
You are not logged in. Consider these WOODWEB Member advantages:
A personal "member history" that displays your posts at WOODWEB
Your forms at WOODWEB will be filled in automatically
Create your personal "My Favorites" page
Numerous automatic notification options
Learn more about WOODWEB Member benefits ...
Business value -- 0 -- 
3/7

I'm in talks with my employer of the past 4 years to buy his shop as he is ready to retire. We're trying to come up with a number. The owner and I do all the office work, drafting, operate the CNC, and also do a lot of work in the shop and installing. There is 1 full time employee who is quite good and has been with the company a very long time, he does all of the finishing.
As for the financials, there is about $100k in cash and receivables. I'm not sure how to put a number on the fixed assets because they are all fully depreciated, old, and wouldn't fetch much at auction, but my best guess is somewhere between $40k and $50k. As for profit, there basically is none. Total sales have averaged about $400k the past 4 years.
What's a ballpark number to value this business at, with the assumption that I inherit the cash and AR?
3/7 #2: Business value ...

There isn't much here beyond the cash and AR. Even the auction value of the machinery seems high. And don't let him snow you with "goodwill." Hate to say it, but if your employer wanted to cash out of this business he should have run it differently. Is there another buyer in the picture? If not, you really don't have to offer him anything.
Just my opinion though. You should have an accountant of your own to review this with, preferably someone who has been involved with the sale of small businesses. That person should be able to help you.
Good luck!
Paul Downs
3/7 #3: Business value ...

You need to back the "expenses" and "bonuses" to the owner back into the profit to get an accurate cash value.
If he puts 22k in a IRA or buys a new truck and expenses it or lots of other places that there could be cash going to the owner that reduce profit for tax purposes would need to be built back into a cash flow statement. then if the business produced x dollars of income a year the investment would be based on goodwill + assets plus the value of the income. This assumes you can do everything he does. The name and location have some value, the cash and a/r have value, but if you get the cash and a/r you generally get the liabilities and warranties.
You need to consult an accountant to help you get a true value and then you need to determine if its worth that to you
A-
3/7 #4: Business value ...

Thanks for the reply Paul.
No, there is no "goodwill" involved since there are no profits to pay any "goodwill" from.
It's hard for me to wrap my head around the fixed assets, however. If I were to set up a new shop just like the one I'm working in now, it would cost me north of $50k. But if the owner were to cash out now, he would likely get $20k or less. So there seems to be a "window" of value there that is hard to put a number on.
I don't know of any accountant who would have any idea of the cost to set up a slider, and edgebander, a CNC machine and the software to run it, compressed air lines, and a host of other machines that required specialized knowledge.
3/7 #5: Business value ...

Ok so if I am reading this correctly....
1. You say there is no profit, and likely hasn't been. To me this is a red flag. Either lack of sales, and or pricing that is too low. I hate to tell it as it is, but this would be a big concern. This could be fixed but indicates a problem as is.
Given that, I am going to give you an important question to think about.
2. Does the business have existing clients. Sales, and contracts in the pipeline, etc? Is there a sales staff with active leads? This is important because.
If the business does not have existing clients, sales & contracts, active leads regardless of what you would like to call it you are essentially buying assets, perhaps taking over a lease. You would be in effect starting your own business, as you are primarily purchasing assets.
I would be making sure that there is indeed a business to purchase. Otherwise my offer would be based on the value of tangible assets (real property, equipment, machinery ,etc...) If you have to do all the hard work of developing sales, and marketing, you might as well start your own business, and perhaps agree to hire some of the former companies employees.
3/7 #6: Business value ...

Furthermore another factor to consider.
How much business is from existing clients? Like I said in my past post, if most of the sales are coming from new customers, you are going to have to go out and generate these leads, or hire someone to do so.
Hypothetically if you are looking at purchasing a business and they have 100k in sales for example. There is a big difference if that 100k in sales is
1. mostly from new clients that will not purchase from you a gain, and
2 100k in sales to wholesale accounts for example that make consistent purchases.
In regards to example 2 there is "business to purchase"
Example 1 would be more of a situation where you are buying inventory, assets, branding, etc and essentially starting your own business.
3/7 #7: Business value ...

Website: http://www.curvedmouldings.com
You need to consider spending $1000 to $1500 for a proper business appraisal. This will show you what they could sell the business for in the open market.
A general guideline is that a business with $50,000 to $100,000 in profit will be worth somewhere around 1.5 to 3 times max. the annual profit. The higher the profit the stronger the ratio.
Profit includes any money taken out of the business by the owner.....whether as salary or or not. So if your owner was taking home $75,000 a year the business is likely worth in the neighborhood of $110,000 to $225,000. This is a very rough estimate/guess but gives you a peak at how an appraiser will look at the business.
Unfortunately machinery generally does not come into play in the value. If the business is worth $200,000 it doesn't matter whether that profit is being made with $10,000 worth of machinery or $100,000 worth of machinery. Weird and sad........but pretty much the way the appraiser is going to view the business.
Inventory on the other hand is taken into consideration. That is as long as it is viable material and not items that have been sitting around for years because there is no use for them.
Hope this helps to begin to give you an idea on how this all works.
BH Davis
3/7 #8: Business value ...

