Question about buying a buisness

Discussion in 'The Pub' started by Melodic Dreamer, Jul 11, 2018.


  1. Melodic Dreamer

    Melodic Dreamer Member

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    I made a different kind of offer. She has the business and on the side she works 12 hours a week with adult sex offenders. She wants to be rid of the everyday responsibilities of a business owner, but she’s continuing her work with sex offenders. There isn’t a lot of places who would want to rent to that type of work. Most would charge between $500-&700 a month for 2 Days a week.

    If I get the business I have another location right down the road. It’s newer, better parking, one level and all out better for less money. I’ve offered her free rent for 5 years where she can use a group room for 12 hours a week in exchange for the business. This way she get what she wants, and her employees will be taken care of.
     
  2. picton

    picton Member

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    Makes sense, did she agree? In the meantime you've valued the business at $36k, and without resorting to DCF, EBITDA and goodwill amortisation, too.
     
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  3. teleguy1974

    teleguy1974 Member

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    Don't Cry For Me Argentina, amirite?
     
  4. 84superchamp

    84superchamp Silver Supporting Member

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    That's how i did it and it worked out well. I earned 20% of the purchase price before really going on my own.
    And the previous owner gave me a financial "yardstick" I've always wanted to present to current business owners like some of those in this thread for their opinion:
    A business should pay for itself in 10 years. ??
    I did it in 7 but i'm sure i was lucky.
     
  5. picton

    picton Member

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    Well, very roughly that implies a P/E multiple of 10* which works for some businesses but probably not all.

    However, businesses should pay for themselves in some reasonable amount of time, which by no means is a rule universally followed. If you bought a share of Amazon and Facebook now and had to rely only on any potential residual cash flows to you as the shareholder to get your money back, how long would you have to wait? Pretty long would be my guess.

    * assuming equal cash flows over 10 years
     
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  6. Last Nerve

    Last Nerve Supporting Member

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    Sounds like a deal is in progress, but there are a few things you could/should look at for a valuation:
    -Balance Sheet
    -Profit & Loss
    -Review Account Receivables and Account Payables
    -EBITDA for sure. Sorry, I'm a proponent. You need to know if the business is really making money or not. I've seen owners put a 2nd on their home, to having UCC Filings with their suppliers, etc, etc.
    You need access to these things to know what the business is worth.
    You could also look at the government-based SBA lending avenue, if you needed some capital for the purchase and for short-term operating costs after the sale.
    Good Luck. Sounds like you're very passionate about it. Hope it turns out how you want it to. Keep us posted.
     
  7. BlackbirdVintageMusic

    BlackbirdVintageMusic Member

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    Lots of business pros here who also like gear, yet no talk of starting a music related business. What gives?
     
  8. tonyhay

    tonyhay Supporting Member

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    4-6 times your estimate of the future annual net earnings, is a good place to start.

    If this is more than a nominal amount, you should get professional fnancial advice.
     
  9. Melodic Dreamer

    Melodic Dreamer Member

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    We are in negotiations. The deal kind of intrigued her. I would like to keep from getting a loan or paying an extra payment. By offering her this we are kind of trading. She is getting the price she wants and I’m not paying a cent.

    I’ve looked at the books. She makes minimal profit. BUT... that is due to having only a few therapist. There are enough employees to get paid really well and maintain the overhead. We always have a wait list. She hasn’t been pro active in recruiting others due to current office size. The location I have lined up has double the office space. By gaining more Therapsit I could easily double our profit within a year. I already have 3 other Therapist I am talking with.
     
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  10. picton

    picton Member

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    Sounds like a great opportunity. Godspeed and good luck!
     
  11. Melodic Dreamer

    Melodic Dreamer Member

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    Thank you. Still in the process. We have been talking about this for a year. She is wanting to be out by the end of this year or sooner.
    Exciting and spooky. lol
     
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  12. jvin248

    jvin248 Member

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    .
    Looks like you are on your way, with a clever 'buy-out' arrangement.
    Sales are the difficult side of the business because good sales can fix a lot of other problems -- so whatever you can do to increase sales and not lose old contacts like the phone number remaining and figuring out any employees that are key sellers is important. At the end of the day you are buying the client/customer list and hopefully migrating as many as you can while expanding the list as fast as possible.

    Go through the business and figure out 'the process' of it, document how things are done so that you can teach them to new employees. Fix some as you go to take cost out (when you find something that seems odd, dig deeper and you can remove it or find a hidden important key and remove the fluff around that key). Often the seller has all this in their head. The goal with this is to write all the rules down so you can hire a manager for the store where you can let it run and open up a second or work on other major expansion plays. Otherwise you are just buying a job, that comes with more headaches.

