Valuations: What Is Your Business Worth? Herold-Lambert Group

Business Valuation: Three Approaches to Measuring Business Worth - ValuAdder

These are based mostly on American financial dictum's so I do not know how much will translate effectively in Australian business markets or financial practices.

Hopefully it helps none the less.

Rod!~

[Ron Musgraves 240]

When it late Ron leaves words out..Surely he meant to add 'monthly' gross?

I speak of monthly figures as that is usually how maintenance contracts are contracted and paid. The 5 figure of Ron's is pretty much right on what pro business salesmen have discussed with me. Usually includes a minimum of well used equipment assets almost as a gimmie as the contracts is what is of value in the immediate and long term for the buyer. Ron's extra 2x multiplier for the whole entity over the minimum 3x I mention for just the contract goes well together.

A business broker will tell you that its all about your past tax returns.

Equipment in this business means very little and if you get 20% of value your lucky.

[Ron Musgraves 240]

suppy and demand is another factor.

Example, open your news paper this morning and like most places you will see they are selling a million pizza joints. Well, its simple theres a ton for sale the market will be down.

[Ron Musgraves 240]

Ron, PressurePros, Inc is for sale :lgmoneyey

The standard number for a bricks and mortar retail location is three-five times the annual net or I have also heard one time the annual gross. I have never heard anyone paying 5 times the gross of any business. I'd sell everything tommorrow if I could get that. The above numbers are not for service businesses.. those are difficult to sell.

I didnt say you would get it Ken, then again who ever gets what they ask?

Plus you have a net business, that might be another story.

Any business will depend on the demand for that type of business and the buyers availiable.

Call a business broker and ask the question. He may have a million for sale an none sold. that will tell you its not going to sell possibly for one months revenue.

[Ron Musgraves 240]

For you guys, I rarely read your posts. i read the first post and give my opionion.

this thread is a thread left to just that. I bet you could call three experts and get different answers and reasons why this or that.

I'm not claiming to be and expert, just sharing my experinces when selling.

I got 4.5 times my gross for one division of my company four years ago.

we started at 5 , they wanted no equipment...

[John Doherty 126]

I have bought and sold a p/w business.

As a buyer of a solid, established business I would look to pay:

50% of the retail value of the equipment (excluding vehicles), and 25-50% of gross sales, dependent on the strength (profitability and retention) of the accounts.

Business brokers are worse than used car salesmen, and in the States generally unregulated, stay away, you need a good accountant and good lawyer.

I hope anyone with a 1 man op. is not planning on funding their retirement by selling their business and using any of the pie in the sky #s people throw around. You'll be washing until your last day.

[MMI Enterprises 289]

A business broker will tell you that its all about your past tax returns.

Equipment in this business means very little and if you get 20% of value your lucky.

Surely you see that most I am implying concerns the contracted work itself.

If you got 4.5 times your annual gross for a division then that is a huge exception don't ya think? Apparently I stand corrected and you did not accidentally leave out "monthly".

I agree with what you say about what equipment means.

I don't have a horse in the running and don't know the specifics what owners had to provide a broker in way of returns. Much is done without broker though in small time stuff so..

[MMI Enterprises 289]

I have bought and sold a p/w business.

As a buyer of a solid, established business I would look to pay:

50% of the retail value of the equipment (excluding vehicles), and 25-50% of gross sales, dependent on the strength (profitability and retention) of the accounts.

Business brokers are worse than used car salesmen, and in the States generally unregulated, stay away, you need a good accountant and good lawyer.

I hope anyone with a 1 man op. is not planning on funding their retirement by selling their business and using any of the pie in the sky #s people throw around. You'll be washing until your last day.

John,

I assume you mean to use the term "annual" on yer figures?

If so then it sounds good to me and translates about same as what I hear.

[Ron Musgraves 240]

50% of the retail value of the equipment (excluding vehicles), and 25-50% of gross sales, dependent on the strength (profitability and retention) of the accounts.

Business brokers are worse than used car salesmen, and in the States generally unregulated, stay away, you need a good accountant and good lawyer.

You dont have to be licensed in jersey? WOW

I thought we lived in the wild west. You see, in arizona or chicago the buyer if serious signs a discloser. he also put money in escrow to review the buz.

I guess jersey they just shoot you if you cross them?LOL

[John Doherty 126]

Figures are annual.

In most states no biz broker license is required unless real estate changes hands, then you need to get a licensed realtor involved.

As a seller, I'd be looking for 50-75% of retail equipment value, excluding vehicles, and 50-100% of prior yr gross sales.

This is strictly for commercial accounts only, residential gross sales hold very little, if any value. I'd say for residential you'd pay or get anywhere from 0-10% of prior years gross sales.

As Ron said always get a non-disclosure, and add a no-compete (don't want someone trying to poach you customers while your trying to sell).