In response to Alan and Ake,
I'm privy to the books for the past 4 years, and there are no "hidden" bennies going to the owner. OTOH, there is still no profit or bonuses at year end. I don't consider it a red flag, it's just something to consider in regards to assigning a value to the business.
There is no sales or marketing structure. It's all word of mouth and existing clients, some of which date back decades. Again, not a red flag since neither of us expect to assign goodwill value. There is roughly $400k/year in sales to wholesale customers that I fully expect to continue going forward.
I can, and have been, doing everything the owner does, so I'm ready for him to exit the picture without affecting operations.
3/7 #9: Business value ...

A few things to think about and balance in your projections
1) How much does the current owner take out in total for salary/draws/benefits/auto etc? If he was out of the picture, that is the gross profit for this business.
2) Assuming the owner spends time in the business actively working, how much will you have to pay another person to pick up some of your duties and some of his? Unless the current owner is mostly absent from operating the business and from performing actual work in the business, there is no way you can long term do both your job and his when he exits. The cost of the extra help needed eats into the gross profit you'd earn from the owner exiting. You may find the sum of those two numbers is negative.
3) What happens if your biggest commercial wholesale client leaves? What if more than one client leaves? You need to have a plan to replace that lost business if you want to maintain what is happening now. And you need to be prepared to shrink if necessary.
4) You will probably need to add more clients if you want to grow the business. Where will they come from and what is your plan to bring in their business?
I could keep going. That's probably enough for you to think about in this round.
3/8 #10: Business value ...

In a small business, the business can basically be the owner. He has all the history, contacts, and customer loyalty. What will happen when he is not there? Do you think you can maintain customer loyalty? How do you propose paying for the business when it presently doesn't turn a profit with old outdated machinery that you will be buying? How will you get financing when the bank sees the profit/loss statement? I would only pay scrap value for the machinery. That is what he would get at auction.
3/8 #11: Business value ...

just a point. Profit does NOT include any money taken out by the owner- whether salary or not.
What's left over after all expenses are paid, and the owner takes a reasonable salary for the efforts he puts into the business- that's profit.
3/8 #12: Business value ...

Dean C,
Technically I would agree with you. But from an appraisal perspective what the owner takes from the business is considered the profit/income that determines the value of the business.
If the owner hires someone to do what he has been doing his/her cut becomes less, and the appraised value of the business becomes less.
Every situation is different of course and the final value of a business will be solely determined by what someone is willing to pay.
BH Davis
3/8 #13: Business value ...

Dean, there is no profit in this business. The owner salary is roughly $80k.
Rich,
Would you sell your business for the scrap value of your machinery? Wouldn't you just have an auction instead?
There is value to be paid for the customer base, it's just a matter of figuring out how much.
3/8 #14: Business value ...

Grant
You ever been to an auction with old 3 phase commercial machines? Around here, they bring close to scrap prices. I would also argue that the customer base will automatically transfer. It takes years of hard work to build customer loyalty. With a new owner, this relationship will have to be rebuilt.
3/8 #15: Business value ...

I pretty much agree with Rich about the value of older equipment. Individuals don't buy it because of the 3 phase, Production oriented businesses don't because it's old and likely to have high maintenance costs, lost production time etc. In a business this size almost all the value leaves with the owner. If you have established a good working relationship with the repeat customers, that has some value. If he has been actually taking $80K out for salary, that in some sense is "profit." Profit in a micro business is difficult to measure. What if he had been taking $20 or $200K? The picture would look a lot different. So would the value of the business.
Seems like a lot depends on where you wan to go with the business. Continue as is? Ramp up production, hire more. Strange as it sounds, increasing production, costs, quite a lot actually. Do you have access to $ other than a bank loan?
3/12 #16: Business value ...

A business has value to the extent it can generate profits and the value of it's assets. The profit is probably the difference between the owners salary and what you could pay someone to do his job.
It sounds more like you are buying a job.
3/12 #17: Business value ...

On the same lines as what Frank just said it looks like the current owner may be buying a job for a long time.
If the leads and sales that exist have expectations of low prices, why pay to continue that cycle, it needs to be changed to get in more profitable customer base that is in the niche of where you want to be.
You can always structure the deal that the sales price is based on asset base plus a percentage of actual profits for existing customers and leads. ie if what you say is true, you get paid, if it isn't you don't
A-
3/12 #18: Business value ...

