What is a fair price to pay for a small business franchise that does $50,000 in sales a year?

Question

I am looking at purchasing a cosmetic company from a women who has been in business for 25 years. I do not have all the details yet, but I do know she has done $50,000 in sales the past three years and said she would be asking around $100,000. This price would only included inventory and customer goodwill. I would have to put in new fixtures, lighting, flooring, paint, and buy point of sales software. The company does not have franchise fees or royalty fees. It is in a rural area in Georgia. Does this sound like a fair offer? What else do I need to take into consideration?

Answer 1

I think it sounds high, but I'm not an expert by any means. You'll need a whole lot more information before you can set a price. Here's what I thought of in just a few minutes.

-how much of that $50,000 was actual profit?

- what were the sales and profit figures for each of the last 5 years,

- how many hours did she work over the last 5 years,

- how much is the inventory worth,

- can she transfer the franchise to you with the parent company's approval or do you have to apply for your own franchise

- will that happen automatically or is there a risk that it won't happen;

- any other property with the deal? You say there is only inventory and customer goodwill, but then you say you have to get lights, flooring, etc.

- are there any accounts payable or receivable? What happens to them? Who pays any bills due? Who gets any money owed the business?

- how long will you have to work to reasonably expect to earn what you paid for the business?

- what is the potential for growth?

- does the franchise limit you to a certain territory?

- are there any employees of the business? Have you managed employees before?

- does the business have any other liabilities, like pensions promised to employees, judgements against it, lawsuits pending, etc.

Answer 2

There are LOTS of things to take into consideration!

What is your plan for the business?
How do you plan to pay for the new inventory you will need apart from what she has?
What does her current inventory ACTAULLY ADD UP TO?
Is the building Owned by her or rented? Will you have additional payments for property?
What are the typical utilities at the building?
How will you expand / advertise / develop new clients?
Will her old clients be committed to you the way they were to her?
Will she continue selling on the side?
What will your business license cost?
Are you going to be a small corporation, or a limited liability, or a sole proprietorship company?
What are the sales and property taxes in the area?
Will you do your own book-keeping? Do you know how to use Quicken if you are?

There are SO many things to keep in mind. I would order some books on the topic - Small Business for Dummies actually has a lot of great info. Also sit in on some business classes (easy to do without paying if they are lecture halls on campus) - or talk to business owners at the local Chamber of Commerce.

Owning a small boutique type business is no easy feat! It is very demanding both time wise and financially. Make sure you have some firm and fully developed plans for your business. Write out and put together a business plan - it will help keep you on track both financially and for future growth.

Good Luck!

Answer 3

The usual going rate for business sales is 2 years income, so about $100k is right, HOWEVER if she is removing all fixtures, lighting, etc. then she should lower the amount. Or, if this is a home based business or something and you want to make it into a retail store yourself, then those are costs that you will just have to front. So, it sounds about right, but you may be able to negotiate with her and come to a mutual agreement on a slightly lower cost.