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6ballsisall
07-11-2006, 08:06 PM
Always thinking of new investment strategies and was curious for those that have bought and sold businesses in the past what their valuation/profit to sale price ratios were. Just curious from both an interest point of view as well as conversation on here.

PendO
07-11-2006, 08:21 PM
I suppose it depends on the business (trucking company, resturant, boat shop, car dealership - all very different animals) ... theoretically anywhere from 2X to 3X annual profit, plus cash value of assets, less liabilities ... people alway overvalue their "goodwill" ...

I think proper valuation always requires a good CPA and you have to look at any potential liabilities (i.e. insurance claims against the business that may come to fruition after the sale) ... also, look at how much insurance the business has carried over the past 3 to 5 years to determine how much you would be protected from a suit arising from their actions

you are basically paying for the right/opportunity to earn the annual profits, with the hope of being able to do it better.

The value also depends on what types of contract the business has (duration) ... the longer the duration and the stronger the indemnity provisions for cancellation, then the contract has some real value ... think of buying a boat shop and you believe you have a bunch of value in "goodwill" b/c of the brand of boats you sell, then the "brand" decides to move to another store "poof" goes the goodwill value [just a hypothetical example]

If a business is so good (profitable on the books) and yet someone wants to sell, you have to wonder why they don't just hire someone to manage it.

6ballsisall
07-11-2006, 08:52 PM
I suppose it depends on the business (trucking company, resturant, boat shop, car dealership - all very different animals) ... theoretically anywhere from 2X to 3X annual profit, plus cash value of assets, less liabilities ... people alway overvalue their "goodwill" ...

I think proper valuation always requires a good CPA and you have to look at any potential liabilities (i.e. insurance claims against the business that may come to fruition after the sale) ... also, look at how much insurance the business has carried over the past 3 to 5 years to determine how much you would be protected from a suit arising from their actions

you are basically paying for the right/opportunity to earn the annual profits, with the hope of being able to do it better.

The value also depends on what types of contract the business has (duration) ... the longer the duration and the stronger the indemnity provisions for cancellation, then the contract has some real value ... think of buying a boat shop and you believe you have a bunch of value in "goodwill" b/c of the brand of boats you sell, then the "brand" decides to move to another store "poof" goes the goodwill value [just a hypothetical example]

If a business is so good (profitable on the books) and yet someone wants to sell, you have to wonder why they don't just hire someone to manage it.


All good points Pendo! Just curious as to those that have done acquisitions more info on their investment. Seems service businesses with low assets get about 1-2x generally speaking. Curious as to others acquisitions and details if they care to share.

JimN
07-11-2006, 09:11 PM
Actually, the brand just gets recognized and isn't tied to the dealer's goodwill unless the brand has a reputation for allowing bad situations to remain. Unfortunately for my argument, I can't think of many companies I deal with based on the way they do business, other than a couple of auto parts stores or rebuilders I have dealt with over the years, mostly owned/run by people I knew before. Goodwill is seriously lacking in most business models these days.

As far as why someone doesn't just find a manager, maybe it's in the owner's exit strategy and they want to do or start something else. Selling it would free up a lot of capitol that could be put to use in the startup or their retirement.

PendO
07-11-2006, 09:23 PM
pretty much I expect the ROI to be inversely proportional to risk ... and also find value in a business/investment that can be easily re-marketed

6ballsisall
07-11-2006, 10:18 PM
pretty much I expect the ROI to be inversely proportional to risk ... and also find value in a business/investment that can be easily re-marketed

I'd be interested to hear more about your experiences here or via PM Pendo if you care to share.

jmyers
07-13-2006, 02:15 PM
If anyone has investors they are know that are looking for a buisness to invest in let me know! We are currently looking for an investor check out the site www.waterskeeter.com Thanks, Jeff.

Sorry for a little old threadjack! :D

barefoot
07-13-2006, 05:25 PM
I’ve used the Gordon Model to valuate businesses in my MBA coursework. It uses a discounted cash flow approach where you forecast cash flows into future years and discount the cash flows into today’s values. The formula is:

TV = CFYr (1+G) / (Ks – G)

TV = Terminal Value
CFYr = Cash Flow for Year X
G = Growth
Ks = Discount Rate (found on your Present Value tables)

It’s simpler than what it seems. Using this formula, you are determining the maximum amount that should be paid for a company. There are a few assumptions that you will need to make. Mainly, you will need to create a P/L statement with earning potentials for X amount of years into the future, usually 4 or 5 years. From there, you will get your Net income & cash flows estimates that you will use to plug into your formula (your last Year becomes the CFYr value). Then you will need to make an assumption as to how much your annual cash flows will grow after Year X…this will be a percent, say 10%, 15%, or whatever you would like to make on your investment. If you would like to make 17% on your investment, use 17%. This number becomes your G value. Finally, you’ll need to determine what kind of discount rate you’ll use for your cash…you know, the Present Value tables that you learned in your finance courses. Ultimately, this will give you the numbers needed to calculate your Terminal Value of the business.

Lets say your CFYr 4 is $1.4 million and you’ve determined that the business can grow at an anuual rate of 7% after year 4 and you’ve determined that you’ll use a discount rate of 20%. Plugging the numbers into the formula, you get:

TV = 1.4 (1 + .07) / (.20 - .07) = 1.489 / .13 = $11.52 This gives you your Terminal Value….$11,520,000 dollars

Using your Present Value tables, start discounting the cash (we’ll use 20% for this example) using your Net Income from your P/L statements that you’ve created for the 4 years. So, say your numbers are:

Yr 1 – a loss of $200,000 * .8333 <--number found on Present Value table --> = 0.167
Yr 2 – $400,000 * 0.6944 = 0.278
Yr 3 – $980,000 * 0.5787 = 0.567
Yr 4 – $1.4 million + $11.52 (the number calculated in your Terminal Value)* 0.4823 = 6.231

Add .0167 + 0.278 + 0.567 + 6.231 = $6.909

$6,909,000 represents what the company is worth in today’s dollars.

Going though this process, you’ve:

A. Constructed a P/L statement for a X number of years into the future

B. Made an assumption that cash flows will grow at a certain percentage after X years and calculated the Terminal Value of the business (that’s the $11.52 number)

C.Calculated the value of the business in today’s dollars using the Present Value tables ($6.909 million)

See, too easy!