Is my business worth anything?

[427Vette]

My wife and I own and operate a small electric contracting business. We have two employees with three service trucks on the road. We are very fortunate to have a huge loyal customer base, a lot of them have been with us for over 20 years. When we were getting into business there was never a thought on how to get out of business. We were more concerned with figuring out if we could some how be able to buy groceries, get customers and figure it all out. We are zeroing in on early retirement and would like to find a away to pass our business along rather then just close the doors have an auction and quit. The problem is that I don't know if our business has any value without my wife and I. We have to be involved daily. Our guys are very capable and can do all of the work but my wife does the scheduling, billing, collecting etc. It has been very profitable for us and to give an idea of the volume of work that we do our gross annual sales are usually around 1.2 million. We have been contacted by a competitor in the past but I think he is more talk then action. We have tried to set up meetings in the past and he always cancels. He has no real interest I presume. Our employees seem to have a little interest but I think they are thinking that they could start their own with no real reason to buy into ours. After all if we quit our customers will need to go somewhere either one of our competitors or one of our guys if they start their own. All we have to sell would be some equipment, inventory (minimal) and of course the business itself. There is no real-estate to sell with it.

Our plan this far has been to stay at it long enough and accumulate enough dollars so it wouldn't matter if we got anything for it or not. So, I am looking for thoughts and ideas from the members here who may have experience in this area.

 

[REWahoo]

Our plan this far has been to stay at it long enough and accumulate enough dollars so it wouldn't matter if we got anything for it or not. So, I am looking for thoughts and ideas from the members here who may have experience in this area.

Disclaimer: I have no experience in selling a business.

You say your two employees show little interest in purchasing the business. Have you discussed it with them? Since they may be able to start their own business without buying yours and you never expected to get anything from selling, how about making them an offer of a great deal? Maybe the value of the assets and inventory, plus a few thousand dollars paid over a year's time, plus you and your DW continuing to work in an advisory/training role for 30-60 days to help with the transition?

Just a thought.

 

[Jerry1]

Yes, your business has value. Beyond the assets, you have an administrative process set up and you have a customer base. I would agree that talking to your employees is one path. You could also sell outright. My thought is that instead of selling, transition running the business to others. Mentor a couple people to run the business and then step away. The key would be to make sure they’re incentivize properly in order to keep your standards, but if you pull this off, the business could generate a nice “annuity” for you. This would mean you’d probably not fully retire. Similar to those that manage a rental real estate portfolio.

There are business evaluation services, ask you accountant or lawyer. Your business is probably worth more than you think. Especially if you are willing to stay on for awhile as the new ownership transitions in.

 

[427Vette]

I have discussed it but VERY briefly. It certainly wasn't the main topic of conversation. I am reluctant to have that conversation until I am 100% certain that I am ready for a change. My father in law was in a similar situation years ago. He told his employees that he was looking to sell out and retire. He meant in the next few years. the next day is number one guy gave his notice that he was leaving. It is nearly impossible to find skilled tradesman who want to work. I cant risk them leaving until the time is right.

Your idea is one that we thought of though. My thoughts are that i would like to get as much as possible but in the same sense that something is better then nothing. I also thought of getting a business valuation done so I would have a clue what it might be worth and they would also know how good of a deal they would be getting.

 

[jetpack]

The real question is what's the profit after you take into account wages for you and your wife. (ie. if you were replaced with staff)

Then, think about actually doing that and just owning the biz, or selling for some multiple of that profit (ie 3x).

 

[RunningBum]

I also have no experience but I assume it depends on whether you have a regular customer base, or are well-known or have a high rating on social media, such that there would be value to someone else to continue the business. That's the attraction, someone new would not have to build up a new customer base, or a competitor could expand there's. If that's not the case, if you are essentially a commodity, there is no value other than your hard assets.

What value that has, I have no idea how to estimate.

 

[CaliKid]

You need to determine actual NET income and give an honest look if your customers buy because of YOU (which is very typical in businesses) or if they do actually buy from the business. In my experience a lot of people are able to make a nice living from their business but have very little to actually sell. I would talk to a business broker more than a business appraiser. I have seen some crazy valuations done by valuation "experts" and in the end their opinion really doesn't matter. A business broker can tell you what a real life human might pay for the business.

 

[COcheesehead]

Owner dependent businesses are worth no more than 1 times sales at best and usually a fraction thereof.

