Valuing A Small Business

[Simmo]

My girlfriend has her heart set on buying her friends salon shop. I've run through the books and I've calculated Revenues , Expenses & Gross Profit for the last 3 years.

The owner of the business is asking for roughly 130% of average annual revenue for the business and I calculate some 14 odd years to recoup on profits.

Obviously I think this is way off the mark but I have no experience in valuing a business to come up with a fair price. Anyone with some suggestions on how to calculate a fair price for this type of business?. How do I take into account the fixtures of the shop as well?

[DFCarlson]

There are few ways to value a going business:

1) The value of the land, building(s) and fixtures and machinery.

If you rent, then the rent cost will go into calculating the profit, but the value of the fixtures and machinery should still be considered. Be sure what the rent will be after the sale, i.e., will it go up?

2) Return on investment. If you put your money in another type of investment you would expect a return of say, 10 per cent (to make calculations easy). Set the per cent return figure at what you want to get back. Based on 10 per cent, if you have 1,000,000 baht to invest then if you buy a business with that 1,000,000 you will want a return (profit) of at least 100,000 baht per year.

3) Some combination of the above 2 methods.

These methods have worked for me in the past to at least get in the right ballpark for valuing the business.

Edited February 5, 2007 by DFCarlson

[Simmo]

I found this page

http://www.salondaily.com/us/business/lega...legal_0012.html

That says a salon's sale value is in the range of 2x - 5x the last years average monthly revenues. Using this for my case puts the price at some 20 - 50% of what the owner wants.

[SamuiRes]

You are buying the business not the property presumably from what you say.

How long is the lease?

Rule of thumb - not accurate but a guide - you need to get your investment back in half the remaining term of the lease.

[rogerinthai]

My girlfriend has her heart set on buying her friends salon shop. I've run through the books and I've calculated Revenues , Expenses & Gross Profit for the last 3 years.

The owner of the business is asking for roughly 130% of average annual revenue for the business and I calculate some 14 odd years to recoup on profits.

Obviously I think this is way off the mark but I have no experience in valuing a business to come up with a fair price. Anyone with some suggestions on how to calculate a fair price for this type of business?. How do I take into account the fixtures of the shop as well?

Sunbelt usually says that the average price is about 2.5 times the yearly profits.

Frankly, I don't see why something you buy your GF has to be profitable? Or a clever business decision? Of course it won't! And her friend, well, she probably just wants to get some funds off you by stating a high price, why should your GF get it all?

Edited February 5, 2007 by rogerinthai

[DFCarlson]

My girlfriend has her heart set on buying her friends salon shop. I've run through the books and I've calculated Revenues , Expenses & Gross Profit for the last 3 years.

The owner of the business is asking for roughly 130% of average annual revenue for the business and I calculate some 14 odd years to recoup on profits.

Obviously I think this is way off the mark but I have no experience in valuing a business to come up with a fair price. Anyone with some suggestions on how to calculate a fair price for this type of business?. How do I take into account the fixtures of the shop as well?

Sunbelt usually says that the average price is about 2.5 times the yearly profits.

Frankly, I don't see why something you buy your GF has to be profitable? Or a clever business decision? Of course it won't! And her friend, well, she probably just wants to get some funds off you by stating a high price, why should your GF get it all?

If it isn't profitable, it isn't worth much at all except for the fixtures. May as well look for a profitable business so your money isn't all flushed down the drain. Maybe when your gfs friend finds that you're looking elsewhere the price will come down... unless your gf and her friend are in it together...

[rogerinthai]

Gonna go down the drain anyway. Just a matter of deciding how much he wants to spend on his GF.

[steveromagnino]

My girlfriend has her heart set on buying her friends salon shop. I've run through the books and I've calculated Revenues , Expenses & Gross Profit for the last 3 years.

The owner of the business is asking for roughly 130% of average annual revenue for the business and I calculate some 14 odd years to recoup on profits.

Obviously I think this is way off the mark but I have no experience in valuing a business to come up with a fair price. Anyone with some suggestions on how to calculate a fair price for this type of business?. How do I take into account the fixtures of the shop as well?

typically a price earnings ratio of something less than 5; so in that case this would be like 2-5 years MAX to recoup the cost from profit.

alternatively, I think they use a ratio for small businesses of somiewhere between 2-3 times FCF (free cash flow) as in small businesses cash flow is king. I'd say for a salon that lower is better than higher due to risk of replication so it is up to the seller to prove that this is not the case; that they have a loyal customer base who will stay with the salon even with a new owner. Ditto for staff.

Regarding assets, this is another approach to buying a business; asset backing; you will logically be paying a higher price than the raw depreciated assets of the business as you are paying some sort of goodwill charge presumably, which is a valuation of future cashflows; if not, then if you are getting the assets for less than what the depreciated value is, then that is a potential bonus, OR implies that the business is not a good one able to employ the assets well.

But saloon is highly competitive business with no barriers to entry; do your homework on the lease; etc otherwise you may fnid yourself paying 3X earnings but then generating just 1X or less.

You should simultaneously have a clear plan for increasing profitability either through increasing revenues OR reducing operating costs or some combination. My own experience is that generally successful business do both or at least go for sales; cost cutting (sometimes farang financed) businesses go for cutting staff, costs, and service, leading to a death spiral. A good marketing plan is probably worth more than worrying about the entry price of the business; if you cannot market and get customers, then the price you pay is, in Joey Tribiani's words, 'a moo point' also known as a cow's opinion.

[Simmo]

If it isn't profitable, it isn't worth much at all except for the fixtures. May as well look for a profitable business so your money isn't all flushed down the drain. Maybe when your gfs friend finds that you're looking elsewhere the price will come down... unless your gf and her friend are in it together...

It's profitable though we're not talking huge numbers. Anyway thanks guys for the other valuation suggestions , they fall in roughly with the rule of thumb valuation link I posted before.

Owner will have to come a long way down before I'd consider it. Suprisingly my GF has a business admin degree , was planning to fund half of it herself, and she knows none of this stuff.

[rogerinthai]

Suprisingly my GF has a business admin degree , was planning to fund half of it herself, and she knows none of this stuff.

Sounds much better - now just tell here to get a loan from the bank for the other half, and you're off the hook!

[steveromagnino]

If it isn't profitable, it isn't worth much at all except for the fixtures. May as well look for a profitable business so your money isn't all flushed down the drain. Maybe when your gfs friend finds that you're looking elsewhere the price will come down... unless your gf and her friend are in it together...

It's profitable though we're not talking huge numbers. Anyway thanks guys for the other valuation suggestions , they fall in roughly with the rule of thumb valuation link I posted before.

Owner will have to come a long way down before I'd consider it. Suprisingly my GF has a business admin degree , was planning to fund half of it herself, and she knows none of this stuff.

probably studied basic accounting, marketing, HR and other bulls&*t subjects; business valuation is finance, and most bus admin degrees teach very little finance.

And incidentally very few people have any idea how to value small businesses; that's at least part of the reason why the values jump around so much; also a major component of why guys like Sunbelt as so valuable; they can accurately assess values for both buyer and seller. :-) If you get a chance go talk to them about some of their businesses for sale; there may be a better option than this for sale right now (and no, I don't work for them, although I do think they know their stuff).