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Selling an established rental business...how to price?
Old 08-15-2010, 10:01 PM   #1
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Selling an established rental business...how to price?

On the off chance I decide to move to NC after our real estate 'tour' this week....i am curious about selling our party rental business. IF it happens, it wont be for about 3 years, at which time our business will have been around for 5 seasons (good accounting, records, customer data etc)

Lets say our gross sales are 130k by then (conservative) with a need for an owner/operator to put in about 15-20 hours week for 26 weeks of the year. Overhead about 30k-40k max per year including labor, replacement costs etc. Repeat customers account for nearly 35% of business. The rest is ALL online searches...and naturally our site is ranked #1 for all keywords we care about on google. We also have about 6 landing pages that funnel traffic to the site. So of course the website and phone #'s would go with it, as well as about 25k worth of equipment/vehicle (conservative USED prices- probably 60k new) all in rentable condition


How the heck do you price something like this?
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Old 08-15-2010, 11:13 PM   #2
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I very nearly sold my equipment rental business a couple of years ago. Thankfully I didn't since I'm sure that I'd have put most of the proceeds into stocks at precisely the wrong time.

At that time the agreed upon share sale purchase price was slightly over 2X yearly sales averaged over the previous 3 yrs. Fair market value of equipment was around the yearly sales average.

Not sure if U.S is similar to Canada, but a share sale is beneficial for the seller since every Canadian is entitled to a lifetime capital gains exemption of $750K so since my wife and I are shareholders, the first $1.5M was tax free. OTOH an asset sale is taxed at good 'ol income tax rates and benefits the buyer. Usually an asset sale commands a much higher multiple because of that.

Good luck, selling a business can be a high stress affair. I encourage you to not drag it out though since it is very hard to operate on a "business as usual" model when in negotiations.
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Old 08-15-2010, 11:16 PM   #3
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Quote:
Originally Posted by Grizz View Post
I very nearly sold my equipment rental business a couple of years ago. Thankfully I didn't since I'm sure that I'd have put most of the proceeds into stocks at precisely the wrong time.

At that time the agreed upon share sale purchase price was slightly over 2X yearly sales averaged over the previous 3 yrs. Fair market value of equipment was around the yearly sales average.

Not sure if U.S is similar to Canada, but a share sale is beneficial for the seller since every Canadian is entitled to a lifetime capital gains exemption of $750K so since my wife and I are shareholders, the first $1.5M was tax free. OTOH an asset sale is taxed at good 'ol income tax rates and benefits the buyer. Usually an asset sale commands a much higher multiple because of that.

Good luck, selling a business can be a high stress affair. I encourage you to not drag it out though since it is very hard to operate on a "business as usual" model when in negotiations.
what was your overhead to yearly gross ratio, if i may inquire
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Old 08-15-2010, 11:47 PM   #4
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It was a bit of a complicated thing in that the three years that were averaged were probably the most radically different from one another in our 25 yr history. We had been expanding quickly in the latter part, and quite conservative earlier on. I don't remember those #'s offhand, sorry.

Might I suggest contacting a couple of business brokers. If you are serious about selling they'll give you a decent ballpark value at no cost to you. If you choose to use one though, the commission scale is usually tapered and often takes a good chunk of the sub $1M portion.
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Old 08-16-2010, 08:49 AM   #5
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Same way you'd value any other business . . . DCF. I'd include estimated wages for the "operator's" time and use a discount rate no lower than 18%, but probably more.
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Old 08-16-2010, 02:01 PM   #6
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My business is quite a bit different than yours but is just a service based business with low fixed assets, similar to yours that way. Had two offers last year for 1 x gross yearly earnings, plus assets, A/R, goodwill, etc.. The going rate seems to be 1 to 1.5 times gross year earnings but YMMV.
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