A competitor may have an interest in buying the name, phone number, web address etc for the client base.

 

[street]

^ I would that is about what it is worth. I would make the offer to your employees and let them get their ducks in a row early so a clear and smooth transfer is achieved. Just shutting the doors isn't a good thing for anyone.
Net Income Range is what I'm thinking.

 

[CaliKid]

Owner dependent businesses are worth no more than 1 times sales at best and usually a fraction thereof.

A competitor may have an interest in buying the name, phone number, web address etc for the client base.

Sales or net income? I would say it greatly depends on the type of business. If gross sales are $1.2m but net income is only $100k I tend to doubt anybody is paying $1.2m for the business. MAYBE someone will pay $100k or $200k if the net income can easily be re-created by them.

 

[ivinsfan]

Owner dependent businesses are worth no more than 1 times sales at best and usually a fraction thereof.

A competitor may have an interest in buying the name, phone number, web address etc for the client base.

Not true in this business if people have electrical needs for their business and such it's ongoing.. If you are honest and reliable you'll get return business. Having said that if the person you're selling to is neither and wanting to make a quick buck, things can go downhill very rapidly.

OTOH if the competitor you're selling too doesn't have a good reputation people will go elsewhere unless he is the only game in town. He might pay enough to get rid of you and capture your business.

 

[427Vette]

Thanks for the great responses so far. We are very well known and have a good reputation. We lack in the social media department because we always had so much work that we didn't need to pursue any type of online presence other then a simple website. Like I mentioned in the original post we have a huge returning customer base, there are over 4000 customers in our system. Some of those customers we hear from weekly, some every thee to four years. Some generate upwards of 50k of sales annually some are one simple service call. After all the bills and wages are paid there is about $200,000-$400,000 in profit, it changes yearly. I have done a little research and have seen some of the business valuation calculation models that are out there. Using some of these our business is worth around one million dollars or somewhere there about. There is no way on God's green earth that anyone would pay that for our business. I would settle for a minor fraction of that.

I didnt know there was a difference between a business broker and a appraiser. I will look for a broker to speak with.

Thanks again! I look forward to more responses.

 

[Clone]

A couple of things to think about- if you were to have an auction sale, what would the net proceeds be. It is easy to think that the replacement cost is what all the stuff should be valued at, but the auction proceeds are what it is worth to somebody else. The difference between those two is the 'equity' that somebody buying the business would see as value.


Second, for a small shop, you need to find a new pair of owners where one person is willing to do the work and the other do the books. There is probably not enough overall margin in the business for a new owner to sit back and hire a bookkeeper, and just skim the money to make a living. The business is like many restaurants- they are a living for the person who is cooking and serving the food.


I think that a transition plan would develop the most value. Help a new, young couple get things under control and understand the business, slowly remove the training wheels, then wish them well and get out of their way.

 

[COcheesehead]

Not true in this business if people have electrical needs for their business and such it's ongoing.. If you are honest and reliable you'll get return business. Having said that if the person you're selling to is neither and wanting to make a quick buck, things can go downhill very rapidly.

OTOH if the competitor you're selling too doesn't have a good reputation people will go elsewhere unless he is the only game in town. He might pay enough to get rid of you and capture your business.

But the new owner has no guarantee that sales will repeat, hence the low multiple. I am selling my business and have had a friend sell his. Been down this road.

 

[ivinsfan]

But the new owner has no guarantee that sales will repeat, hence the low multiple. I am selling my business and have had a friend sell his. Been down this road.

Yes that's my point...either way a big cash payout for that type of business probably won't happen.

 

[Aerides]

Most likely your buyer would be a larger version of you. A small chain, at least. That way, they could insert their oversight and bookkeeping, while maintaining your brand and customer history.

Most sales like this would ask you to stay on for a year or three to transition, possibly as a paid employee of the buyer company.

And if you have proven documented net profits, over multiple years, of $200-$400k, then a selling price of 1M is totally reasonable.

You mention your lack of social media... but do you have solid customer records, including emails? There's gold in them there hills alone.

 

[pb4uski]

I would think through a transition plan with the existing employees where in addition to their existing compensation that they get some stock in the company each year for the next x years or so. Let's say that you want to retire in x years and set it up so they end up with y% of the stock in x years and you then negotiate an exit for the remaining % of the stock, either at once or them paying you over a number of years.