    The couple of comments posted about seller opening up 'down the street' happens a lot and the music industry model for that is Leo Fender ... he sold to CBS then founded/worked with Music Man then left there and founded G&L. Not the guy you'd want to buy a business from, lol.

    .
     
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  13. badhorsie551

    badhorsie551 Member

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    If you are asking for advice on a musical website you are in over your head.

    Get some professional help.


    Or you could just pay the full price and flip it later.
     
  14. bsacamano

    bsacamano Member

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    I head up the valuation division of an M&A firm (CFA charterholder, Accredited Senior Appraiser with the American Society of Appraisers). We represent the sellers of businesses and my group puts together the valuations and the marketing materials the deal makers use to market the business.

    There are three methods used to value a business; the income approach (DCF for something of the like), the market approach (comps or what have similar businesses of a similar size sold for in the past), and the asset approach (cost to replace the assets or liquidate the assets).

    There are also general industry rules of thumb published annually in The Business Reference guide. The rules of thumbs typically apply to smaller businesses (sub $1 million in value) or generic sorts of chains.

    Anyways, feel free to DM me to discuss further.

    Business type, size, location, and about 674 other factors come into play for a valuation.
     
    Last edited: Jul 12, 2018
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  15. AZChilicat

    AZChilicat Member

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    I'm so happy that a few other people have mentioned DCF now besides me. For some reason I always feel like I'm hanging my arse out when I raise that here.
     
  16. Bankston

    Bankston Member

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    It's been said before and I'll say it again.

    Hire an attorney who knows what they're doing. Believe me when I tell you it will cost you much more later if something is not done right at the outset. Law is a lot like medicine . . . an ounce of prevention is worth a pound of cure.
     
  17. bsacamano

    bsacamano Member

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    DCF is an interesting topic. It's highly technical and certainly rooted in sound theory. Yet, we find when discussing the topic of valuation with many of our buyers (our buyers are mostly private equity groups), they value potential acquisitions on a multiple of EBITDA. For instance, one group gave a round-table discussion at a recent ACG. They start at 5 times adjusted EBITDA and go up or down from there based on industry, historical performance, customer concentration, and other factors.

    Meanwhile, here at my firm we have hour long debates on which risk free rate to use in the discount rate. As a proxy, should we use a short-term treasury since it's the most risk free asset or a long-term treasury since we want to match the life of the discount rate to the life of the asset being valued? Then, once we decide on which treasure we want to use as a proxy, should we go ex-post or ex-ante? If we go ex-post, what time period should we consider in determining the risk free rate? And, once we decide on the time period, should we go with an arithmetic mean or a geometric mean? And should we exclude anomalous years from that average?

    I have Duff & Phelps US Guide to Cost of Capital on my desk. It's used by most professionals to determine the discount rate side of the DCF equation. It has 48 pages of a discussion on the risk free rate component of the discount rate. FORTY EIGHT PAGES. And the risk free rate component of the discount rate is the smallest component of the discount rate.

    So, we go through all this for our DCFs and the buyer puts their index finger in their mouth, holds it up, and says, ummmm, we think 5 times EBITDA.
     
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  18. BlueRiff

    BlueRiff Silver Supporting Member

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    How do you know the price is steep if you don't know how to estimate its worth? Given these really fundamental questions you're asking - you might want to reconsider this move altogether. It sound like you don't know this industry. I'm not being negative or insulting - it doesn't sound like you are prepared to close this transaction and you might not know the industry enough to be successful. Take the time to understand the industry and at least high level valuation of businesses before you start as well as hiring legal and accounting help. Seriously - reconsider this.
     
  19. AZChilicat

    AZChilicat Member

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    In b-school I'd get paralyzed at picking what discount rate to use in a valuation assignment. DCF just causes me agita in some regards.

    Are your clients paying no attention to things like enterprise value, financial decisions, etc?
     
  20. picton

    picton Member

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    If the buyer is a PE fund (you indicated most of the buyers you deal with are), then they are most likely seeing what price they can get away with and still make money on the deal, based on their forecast. Likely they are modelling a number of value drivers, multiple arbitrage (ie. buying low and selling high) being one of them. So the entry multiple is just one variable in a polynominal equation for the exit IRR/money multiple, speaking metaphorically.

    I've worked in PE and M&A related businesses for close to 15 years, am also a CFA charterholder and happen to believe DCF is mostly BS. I would never recommend to anyone to buy or sell something solely on the basis of a DCF. In the end, it almost always come down to "can I make money on this if I sell or buy at this price". In other words, reasoning and common sense.

    Sorry for the harsh tone, by the way. Don't intend to demean your work in any way. Just one practitioner's opinion.
     
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