Make Offer on Business Opportunity

Discussion in 'Commercial Property' started by New_Investor, 15th May, 2015.

  1. New_Investor

    New_Investor Member

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    Hi SS Gurus,
    I am in negotiation to buy a business, I got the sales and P&L for the last 3 years. I will have a meeting with the business owner tomorrow to answer some of my open questions.

    The business is an indoor children playground. the owners bought a bigger one far away, and they cannot concentrate on this one any more. the sales is deteriorating for the last 3 years. which means, some more work and some more service and it will do well.

    I have a friend who owns a similar business, and she looked at the numbers and advised for an offer, but she don't have a way to calculate the offer.

    My question is.
    is their a formula that I can apply to get an a reasonable offer?

    The asking price is 235K, Net Profit for 2012, 2013, 2014 is 66K, 35K, 10K.

    Based on those numbers, will I be able to calculate an offer. I am sure the answer is yes, but I do not know the answer.

    The calculation I have made through Commbank website is 175,000. and another one is 200,000.

    I hope you guys can help me with that. Please feel free to advice to go do some homework first and look later.

    The only thing that attracts me to this business is that it can run by only my wife, and I can keep my job. it is 10 minutes drive from my home, it have a good potential as the current owner do not go their at all and his wife goes their 1 day a week, so some effort will really change the place.

    your answers will be highly appreciated.

    Thanks
    Ram
     
  2. Hulkster

    Hulkster Member

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    Whats the split on equipment/stock and goodwill?

    Ask for copies of bank statements to prove income

    My main experience is in hospitality businesses where most of the time, value was 3x net profit. In your case this would be $30k.

    I'd be very concerned about this one - hope you have a tonne of equity available.
     
  3. sanj

    sanj Member

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    It's too hard to put a figure on it without more info. Is it a capital intensive business? What is the value of the assets there?

    Any debt that you will be taking on?

    Good lease with options etc?

    How hard will it be to turn around?

    The profit of 10k, did that include the owners getting a wage at commercial rates if they were running the business?

    Ultimately it's only worth what someone is willing to pay but at first glance it appears the asking price is high. Value of assets will be a big factor here imo.


    Fwiw I recently bought into a business at nearly 4/5 times multiple to its st5ong growth trajectory so it isn't always a case of it being 100% down to fixed multiples or formulas, potential has a big part to do with it.
     
  4. jrc

    jrc Member

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    are there any leases/ hire purchase you are taking on? does any of this coincide with the downturn in net profit. I don't see how Commbank's figures make any senses.
    What are the earnings before interest and depreciation
    How much is insurance - they're running two centres so possibly they can get insurance a bit cheaper than you with one centre
    how long is the lease on the premises, a there any options to renew
     
  5. j_p

    j_p Member

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    Are you sure it will do well? What experience does your wife have that will add to its value since she will be the one running it?

    People experienced in the field have decided to move on to greener pastures. Has it done poorly because they have had their attention split or is that just the excuse they are giving you?

    I have no experience in this area but looking from the outside unless you bring something specific to the business to add value/revenue it looks pretty risky.
     
  6. Tonibell

    Tonibell Member

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    First step might be to ask the vendor how they came up with the $235K price.

    You would not want to be paying much for goodwill based on the figures provided. That is really where the earnings multiples are relevant.

    I think they may be happy to get out of it with you taking over the lease and the assets + stock at valuation.

    You also need to do a business plan and some market studies to make sure this will achieve a good result - even with some very conservative assumptions.

    With those centres you need to be attracting a new set of customers every year or so - which means keeping it fresh and new.
     
  7. Propertunity

    Propertunity Real Estate Buyers Agent

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    ^^ this.

    You need to find out the PE for this type of business. 3 x nett profit is common. Value of the business is $30K. Even if it was 6 x it still does not equal the current asking price.

    If the owners have set up a similar operation just down the road, be careful that existing clients do not follow them, making profit even worse.
     
  8. sanj

    sanj Member

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    Youre right but that doesn't take unto account assets.

    If there is $300k of valuable assets then it could be a fair price. As it stands no one can really say


    I nearly bought a nightclub last year for 400kdespite it only breaking even, in the end I was outbid And it was fair value even at 450k so it isn't solely about multiples
     
  9. New_Investor

    New_Investor Member

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    Update

    Thanks Guys for your answers, here is some information.

    - Owner?s new business is 700 KM away, and they are happy to sign any agreement that they won?t open a similar business.
    - The lease is 3*3*3 renewed 18 months ago.
    - Rent is 104K / Year.
    - Wages are currently 50K, 1 manager and young students over busy days and weekends.
    - My wife wage will be replacing the manager.
    - I don?t know the exact split of equipment / stock / and good will. Stock is 3K, as per the memorandum, initial equipment price is 500K, this was back in 2007 when the place was opened. But not sure if this will be related to the remaining depreciated value or not.
    - I am not taking any debt from the purchase.
    - My wife is working in the childcare environment, and she is a graphic designer. So she will do good with kids and marketing / advertising. Our plant is to keep the manager for sometime until she is familiar with how to run the business herself.
    - It is the only place in an area of 10 KMs, surrounded by other family / children activities (AMF / Flip Out). different activities. Kind of an attraction area.
    - Owners are not managing it, and I will keep the current manager, so fingers crossed clients will not leave. We are not planning to do major change instantly.
    - I am attaching a print shot from the P&L, please have a look and trust your advice.

    Will ask for bank statements to prove income. And how they came up with the 235 price
     

    Attached Files:

  10. Propertunity

    Propertunity Real Estate Buyers Agent

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    I beg to differ - how you value a business is ALWAYS about multiples. There is nothing stopping someone from ignoring that and paying any amount of money for it (its a free market economy).