That will hopefully avoid the situation that your father-in-law had. It will be a good way for your employees to avoid the risk of going out on their own and put a little golden handcuffs on them from now until you are ready to retire. Who knows, perhaps one of their wives is capable of being groomed into the things that your wife does now.

It could be a win-win for everyone where you get to transition out knowing that the business is in good hands that you have groomed over a number of years and you end up getting more out of it than just liquidation value.

 

[427Vette]

And if you have proven documented net profits, over multiple years, of $200-$400k, then a selling price of 1M is totally reasonable.

You mention your lack of social media... but do you have solid customer records, including emails? There's gold in them there hills alone.

All of this information would be in our accounting program. Our only "solid" customer records would be our past invoices and estimates. our business doesn't generally operate off of emails. Of course there are some emails but I generally I get a phone call telling me that they need one of us ASAP because they forgot to plan ahead. Or I get a call that the power is out. I don't think it's something typically would email and wait for a response.

 

[OldShooter]

I have bought and sold businesses and, through SCORE, advised others. Thoughts:

As mentioned you need a proforma P&L that includes market rate salaries for the work you and your wife do. A small business owner typically gets two income streams from the business. The first is his paycheck for working in the business. The second is a return on his investment. That is what a buyer will look for. You may want to consult a CPA in preparing the proforma. Getting it right is pretty important. Another thing you will need is a list of assets. Tools, trucks, etc. at fair market value. Fresh, moving inventory at cost.

The most likely "good" buyer for your business will be someone who wants to step into your shoes, probably hiring out the bookkeeping. In our state a graduate EE can get a Master ticket simply by passing the test. So an EE wanting to escape from the corporate whirl might be a candidate.

Talk about pricing is premature. One thing I advise potential buyers for this type of business is that the seller should agree to stick around for a while, maybe at least a year, and he/she should be motivated to make the buyer succeed. This is typically done by basing part of the price on that overlap year's sales. IOW, a down payment plus what is sometimes called an "earn out." The downstroke should be enough to pay for the hard assets plus a chunk of the goodwill.

There are all kinds of books out there advising buyers to find a retiring owner who will finance 100% of the deal. "Buy a good business with no money down." These are dreamers with no skills or money. Filter them out as fast as possible.

There are all kinds of biz brokers out there, heavily weighted towards dishonesty and incompetence. Try to talk to attorneys, CPAs, insurance agents in your network and hope to find a good biz broker or two. Talk to them about your plans but don't sign anything. Also pass the word to your customers and suppliers that you will be retiring some time in the future and would like to hear from anyone who might be interested in the business.

 

[NgineER]

How about a different approach?

Have you thought about farming out more of your work and still keep the business intact? I don't know exactly what your involvement is, but could you farm some/all of the tasks out?

The four hour work week is an interesting read and could be helpful. It might not work for you, but I chatted with a business owner on a flight last year and his firm had implemented some of the outsourcing mention in this book and was able to step away more from the day to day work.

An alternative to selling...

 

[savory]

I have bought and sold businesses and, through SCORE, advised others. Thoughts:

As mentioned you need a proforma P&L that includes market rate salaries for the work you and your wife do. A small business owner typically gets two income streams from the business. The first is his paycheck for working in the business. The second is a return on his investment. That is what a buyer will look for. You may want to consult a CPA in preparing the proforma. Getting it right is pretty important. Another thing you will need is a list of assets. Tools, trucks, etc. at fair market value. Fresh, moving inventory at cost.

The most likely "good" buyer for your business will be someone who wants to step into your shoes, probably hiring out the bookkeeping. In our state a graduate EE can get a Master ticket simply by passing the test. So an EE wanting to escape from the corporate whirl might be a candidate.


Talk about pricing is premature. One thing I advise potential buyers for this type of business is that the seller should agree to stick around for a while, maybe at least a year, and he/she should be motivated to make the buyer succeed. This is typically done by basing part of the price on that overlap year's sales. IOW, a down payment plus what is sometimes called an "earn out." The downstroke should be enough to pay for the hard assets plus a chunk of the goodwill.

There are all kinds of books out there advising buyers to find a retiring owner who will finance 100% of the deal. "Buy a good business with no money down." These are dreamers with no skills or money. Filter them out as fast as possible.

There are all kinds of biz brokers out there, heavily weighted towards dishonesty and incompetence. Try to talk to attorneys, CPAs, insurance agents in your network and hope to find a good biz broker or two. Talk to them about your plans but don't sign anything. Also pass the word to your customers and suppliers that you will be retiring some time in the future and would like to hear from anyone who might be interested in the business.

