Whats your business worth?

[PressurePros 248]

Good topic brought up on another board. In a nutshell, my contention is that a trade business is worthless if the owner participates in any part of the operation other than upper managment. When I say worthless I mean you cannot sell it for anything other than the value of its tangible assets.

Thoughts?

[JFife 14]

I sadly agree, with the exception of a commercial-based biz that has accounts to throw into the mix. Even that isn't a fortune.....seems I remember grasscutters were getting about "three cuts" as the sale-price on their accounts.

[Ron Musgraves 240]

Good topic brought up on another board. In a nutshell, my contention is that a trade business is worthless if the owner participates in any part of the operation other than upper managment. When I say worthless I mean you cannot sell it for anything other than the value of its tangible assets.

Thoughts?

I can agree with that, however no experience trying to sell at that stage to back it up. I can see how perception from customers would be very different see me one day and you another.

Jon, i think residential would be tougher for sure.

[Jeff 232]

Unless you have signed contracts worth a lot of money monthly , not much worth other than assests. Plus any contract could be broken/dropped

[PressurePros 248]

I can see how perception from customers would be very different see me one day and you another.

Exactly, Ron. Thats what makes one's business not worth as much if they are involved in daily operations like selling or PR. Ron ********** himself may be worth a fortune, but unless I can step in, buy it, utilize Ron's systems and make exactly the same money as Ron does, his business doesn't have as much value.

[PressurePros 248]

Right again Jeff but let me pose this to you. I come in tommorrow. I am now 'wannabe Condo King'. Your customers, PM's etc ask, "where's Jeff".

"No fear", I tell them, "I am going to take care of you from now on."

What is your prediction? Would I make the same exact money you are making now?

[Beth n Rod 1,279]

Business turn overs involving long term and on going contracts usually require that the original owner stay on in a consultative capacity for a period of time determined by the condition of sale documents.

In laymens terms for example, Jeff would stay on in a limited capacity to help oversee the changes and introductions of the new management and also to help familiarize them with the accounts.

As far as tangible worth, that is one of the components of value/asset assessment before sale. Other items include equipment, vehicles after depreciations and any debts remaining after amortization. Overhead burden, labor and incidentals are also kept in the picture.

As far as Ken's last question, that would depend on how the whole transition was handled. If Jeff was not a part of it and did not give notice to those he had active contracts with, they would be dropped in a short time most likely. On the other hand, if he were to make the proper introductions and remain as an advisory/consultant (compensated of course) capacity, this would help ease the concerns of those in active contract status. Some may still jump ship if the relationship is not what they are looking for but the buyer would have a better chance of maintaining those accounts than if he just dropped off the face of the earth from them.

Rod!~

[JFife 14]

Re: Jeff's work, which to me (assumption) would fall in a catagory somewhere between residental and commercial. My guess is that he doesn't have signed contracts to come back at repeated intervals, like RonM. would have for cleaning a KFC for instance.

So the way for Jeff to start adding VALUE (per Ken's post) to his biz would be to back off of the driver's seat, and get his PM's to start getting familiar with some other faces/names. Your dream should be for a PM conversation with the HO's to go like this: "We need pressurewashing done. We are going to call JL Powerwash. The guy down there we deal with is named Herschel, I'm not sure if he's the owner or not, but he takes great care of us whenever they do work here."

So long as people say, "oh, we need to call Jeff and get this cleaned!!" You'll never have a biz that can sell for anything but Current Assets. Certainly, that isn't everyone's goal. Some like to stay personal and on top of things. Personally, if my customers forgot that I existed tomorrow it would be the happiest day of my life!! Not just because of the "re-sale" thing---but because they are now purchasing my business, not purchasing "me".

In Rod's last paragraph, he said that "some customers may stay on if properly introduced to new ownership, Jeff stays on to manage, etc". My point is that the customer should have no reason to EVEN KNOW that this took place!! All they know, is Herschel handles things, and it works well for them. The ownership transfer would take place mainly in the office. I'd be more concerned about having a #2 guy on the jobs that the PM's were learning to know/trust in case something happened with Herschel.