    The figures you last posted seem to tell a slightly better story than originally thought.
     
  11. sanj

    sanj Member

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    Always??

    That is entirely wrong

    a business in a good location, with a good lease and good staff, needing no capital upgrades can be worth a lot more than another one in the same industry, in a worse location and needing $$ spent on it, even if business b is making more profit than business a. This is especially true is business b is owner operated.

    general rules are good for exactly that, providing a rough point at which you start valuing the business but it isn't a hard and fast rule.

    i know of someone who bought a 20% stake in a business only making 50k a year for 150k, valuing it at 750k. Industry multiples are 3 to 5 for this industry giving it a maximum "multiple" value of 250k. So, according to multiples he paid 3 times as much as he should Despite the business showing very strong growth and having forward contracts that had not been banked yet so not shown on the books.

    3 years later this business is making over 3m a year after ttax And was recently independently valued at well over 10m

    If this person had solely looked at multiples he would have missed out on some ridiculous earnings, as an example last month alone he received a special divi in excess of his entire investment. I know this for a fact because I helped him do the DD on this and have seen the books.

    Most people (nnot all) who follow hard and fast multiple rules miss out on the best opportunities or do it because they don't have the confidence to value a business them self.
     
  12. Ace in the Hole

    Ace in the Hole Don't compete, Dominate !

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    Revenue has been very steady over the past few years.
    Expenses have been increasing leading to just staying afloat.
    100k rent is absolutely massive for a business only doing 300k revenue.

    The rent seems disproportionate to the size of the business.
    How can wages of just 50k support such a business, it seems like something is out.
     
  13. pinkboy

    pinkboy SS Lookerafterer

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    For me, some things dont add up:

    Rent....$100k/pa for this business? Is the premises owned by the vendor?
    Wages.....seem very low.
    Superannuation doesn't add up.....hard to quantify with the above wages being deceitful.
    Workcover....non-existent almost.
    Depreciation.....looks odd.


    Say you did buy this business.....how are you making money? By using as a wage earner for the wife? Taking (what?) profits???

    You are buying a job (and a very hard one at that), and a headache.

    What's the exit strategy if things turn custard?


    pinkboy
     
  14. Ace in the Hole

    Ace in the Hole Don't compete, Dominate !

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    And the original 500k initial equipment cost will be well and truly depreciated by now.
    That repairs and maintenance figure is gonna rise higher and higher.

    So all up, more costs/less income.
     
  15. poordeveloper

    poordeveloper Member

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    If the manager has been in charge while net profit has dropped from $66K to $10K over two years, I wouldn't be keeping them around for too long! :D
     
  16. jrc

    jrc Member

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    As well as the above comments if you potentially have 4 1/2 years lease left then after your wife gets paid for her time you need to have earned back your purchase price after tax during that period and probably a margin of 20% to cover your risk.

    If you're not borrowing you need to consider how you would use the money otherwise ie is it better financially for your wife to keep working where she is and to invest in something else.

    If they are adding back the wages, then you are buying a job. Why is the 6 months to December so good - sales are up but other revenue isn't. Cost of goods sold should probably have increased if sales had increased.

    Why are the wages so high this half year?
     
  17. Propertunity

    Propertunity Real Estate Buyers Agent

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    As others have said, I think you are just buying a job. :(

    Perhaps the title of the thread should be: Help me justify buying my wife a job close to home. (sorry if that comes across as a little harsh - but you did ask for opinions)
     
  18. GreyGhost

    GreyGhost Member

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    Spend the money and go see an accountant.
    As mentioned above, some figures don't look right. You may need to substitute with market values for a few.
    Also the NP was on a decline for the last 3 years, now as they want to sell they have done 100k 6 months to December 2014..

    I do small business purchase/sale feasibility anaylysis every month.
    Spend the money and have an accountant act on your behalf.
    If the numbers don't stack they don't stack!
    Even if it costs you $2k, a whole lot better than being stuck with a lease and a dog business for 1-2 years...
     
  19. GreyGhost

    GreyGhost Member

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    That's what most small business' tend to be.
    I guess you have read the E-Myth!
     
  20. Ace in the Hole

    Ace in the Hole Don't compete, Dominate !

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    Here's a comparison biz for you to compare.
    Seems a very similar description to yours.
    Similar revenue and asking for 149k.

    http://australia.businessesforsale.com/australian/Northcote-Play-Centre-Business-For-Sale.aspx

    An excellent opportunity to own an easy to run play centre in Melbourne?s suburb of Northcote.
    Established for nearly 10 years the owner has built the business into one with excellent reputation and growing customers.
    Excellent set up- with bright and colorful design ensures equipment and surrounds are ideal and require no immediate attention from new owner.
    Seating capacity for 80 adults plus 3 bright unisex Birthday Rooms that allow another 75 children.
    Taking an average of $6,000 per week with a healthy return.
    Rent is very reasonable with long lease options of another 3x3x3x3.
    Trading hours: Mon, Tue & Fri 9:30am-4pm. Wed & Thu 9:30am-5pm - Sat and Sun 10am-10pm
    Employees: 1 FT Owner 2 PT 2 Casual Staff
    Years established: 9

    I highlighted the important stuff.
    How your prospective biz operates with 1 manager and a couple of part time students is puzzling.
    Look at the oprerating hours of this comparitive biz.
    Very reasonable rent suggests lower than 100k considering the 312k turnover.
    I think buying a job would be a slight understatement here...

    I hope you can deal with drama because I was in the bathroom at one of these play centres recently, and a dad was carrying his little boy into the bathroom and had to wash off a nugget of poo stuck to the bottom of his foot, in the hand basin, because some other kid decided to drop a poo into the ball pit.
    Deal with that...