Advice on asking price for business.

[big head]

I am looking at buying an established retail business. Here are the
specifics I have now.
61.5k in assets
80k in discretionary earnings
asking price is 395k.

That seems high to me, but I have no experience in these matters.
Any advice or guesses as to where I should start negotiating would be
great.
I have not seen tax returns yet, they are in the mail

Thanks

[Wayne Lundberg]

Post by big head
I am looking at buying an established retail business. Here are the
specifics I have now.
61.5k in assets
80k in discretionary earnings
asking price is 395k.
That seems high to me, but I have no experience in these matters.
Any advice or guesses as to where I should start negotiating would be
great.
I have not seen tax returns yet, they are in the mail
Thanks

The rule of thumb is not to pay more than the average yearly sales for the
past three years, multiplied by a factor you consider realistic once you
take over management and improve sales. Let's face it, you have a choice of
putting your money in a savings account that guarantees you at least 3.5%
per year... and even the best retailer in the world, Wal-Mart make a net
profit of no more than 3% per year and work on gross margins of no more than
15% on average.

Assets and inventory don't count worth a diddly today because of the rapid
changes and innovations that make old stuff obsolete real quick. The
inventory may be listed as an asset but in reality it is only worth what it
can be sold at. A one-time client of mine has a warehouse full of brand new
and excellent speakers and he can't get rid of them by having a barnyard
sale because they are listed at well over market value by his bank and the
bank insists on keeping them listed as assets. Go figure.

Wayne
www.pueblaprotocol.com

[John A. Weeks III]

Post by big head
I am looking at buying an established retail business. Here are the
specifics I have now.
61.5k in assets
80k in discretionary earnings
asking price is 395k.
That seems high to me, but I have no experience in these matters.
Any advice or guesses as to where I should start negotiating would be
great.
I have not seen tax returns yet, they are in the mail

Every type of business has a different formula for putting
a value on the business. We would need to know a little more
about what kind of business, what kind of clients, and how
the money is earned. For example, if these contracts are
locked in for 30 years and take no effort to service, then
$395K might be a bargain. Then again, if these are customers
that come and go, and it costs $500 to obtain each new
customer, and each new customer is only worth $510, then
there might not be any real value at all here.

-john-

[big head]

Post by John A. Weeks III

Post by big head
I am looking at buying an established retail business. Here are the
specifics I have now.
61.5k in assets
80k in discretionary earnings
asking price is 395k.
That seems high to me, but I have no experience in these matters.
Any advice or guesses as to where I should start negotiating would be
great.
I have not seen tax returns yet, they are in the mail

Every type of business has a different formula for putting
a value on the business. We would need to know a little more
about what kind of business, what kind of clients, and how
the money is earned. For example, if these contracts are
locked in for 30 years and take no effort to service, then
$395K might be a bargain. Then again, if these are customers
that come and go, and it costs $500 to obtain each new
customer, and each new customer is only worth $510, then
there might not be any real value at all here.

It consists of selling new clothing and accessories at state and county
fairs. The assets are 3 trailers and FF&e valued at 21k and 40k of
inventory. They have spaces reserved for the coming year. Gross sales
last 3 years avg 275k. expenses avg about 25k, almost all of which is
deductible. Cost of goods sold avg 140k.

[John A. Weeks III]

Post by big head

Post by John A. Weeks III

Post by big head
I am looking at buying an established retail business. Here are the
specifics I have now.
61.5k in assets
80k in discretionary earnings
asking price is 395k.
That seems high to me, but I have no experience in these matters.
Any advice or guesses as to where I should start negotiating would be
great.
I have not seen tax returns yet, they are in the mail

Every type of business has a different formula for putting
a value on the business. We would need to know a little more
about what kind of business, what kind of clients, and how
the money is earned. For example, if these contracts are
locked in for 30 years and take no effort to service, then
$395K might be a bargain. Then again, if these are customers
that come and go, and it costs $500 to obtain each new
customer, and each new customer is only worth $510, then
there might not be any real value at all here.