People that can AFFORD to buy a business with some intangible assets aren't looking for something where they're going to be friends w/ the client. They want something that is running smoothly.....all they have to do is change the name on the paperwork, watch the books, etc. and make a pre-determined percent profit on their investment. Nothing else. Was talking to a guy that had a small Holdings Co. that would buy small businesses.....getting advice on how to build a biz that will sell well. Two things he cared about: 1) Can he make this certain amount of profit he seeks, and 2) How easy would it be for him to come in a run the biz without knowing anything about it, and were people in place to operate everything??

[Beth n Rod 1,279]

In Rod's last paragraph, he said that "some customers may stay on if properly introduced to new ownership, Jeff stays on to manage, etc". My point is that the customer should have no reason to EVEN KNOW that this took place!! All they know, is Herschel handles things, and it works well for them. The ownership transfer would take place mainly in the office. I'd be more concerned about having a #2 guy on the jobs that the PM's were learning to know/trust in case something happened with Herschel.

That would be unfortunate if the client was not informed of the change. Once they learn of it, they will be very upset to find that such a change has taken place. Besides, there is a federal law called disclosure in the consumer protection act that requires the introduction. This provides them with certain rights and avenues of reconciliation even though nothing else may have changed.

Consumer Protection Act, 2002, S.O. 2002, c. 30, Sched. A

State Offices Administering Business Opportunity Disclosure Laws

http://www.ftc.gov/os/2006/04/R511993BusinessOpportunityRuleNoticeofProposedRulemaking.pdf

People that can AFFORD to buy a business with some intangible assets aren't looking for something where they're going to be friends w/ the client. They want something that is running smoothly.....all they have to do is change the name on the paperwork, watch the books, etc. and make a pre-determined percent profit on their investment. Nothing else. Was talking to a guy that had a small Holdings Co. that would buy small businesses.....getting advice on how to build a biz that will sell well. Two things he cared about: 1) Can he make this certain amount of profit he seeks, and 2) How easy would it be for him to come in a run the biz without knowing anything about it, and were people in place to operate everything??

In studying the necessities for getting into a business and also getting out of it (covering all the bases) it became apparent that it is common practice to have a consultant stay on for a period of time. The changes described above are not the only changes. If a company is incorporated, the incorporation must be dissolved and the new owner must re-incorporate. Also, the EIN filing must be changed, and a new one must be applied for. Also, tax related licenses (if applicable) must be handled in the same respect. These are not transferable according to the paperwork I had to review and get approved. Changes in ownership, sales amounts, and other federal tax collection documents are required.

I realize that the state requirements may be different but the federal ones are across the board.

Rod!~

[JFife 14]

....but wouldn't that only be applicable if you had existing/active contracts?? In the example of "Jeff", I am assuming he doesn't have active contracts--they call when he is needed/or visaversa. In that scenario, I don't see why disclosure would be necessary?? Just like if you sold out this year, and a deck you did last year called for a recoat. There isn't a reason to disclose that Rod Rodriquez is no longer present.....or is there??? I didn't read the link, perhaps it would answer this question, but I am a lout:)

[Beth n Rod 1,279]

Rod was posting from the premise that there are ongoing accounts I believe....

Beth

[Beth n Rod 1,279]

Jon, not so lout please... :)

Yeah, I was speaking in the condition of a business sale with active ongoing contracts.

If in the absence of the above, the customer would not need to know that the business changed hands. There is the ever commonality of different people on a job site performing a service which in the case as you previously referred to would not qualify for concern on either parties part.