Alan,
I think what you proposed makes the most sense: assets + percent of sales. So I would essentially be paying the current owner a sales commission every year. That protects me if those sales falter. And it protects the owner if I can't figure out how to make a decent salary based on those sales.
The question then is, what is a reasonable sales commission to pay for that existing client base? And for how long?
0 -- 
Buy & Sell Exchanges | Forums | Galleries | Other Resources | Site Map
Buy and Sell Exchanges
Job Opportunities and Services Exchange
Employment opportunities and services within the woodworking industry
Lumber Exchange
A worldwide buy/sell exchange for lumber and wood products
Machinery Exchange
A worldwide buyer and seller exchange for woodworking machinery and equipment.
Classified Ad Exchange
Classified advertising for the woodworking industry (for advertisements that do not include machinery, lumber products and employment listings)
Forums
Adhesives Forum
Discussing topics related to adhesives within the woodworking industry
Architectural Woodworking Forum
Discussing quality standards and production of architectural wood products
Business and Management Forum
A forum for the discussion of business topics: from sales and marketing to dealing with difficult customers.
Cabinet and Millwork Installation Forum
Discussing all aspects of installation issues encountered by cabinet and millwork installers.
Cabinetmaking Forum
Discussing 32mm and face frame cabinet construction including fabrication, casegoods design, and installation.
CAD Forum
Shedding light on the all-too-often shadowy world of CAD.
CNC Forum
Discussing CNC (computer numerically controlled) woodworking equipment, software, and automated product manufacturing.
Dust Collection, Safety and Plant Operation Forum
Discussing topics related to maintaining a safe and productive working environment.
Professional Finishing Forum
Finishing issues for the production environment
Forestry Forum
The science and art of forest cultivation and timber management, planting, surveying, tree diseases, silviculture and timber harvesting
Professional Furniture Making Forum
Helping professional furniture makers improve quality, save time, and increase profits
Laminating and Solid Surfacing Forum
Issues related to laminating and solid surface materials and processes
Commercial Kiln Drying Forum
Discussions covering issues faced be commercial drying operations that process at least 750,000 bd. ft. of lumber per year
Sawing and Drying Forum
Discussing topics related to primary processing and drying of lumber
Solid Wood Machining Forum
Discussing topics related to the machining of solid wood
Value Added Wood Products Forum
Learn how to improve your output, find new markets, and boost sales of your lumber products
Veneer Forum
Discussing topics related to veneer processing, manufacturing, and fabrication
WOODnetWORK
An electronic discussion group for woodworkers throughout the world
Galleries
Project Gallery
Where professional woodworkers can post examples of their work
Sawmill Gallery
Professional primary processing companies display and describe their sawmill facilities
Shop Gallery
Professional woodworkers display and describe their shop facilities, products and equipment
Shopbuilt Equipment Gallery
Professional woodworker's jigs, rigs, and shopbuilt equipment
Other Resources
Industry News
Late-breaking news from all sectors of the wood industry
Video Library
Index of industrial woodworking related digital videos on the web
Auctions, Sales and Special Offers
Advertisers offering woodworkers discounted prices on good and services, and announcements of upcoming auctions
FORUM GUIDELINES: Please review the guidelines below before posting at WOODWEB's Interactive Message Boards (return to top)
WOODWEB is a professional industrial woodworking site. Hobbyist and homeowner woodworking questions are inappropriate.
Messages should be kept reasonably short and on topic, relating to the focus of the forum. Responses should relate to the original question.
A valid email return address must be included with each message.
Advertising is inappropriate. The only exceptions are the Classified Ads Exchange, Machinery Exchange, Lumber Exchange, and Job Opportunities and Services Exchange. When posting listings in these areas, review the posting instructions carefully.
Subject lines may be edited for length and clarity.
"Cross posting" is not permitted. Choose the best forum for your question, and post your question at one forum only.
Messages requesting private responses will be removed - Forums are designed to provide information and assistance for all of our visitors. Private response requests are appropriate at WOODWEB's Exchanges and Job Opportunities and Services.
Messages that accuse businesses or individuals of alleged negative actions or behavior are inappropriate since WOODWEB is unable to verify or substantiate the claims.
Posts with the intent of soliciting answers to surveys are not appropriate. Contact WOODWEB for more information on initiating a survey.
Excessive forum participation by an individual upsets the balance of a healthy forum atmosphere. Individuals who excessively post responses containing marginal content will be considered repeat forum abusers.
Responses that initiate or support inappropriate and off-topic discussion of general politics detract from the professional woodworking focus of WOODWEB, and will be removed.
Participants are encouraged to use their real name when posting. Intentionally using another persons name is prohibited, and posts of this nature will be removed at WOODWEB's discretion.
