How to value a business?

Question

Hello all. I am on the verge of making an offer for an existing business. It is a service business with very little assets (a truck and a forklift). He has one employee that he pays on a 1099 contract basis about 35K a year). He is on pace to net about 120K this year, and he netted 90K last year. The business is over twenty years old. He is getting rid of it because he is seventy two. He has accounts which pay him monthly, and as of June first he had 328 accounts, although this number fluctuates somewhat because peolpe drop his service, and obviously he gets new customers too. It is a swimming pool service company for the record. He wants to structure the sale so that the new owner takes complete control over the business from day one. I would assumehis business bank account, which has 45K in it. He is asking 400K. Is this a fair price for this business, and how do you generally determine the price of a business? I would assume his position, and he works 3 days a week.

Answer 1

To do a real assessment of worth you'll have to value the business based on cash-flow and bring each year to present value. There are spreadsheets available on-line to do this. Just plug expenses, sales, projected growth, etc. and you'll get your answer. If you want the quick and dirty: you'll recuperate the investment in a little over 3 years. Plug the interest you want for your money, (say 7%). Bring it to present value and you'll still recoup in 5 years or less with the growth you mentioned. That is really good. If you like what the business is about and you don't mind doing the work in case one of your guys gets sick and have the ability to make it grow, then go for it.

Answer 2

There really is a lot to this question. On the info you gave, you have a pretty good deal. Price of 400 on a business that nets 120 and has 45 in the bank. The real question is how many accounts will switch to another service when you come on board. Some may have stayed with the prior owner because "they have always used him." The other question that you can ask yourself is "What can I do to increase revenues and decrease costs?"

Talk this over with an accountant or your banker.