Rod!~

[Michael Ahr 14]

Sorry to get in to this late, but here is what we did. We bought an existing business 2 years ago. We filed all the Fed. paperwork(EIN #,reincorporated, even tweaked the name abit-kept the same phone #). With the business we got a past client list of approximately 500 mostly residential customers who look to have work done every 2-3 years. It was up to us to establish ourselves with the past customers and ensure them they would be getting the same high quality work they were accustomed to. Did it work with everybody, no, but we kept most customers that we serviced. Some decided to try another company and we have gotten calls back from them because the other companies work wasn't to our standards. As far as commercial work, we have 1 PM around here that covers most of the HOAs and we are his company. We have been able to provide quality work at a reasonable price and have stayed busy. The lines that have worked best for us is" no, Joe is not with the Co. any more but he trained us before he left and here is how we are going to do your.....". The customer then usually replies"That's the way Joe always did it" and is happy. I guess what I am trying to say is, if the old owner isn't with the co. any longer, an upfront approach is best. I wouldn't want to be jerked around and so I won't jerk around my customers. Just my opinion.

Mike

[PRESSURE PACKED 14]

THAT IS WHY A SELF RUN BIZ IS NOT WORTH MUCH TO ME..IF "JOE" WOULD HAVE HAD EMPLOYEES THE CUSTOMER BASE WOULD HAVE NEVER KNOWN ABOUT THE "CHANGE OF HANDS" AND YOU "THE NEW OWNER" COULD HAVE SHOWN FACE WITH A POLO SHIRT THAT SAID "ACCOUNT SUPERVISOR" OR WHATEVER AND PROBABLY GOTTEN BETTER #S WHEN IT CAME TO REPEAT CUSTOMERS

Mike

[Ron Musgraves 240]

Exactly, Ron. Thats what makes one's business not worth as much if they are involved in daily operations like selling or PR. Ron ********** himself may be worth a fortune, but unless I can step in, buy it, utilize Ron's systems and make exactly the same money as Ron does, his business doesn't have as much value.

I have completely separate divisions and customers don’t even know my name. I have managers that run and completely take care of the business.

I can see your point when you’re a single operator and do everything. I have purchased a lot of equipment from people that have gone out because they couldn’t find a buyer.

In my case if I wanted to sell you might actually increase the sales more by coming involved. My growth accelerates when I do get involved.

I starting another segment of my pressure cleaning now, I will hardly see my other divisions run. I’ll bet I see and increase while I’m away at first.

[MMI Enterprises 289]

Whats your business worth? ...When I say worthless I mean you cannot sell it for anything other than the value of its tangible assets.

Thoughts?

True true...my business is only worth about 900k shy of 1 meeeeeeeeilion Rupi then.. :)

[Jeff 232]

Re: Jeff's work, which to me (assumption) would fall in a catagory somewhere between residental and commercial. My guess is that he doesn't have signed contracts to come back at repeated intervals, like RonM. would have for cleaning a KFC for instance.

So the way for Jeff to start adding VALUE (per Ken's post) to his biz would be to back off of the driver's seat, and get his PM's to start getting familiar with some other faces/names. Your dream should be for a PM conversation with the HO's to go like this: "We need pressurewashing done. We are going to call JL Powerwash. The guy down there we deal with is named Herschel, I'm not sure if he's the owner or not, but he takes great care of us whenever they do work here."

So long as people say, "oh, we need to call Jeff and get this cleaned!!" You'll never have a biz that can sell for anything but Current Assets. Certainly, that isn't everyone's goal. Some like to stay personal and on top of things. Personally, if my customers forgot that I existed tomorrow it would be the happiest day of my life!! Not just because of the "re-sale" thing---but because they are now purchasing my business, not purchasing "me".

In Rod's last paragraph, he said that "some customers may stay on if properly introduced to new ownership, Jeff stays on to manage, etc". My point is that the customer should have no reason to EVEN KNOW that this took place!! All they know, is Herschel handles things, and it works well for them. The ownership transfer would take place mainly in the office. I'd be more concerned about having a #2 guy on the jobs that the PM's were learning to know/trust in case something happened with Herschel.