I'd get some $ in hand before you hand over the meat of your info. too.

[Tmrrptr 164]

I've seen advice presenting an x times gross in an attempt to calculate value of a business.

It's all hinged on enthusiasm of a potential buyer.

And I'll be a stick in the mud, again...

I do not feel we have stable market conditions at this point in time. Business is on a down cycle, related to the housing bubble.

Now is not a good time to sell anything and I certainly would not buy.

[john@AEC 37]

G'day All

Thanks for all the comments - this place is always interesting!!!

I've received some extra info from the seller, and examined some accounting methods recommended for valuing this type of business.

The business has 22 regular clients, with jobs done weekly, monthly, 2,3,6 & 12 monthly. The clients have been using this business for 1 year up to 14 years (half for over 8 years). About half the t/o comes from 3 clients (2 x weekly & 1 monthly), with the next quarter coming from 4 clients (1 weekly & 3 monthly). Most of the jobs are between 45min & 1hr 15min away (but I still need to find out the travel/timing constraints to minimise my travel and maximise the number of jobs done when I'm out). T/o is about $90,000 pa and the seller claims he works an average of 20 hours/week (though I suspect that is charge out time only and doesn't include travel, maintenance & preparation or administration). I haven't seen the Profit & Loss statements, but assume a generous Net Profit of $10,000 pa.

The equipment includes; vehicle (14 years old), trailer, 2 x cold water pressure cleaners (3000psi @ 5gpm - Kubota 22hp diesel & 4gpm - B&S 16hp), 2 x surface cleaners (1 vacuum ports), electric vacuum, Oil Separator, Ride-on Scrubber and all the usual reels, hoses, lances etc. and has a "book value" of $20k - $25k.

There are three methods recommended to me for valuing this type of service business with regular/repeat contracts.

1. Capitalized Earnings or Return on Investment; this uses a percentage return (usually from 20% to 50% pa) that reflects the risk involved. The "magic" is agreeing with the seller on a rate of return that reflects the risks involved in having the same Net Profit in the future.

2. Cash Flow; use the Net Profit to repay the Purchase Price over (usually) 3 to 5 years.

3. Excess Earnings; the Net Profit is made up of Return on Assets (3% or 4% above business loan rate) and Excess Earnings. The value of the business is Value of Assets plus Excess Earnings multiplied by a risk factor of between 2 (higher risk) & 5 (lower risk), again the "magic" is agreeing with the seller on the risk involved in obtaining the same future Net income.

The risks to this business are the usual; clients leave (they may close/sell/refurbish etc - 7 out of 22 clients bring in 75% on income), clients ability to afford the service, water restrictions tighten - reducing allowed frequency (we are on level 6), EPA/city council enforces "nothing down the drain but rain" & "no crap in the creek", equipment problems, vehicle problems, operators health....

So, I says thinking out loud, I feel this is a bit riskier than average (but what would I know?). If I use method 1 and a return of 35%, or method 2 and want to repay Purchase price in 3 years, or method 3 and risk factor of 3, I get selling prices of $29k, $30k & $40k - $45k. But of course, none of this is written in stone, so these figures can only be considered as starting points for negotiation.

That's enough thinking for now.

[PressurePros 249]

John, you can see why it is difficult assessing a service business's value. I have looked at other PW'ing companies, landscape and painting companies. Not one of them was worth anywhere near what the owner thought it was worth. This is understandable.. these are our babies.

I would pay someone three-five times the net earnings of their business if they were taking out a substantial salary and had employees in place (that came with the business) to do everything. If a service companies owner lifts a wand, then you have to factor training, payroll etc. When you factor the shrinking business potential into the equation.. well, thats why you see a number like I posted. I would be the wrong guy for someone to come to approach an offer to buy. I am breeding my guy Jason to take over everything. He is not looking for an investment and will be happy being a working owner until the end. I'll hold the paper in lieu of a higher selling price then I would get on an open market.

[MMI Enterprises 289]

So what he askin?

Offer like 20k monthly net based on bulk buying, another 5k for his name, and maybe 10-15k for the equipment..

Has a Rideon eh?..may be worth that of a washer or more..

[Ron Musgraves 240]

bottom line you'll get what they are willing. LOL

[john@AEC 37]

Well folks, thanks for you input/thought starters.

I did buy the business. How much did I pay? less than they wanted, but more than I should have (the difference will be recovered by selling duplicate equipment & vehicle).

My domestic work has been quiet (it's our slow season now) but with the new business I've been regularly working 5 & 6 days a week and regularly exceeding my income target. I'm generally booked up 3 to 5 weeks ahead, so have lost many opportunities because I can't do it "by Friday".

Thanks again.

[PressurePros 249]

Good luck with it, John. Sounds like it was a good maneuver.

PS: Send some of that winter wind up here. Going to be over 100 today and half of the coming week.