Comments, questions, or criticisms regarding Forum policies should be directed to WOODWEB's Systems Administrator
(return to top).
Carefully review your message before clicking on the "Send Message" button - you will not be able to revise the message once it has been sent.
You will be notified of responses to the message(s) you posted via email. Be sure to enter your email address correctly.
WOODWEB's forums are a highly regarded resource for professional woodworkers. Messages and responses that are crafted in a professional and civil manner strengthen this resource. Messages that do not reflect a professional tone reduce the value of our forums.
Messages are inappropriate when their content: is deemed libelous in nature or is based on rumor, fails to meet basic standards of decorum, contains blatant advertising or inappropriate emphasis on self promotion (return to top).
Libel: Posts which defame an individual or organization, or employ a tone which can be viewed as malicious in nature. Words, pictures, or cartoons which expose a person or organization to public hatred, shame, disgrace, or ridicule, or induce an ill opinion of a person or organization, are libelous.
Improper Decorum: Posts which are profane, inciting, disrespectful or uncivil in tone, or maliciously worded. This also includes the venting of unsubstantiated opinions. Such messages do little to illuminate a given topic, and often have the opposite effect. Constructive criticism is acceptable (return to top).
Advertising: The purpose of WOODWEB Forums is to provide answers, not an advertising venue. Companies participating in a Forum discussion should provide specific answers to posted questions. WOODWEB suggests that businesses include an appropriately crafted signature in order to identify their company. A well meaning post that seems to be on-topic but contains a product reference may do your business more harm than good in the Forum environment. Forum users may perceive your references to specific products as unsolicited advertising (spam) and consciously avoid your web site or services. A well-crafted signature is an appropriate way to advertise your services that will not offend potential customers. Signatures should be limited to 4-6 lines, and may contain information that identifies the type of business you're in, your URL and email address (return to top).
Repeated Forum Abuse:
Forum participants who repeatedly fail to follow WOODWEB's Forum Guidelines may encounter difficulty when attempting to post messages.
There are often situations when the original message asks for opinions: "What is the best widget for my type of shop?". To a certain extent, the person posting the message is responsible for including specific questions within the message. An open ended question (like the one above) invites responses that may read as sales pitches. WOODWEB suggests that companies responding to such a question provide detailed and substantive replies rather than responses that read as a one-sided product promotion. It has been WOODWEB's experience that substantive responses are held in higher regard by our readers (return to top).
The staff of WOODWEB assume no responsibility for the accuracy, content, or outcome of any posting transmitted at WOODWEB's Message Boards. Participants should undertake the use of machinery, materials and methods discussed at WOODWEB's Message Boards after considerate evaluation, and at their own risk. WOODWEB reserves the right to delete any messages it deems inappropriate. (return to top)
Forum Posting Form Guidelines
|
Your Name
|
The name you enter in this field will be the name that appears with your post or response (return to form).
|
Your Website
|
Personal or business website links must point to the author's website. Inappropriate links will be removed without notice, and at WOODWEB's sole discretion. WOODWEB reserves the right to delete any messages with links it deems inappropriate. (return to form)
|
E-Mail Address
|
Your e-mail address will not be publicly viewable. Forum participants will be able to contact you using a contact link (included with your post) that is substituted for your actual address. You must include a valid email address in this field. (return to form)
|
Subject
|
Subject may be edited for length and clarity. Subject lines should provide an indication of the content of your post. (return to form)
|
Thread Related Link and Image Guidelines
|
Thread Related Links posted at WOODWEB's Forums and Exchanges should point to locations that provide supporting information for the topic being discussed in the current message thread. The purpose of WOODWEB Forums is to provide answers, not to serve as an advertising venue. A Thread Related Link that directs visitors to an area with inappropriate content will be removed. WOODWEB reserves the right to delete any messages with links or images it deems inappropriate. (return to form)
|
Thread Related File Uploads
|
Thread Related Files posted at WOODWEB's Forums and Exchanges should provide supporting information for the topic being discussed in the current message thread. Video Files: acceptable video formats are: .MOV .AVI .WMV .MPEG .MPG .FLV .MP4 (Image Upload Tips) If you encounter any difficulty when uploading video files, E-mail WOODWEB for assistance. The purpose of WOODWEB Forums is to provide answers, not to serve as an advertising venue. A Thread Related File that contains inappropriate content will be removed, and uploaded files that are not directly related to the message thread will be removed. WOODWEB reserves the right to delete any messages with links, files, or images it deems inappropriate. (return to form)
|
|
|
|