People that can AFFORD to buy a business with some intangible assets aren't looking for something where they're going to be friends w/ the client. They want something that is running smoothly.....all they have to do is change the name on the paperwork, watch the books, etc. and make a pre-determined percent profit on their investment. Nothing else. Was talking to a guy that had a small Holdings Co. that would buy small businesses.....getting advice on how to build a biz that will sell well. Two things he cared about: 1) Can he make this certain amount of profit he seeks, and 2) How easy would it be for him to come in a run the biz without knowing anything about it, and were people in place to operate everything??

I sure wish I had a Herscel working now

You are right. Mostly the only contracts I have signed are per job. There is no guarantee or real way to have them on a multi year contract. I have properties that clean when they need, want or can afford it.

I do have a few that are on maint. contract, but its not a binding contract except for the $$$ amount

Were's HERSCHEL, I want Herschel

Interesting stuff!!!!

[Jeff 232]

Right again Jeff but let me pose this to you. I come in tommorrow. I am now 'wannabe Condo King'. Your customers, PM's etc ask, "where's Jeff".

"No fear", I tell them, "I am going to take care of you from now on."

What is your prediction? Would I make the same exact money you are making now?

Someone else coming in Probably not, but I am very handsome

But really, you are right, a lot of my sales is directly tied to me, my name & face and the relationships i have developed. I could bring someone and introduce as my manager of biz and probably still keep a good deal of the relationship/work but maybe not all

[MMI Enterprises 289]

Don't kid yerselves too much...ACCOUNTS AND ROUTES CONTRACTED OR NOT ARE ALWAYS WORTH MONEY.. A business up and running that can show gross receipts with proper profit & loss info and an active ongoing schedule is going to be worth at least it's depreciated asset value plus some factor of it's monthly gross receipts. (3 to 6 is common). The gross receipts are akin to an asset and can be associated directly to sellable accounts or routes. Yes name value due to marketing and numbers served is of course at some level an intangeable asset worth hard money and but is likely in direct correlation to the size of the business and it's sales force. To say that a business without much size has no name value would not be true. It's customers and it's potential customers of its service area place a name value to it. Profit is profit and in the end when someone is buying a business the end numbers is what matters as to whether it is profitable to buy. The name value of aka smaller company correspondingly gets smaller as the area served, receipts, sales force , etc. gets smaller compared to the bigger companies. I bet it real easy for some relatively small service related corporations to confuse or forget their offices, warehouses, and equipment as equaling location location location where as small service related business knows full well that location location location is really there service area. They bring it to the customers same as the big boys do.

No buyer but a dumb one would look at the numbers of one and not the other. Material participating type buyers are shoe string if not more frugal and more discriminitive with the numbers basedon the risks involved where as fat cats that are well versed in letting others make them money are more likely to opt for the all in place up and running on its own type businesses when they buy. There surely are more of such folk than the other and them type folk are simply investors and btw sometimes considered gamblers. So my view goes that many of our small businesses, although smaller scale, are worth more comparativley when things such as profit margin or efficiency are considered along side bigger business. The bigger businesses are simply worth some speculative amount to investors.. :)

[Ron Musgraves 240]

I think it all depends on how you build the business.

[PressurePros 248]

Don't kid yerselves too much...ACCOUNTS AND ROUTES CONTRACTED OR NOT ARE ALWAYS WORTH MONEY.. A business up and running that can show gross receipts with proper profit & loss info and an active ongoing schedule is going to be worth at least it's depreciated asset value plus some factor of it's monthly gross receipts. (3 to 6 is common).

I want some of what you're smoking. I offer one times a company's annual gross and that's if it is an established bricks and mortar retail operation. I have always used that formula. Some businesses might be worth more, but I wouldn't buy them. You might be thinking of 3 times net earnings? For a service business I would probably offer .25 times its gross earnings if the company ran tight with good margins.

To say that a business without much size has no name value would not be true. It's customers and it's potential customers of its service area place a name value to it.