Of all of the responses I read so far, this one came closet to my thoughts. Here might be a couple of things to also think about:

- Businesses like yours will typically have a rule of thumb evaluation. Perhaps there are others you know in the same or VERY SIMILAR business. Did they sell on a multiple of sales or profits for example? Knowing how much of your business is repeat vs emergency or one stop calls would be important. I believe someone suggested a pro forma. That is a good idea.
- Helping for a year may also be a good idea and something a buyer could be interested. Building in an upside for you and downside for the buyer (adjustment in purchase price) may work well to gain interested buyers in a service business like this
- If you wish too or if there is no other choice, selling to employees is an option. I think not only will you need to help them but you might want to bring in an experienced person who will help guarantee that you will be paid and help the business continue. This new employee is determined by the skills of your existing ones. To be clear, they all become owners in some fashion but there is a new 'you' who might own a larger percent of the business. I suppose there are many ways to do this but I would expect that the buy-in for your employees and the new person is fairly inexpensive as it relates to the purchase price. Your money maybe paid over 5 years for example. At which point the owners begin to see a significant positive income jump since they are paying themselves and not you.

 

[SALTedOut]

There are consulting businesses that help people, properly price, market and sell their private businesses. They come in, understand the business, its operations, financials and then put together a marketing plan to sell.

A friend of mine owned a local business and was thinking about selling. He figured it would take about a year to find a buyer and sell. The people he used found a buyer within 6 weeks and the deal closed in 30 days. He stayed on for 3 months to help with transition as part of the deal.

You can get deal from all cash to part cash and part multiyear payouts based on future operations. The question with the later is whether you trust the buyers to continue to properly run the business. If they run it into the ground your future payments are zippo.

I'm not sure how he found the people he used but I'd guess you could start with the local chamber of commerce or something like that.

 

[MichaelB]

My brother has his own business. He joined the local small business association and asked other members there to see if buying and selling was a common practice in his business area. Once he established that it was, he then checked with some of the local accountants to see if they knew how the businesses were valued. He didn't have to pay any of them, and got some pretty useful info.

He hired someone as an employee that is interested in buying. Still some years to go before that happens, but in this case that's a plus. It's a business with a regular customer base and the potential future owner needs to build a reputation with the clients to help make the future takeover more successful.

 

[street]

I have bought and sold businesses and, through SCORE, advised others. Thoughts:

As mentioned you need a proforma P&L that includes market rate salaries for the work you and your wife do. A small business owner typically gets two income streams from the business. The first is his paycheck for working in the business. The second is a return on his investment. That is what a buyer will look for. You may want to consult a CPA in preparing the proforma. Getting it right is pretty important. Another thing you will need is a list of assets. Tools, trucks, etc. at fair market value. Fresh, moving inventory at cost.

The most likely "good" buyer for your business will be someone who wants to step into your shoes, probably hiring out the bookkeeping. In our state a graduate EE can get a Master ticket simply by passing the test. So an EE wanting to escape from the corporate whirl might be a candidate.

Talk about pricing is premature. One thing I advise potential buyers for this type of business is that the seller should agree to stick around for a while, maybe at least a year, and he/she should be motivated to make the buyer succeed. This is typically done by basing part of the price on that overlap year's sales. IOW, a down payment plus what is sometimes called an "earn out." The downstroke should be enough to pay for the hard assets plus a chunk of the goodwill.

There are all kinds of books out there advising buyers to find a retiring owner who will finance 100% of the deal. "Buy a good business with no money down." These are dreamers with no skills or money. Filter them out as fast as possible.

There are all kinds of biz brokers out there, heavily weighted towards dishonesty and incompetence. Try to talk to attorneys, CPAs, insurance agents in your network and hope to find a good biz broker or two. Talk to them about your plans but don't sign anything. Also pass the word to your customers and suppliers that you will be retiring some time in the future and would like to hear from anyone who might be interested in the business.

This is some solid advise.

 

[WestUniversity]

It sounds like you’re primarily a service business? If so I believe they are ordinarily sold at a multiple of the annual billings as typically the acquiring entity is buying the current book of business. Usually the seller sends a letter of recommendation to all of the current customers, recommending the acquiring entity. The buyer and seller would have to agree on the multiple of annual billings and the period over which the buyer would payoff the seller...