It consists of selling new clothing and accessories at state and county
fairs. The assets are 3 trailers and FF&e valued at 21k and 40k of
inventory. They have spaces reserved for the coming year. Gross sales
last 3 years avg 275k. expenses avg about 25k, almost all of which is
deductible. Cost of goods sold avg 140k.

To me, I'd think that anyone could do this. I don't see
anything special about what they are doing that makes this
deal worth anything more than the value of the trailers and
inventory. And inventory has to be written down to account
for stale merchandise. I'd have a hard time paying more
than $30K, and even that might be too much. You could start
this same business on your own for $30K, so that should be
the top value.

-john-

[big head]

Thank you, that pretty much confirmed what i thought. I also cant find
any evidence that owners make 80k in compensation like they claim.
They show it on their financials, but I can find anyhwere that they
show it on the tax return. They usually break even or worse and all
that they might put in their pocket is the depreciation.

[Mike Turco]

Post by big head
Thank you, that pretty much confirmed what i thought. I also cant find
any evidence that owners make 80k in compensation like they claim.
They show it on their financials, but I can find anyhwere that they
show it on the tax return. They usually break even or worse and all
that they might put in their pocket is the depreciation.

Good for you for doing the research!

There are a lot of opportunities out there for you. As John mentions, you
could start your own business just like this guy has for about 30k. Given
what you know about how he's doing, though, why would you want to do so?
What are your real interests in starting a business? Did this business
appeal to you for some reason other than its potential for (mediocre) cash
flow?

[big head]

Post by Mike Turco

Post by big head
Thank you, that pretty much confirmed what i thought. I also cant find
any evidence that owners make 80k in compensation like they claim.
They show it on their financials, but I can find anyhwere that they
show it on the tax return. They usually break even or worse and all
that they might put in their pocket is the depreciation.

Good for you for doing the research!
There are a lot of opportunities out there for you. As John mentions, you
could start your own business just like this guy has for about 30k. Given
what you know about how he's doing, though, why would you want to do so?
What are your real interests in starting a business? Did this business
appeal to you for some reason other than its potential for (mediocre) cash
flow?

My wife and I are just tired of working for someone else, we constantly
have to worry about our jobs. That business just appealed to our love
of travel, but after we thought about it some more, we realized it
would not be possible to be away from home that long. We are looking
at various retail and restaurant opportunities.

Thanks for all the replies

[Tech Guy]

I too am looking for a business and spent the first 5 months reading about
business valuation. The best book I found is entitled The Business Valuation
Book by Scott Gabehart and Richard Brinkley. Brinkley is the former CEO of
VR Business Brokers and an analysis of their database of businesses that
have sold provides the statistical framework for the book. It is an American
Management Association book, ISBN 0-8144-0642-4. It comes with an
accompanying CD that gives many "rules of thumb" on valuing various types of
businesses. I'd recommend you get it so you can back up your assertion as to
value.

Post by big head
I am looking at buying an established retail business. Here are the
specifics I have now.
61.5k in assets
80k in discretionary earnings
asking price is 395k.
That seems high to me, but I have no experience in these matters.
Any advice or guesses as to where I should start negotiating would be
great.
I have not seen tax returns yet, they are in the mail
Thanks

[Wayne Lundberg]

Post by Tech Guy
I too am looking for a business and spent the first 5 months reading about
business valuation. The best book I found is entitled The Business Valuation
Book by Scott Gabehart and Richard Brinkley. Brinkley is the former CEO of
VR Business Brokers and an analysis of their database of businesses that
have sold provides the statistical framework for the book. It is an American
Management Association book, ISBN 0-8144-0642-4. It comes with an
accompanying CD that gives many "rules of thumb" on valuing various types of
businesses. I'd recommend you get it so you can back up your assertion as to
value.

Post by big head
I am looking at buying an established retail business. Here are the
specifics I have now.
61.5k in assets
80k in discretionary earnings
asking price is 395k.
That seems high to me, but I have no experience in these matters.
Any advice or guesses as to where I should start negotiating would be
great.
I have not seen tax returns yet, they are in the mail
Thanks

Why not just put your comments in the newsgroup and go from there. Why do
you want me to do research on a subject that I have been dealing with for
years and know what the heck I'm talking about.


Wayne