Yes, but not much value. A business has value when:

• It has been narrowed down to a group of hands-off systems.

• When every problem has been solved before it arises.

• When management and internal structure are honed and efficient. (ie every job title is defined)

Profit is profit and in the end when someone is buying a business the end numbers is what matters as to whether it is profitable to buy.

Not totally true.. More important to me (ie more valuable to me) is how well an investment generates income with minimal interaction on my part.

Pressure wahsing businesses have two major downfalls working against giving it sellable value.

1) Cheap startup means the market can get flooded and drive down net earnings

2) 98% of them have very high level of owner interaction for daily operation. That's a job, not an investment.

[plainpainter 217]

Ken - if someone say wanted to takeover my painting business, and wanted to invest in my reputation as an honest and quality painting contractor vs. trying to start his own business from scratch. Why wouldn't he just come and work for me and 'takeover' operations - and then when I was fully out of the picture - and he was comfortable with the customer base. Why wouldn't he put an offer on my business? I see your point. But if another prospective owner wants to mimic my business model by working on the jobs as I do as a small time operation. I can't see why they wouldn't want to buy my business from me. I think you are more referring to someone who has no 'hands-on' experience with the trades and just wants to buy a business and have it work turnkey. I think even in the world of high-tech, the more succesful companines have been those where the board are comprised of engineers willing to know first hand every part of the business. A hands-off type of company is a dream that probably won't come true for most of us. Even in my business - my helpers just don't scrape as well as I do. That extra bit of effort is what keeps my jobs lasting longer than the competition. If I just told my workers to scrape and then prime - it would be no better than my competition unless I got involved - the thing is how do I replace ME? Who is going to go that extra length for quality and also know when to stop when there is no further point? Perhaps that is why most major chains have never succesfully franchised painting operations.

[PressurePros 248]

I'm not saying you couldn't find someone to buy your business. Just like I build a turnkey rig for 10g's and sell it on ebay for $15K. There are the guys out there that would be willing to buy a small trade business. They will buy a job because they don't mind working for a living because it beats working for the man. They will cash in the old 401K and borrow some money from the mother-in-law. A business like Just Plain Painting that requires hands on working and management better be priced in the realm that a guy like described above can afford. What are we talking..maybe $40K tops? Beyond that price you are looking at a different level of savvy investor.

Dan, no one is ever going to do work like you (employee wise) If they could, they would own their own business. The key is to establish acceptable performance criteria as well as turnkey systems that allow meeting that criteria. There are ways it can be done. It involves written and replicable procedures and QC management.

Hopefully this helps you understand the difference and why I say a small, owner run trade business is relatively worthless beyond its tangibles.

[plainpainter 217]

QC management....dream a little dream.....yeah I hear you Ken. Most painting contractors I doubt hardly get sold to others. I have seen plumbing businesses that were bought and sold - but they always had a brick and mortar place to go along with it, even if it was rented space. Maybe that's the trick - owning some commericially zoned property with a garage building and a front office. But I doubt most people think of selling their business. I just think about busting hump to make some money. Oh yeah - I am getting my 7'x12' trailer next week - I have a direct drive AR pump on a honda 13 hp motor for 3800psi 4.0GPM's - and I will get some hose reels from Bob - and a 275 gallon tank - some hoses - and I think I will be good for a while. Maybe my business will be worth more with pressure washing services?

[PressurePros 248]

You know what's funny, Dan? I thought I was the key to PressurePros' field work with the same mentality that you stated above. How about this for a piece of Humble Pie.. My company production rate has almost doubled over this time last year. Same amount of crews. Like the song says.. you got to know when to hold 'em and when to fold 'em. I'm precise, meticulous and SLOW. I rented an extra rig and dragged it around this week. I did three jobs. The other two crews did 14. I was never meant to be out doing this stuff. God has showed me this again and again (like the article I posted about on perfectionism). I'm starting to get the picture.