Valuing a business

makeandcreate

I have seen a business for sale locally - I've been in there several times - and I have checked the location out a couple of times this week and there is good footfall but the business itself doesn't seem that busy. This in itself doesn't really worry me - as I'd plan to half the current floor space for the current business and expand with new products and services.
However, it does mean I think the current owner has the business overvalued - I cannot see much "goodwill" per se and it's clear that some of the stock has sat on the shelf for a long time. Although the figures are showing 60% gross profit - all I have been able to get them to divulge so far.
I thought about asking the owner if I could either work in the shop or shadow someone to get an actual handle on the business for 3 or 4 days - perhaps I am underestimating it.
My questions are - if you were the business owner would you let me, or am I asking too much? And can anyone recommend someone that does business valuations?

pedronomix

Read post No 45 on this thread , really solid stuff http://www.boards.ie/vbulletin/showthread.php?t=2057193101&page=3

You are going about it the right way but without being given proper trading accounts you have no chance in making any informed decisions.

A nice idea for you, but I would never let a potential buyer move in on "freeview"!

jimmii

The SeanSouth post nails it completely definitely worth reading a couple of times! 60% gross profit seems huge have you been able to look at the books to confirm that or is that just coming from the seller?

To me Gross Profit means nothing. The company can still be making a loss. Net Profit is the figure you need, once you have that its a lot easier to make a reasonable valuation.

makeandcreate

Thanks for all the replies.
You've all outlined things that are raising red flags - like the gross profit v net profit. At what stage in negotiations should I expect to be shown the books?
Not sure how to proceed with making an offer - I know some of the stock will never sell at rrp - needs clearing probably at below cost to shift it and fixtures and fittings depreciate massively and they are pricing the fixtures at cost and stock at rrp.
There's a website but it's just a free one with basic info on it and not that well written - Facebook has about 500 followers - not much to write home about there.
Do I make a lower offer than I'd pay and expect to negotiate or do I approach them with a one time this is where I'm at offer?

terryhobdell

makeandcreate wrote: »

Thanks for all the replies.
You've all outlined things that are raising red flags - like the gross profit v net profit. At what stage in negotiations should I expect to be shown the books?
Not sure how to proceed with making an offer - I know some of the stock will never sell at rrp - needs clearing probably at below cost to shift it and fixtures and fittings depreciate massively and they are pricing the fixtures at cost and stock at rrp.
There's a website but it's just a free one with basic info on it and not that well written - Facebook has about 500 followers - not much to write home about there.
Do I make a lower offer than I'd pay and expect to negotiate or do I approach them with a one time this is where I'm at offer?

You really have to see the accounts if they want to sell they have to offer proper information if they are not they won't find a purchaser unless he is a mug. If they are serious I think your suggestion of working for a few days is reasonable. If they are trying to find a mug let them. If it really interests you make a low bid and keep in touch with them it's amazing how quickly people become realistic . Keep watching the operation the more you know the better. In the end of the day it's up to you to decide if you can make a profit.

jimmii

Once they know you are seriously considering buying then they should show you the books really as that is going to be the thing that decides whether it goes ahead or not. It sounds like the stock isn't worth a great deal you probably wouldn't want to be paying more than 20-30% of retail if you think you are going to need to sell it all off on sale. Definitely worth trying to get a couple of days in there it will let you get to know some of the regulars (see if their loyalty is to him or the shop) a touch so if the change does happen its a little smoother it will also give you an idea of what the footfall is like for them (assuming there is no footfall counter data etc). Street footfall and shop footfall can vary massively our footfall is 6 or 7 times as much as neighbouring shops (brag!). You should basically just be trying to accumulate as much data as possible about the business so you can make the most informed decision you can then obviously go way lower than you think you should if he takes your first offer then that would also raise some concerns for me.

By the sounds of it then it will be very easy to offer some immediate increased value due to their poor online presence. It stuns me how there are businesses who aren't taking advantage of such a great (and relatively cheap) marketing tool. Our ROI on Facebook is 1000%+ we generate a hell of a lot of sales from there and have probably put in a few hundred on getting it to the stage its at.

makeandcreate

makeandcreate wrote: »

Thanks for all the replies.
You've all outlined things that are raising red flags - like the gross profit v net profit. At what stage in negotiations should I expect to be shown the books?
Not sure how to proceed with making an offer - I know some of the stock will never sell at rrp - needs clearing probably at below cost to shift it and fixtures and fittings depreciate massively and they are pricing the fixtures at cost and stock at rrp.
There's a website but it's just a free one with basic info on it and not that well written - Facebook has about 500 followers - not much to write home about there.
Do I make a lower offer than I'd pay and expect to negotiate or do I approach them with a one time this is where I'm at offer?

First of all I would be very professional in your approach to doing this. If you can value the business properly, and have facts to back up your numbers, this will help you negotiate a better deal for yourself.

So Id go straight in and say your interested in purchasing the business if its still for sale. Tell him you will need to do due diligence which will take you one week, and that he will need to provide the most recent set of accounts for review, along with any other information on sales and the business that would help you to make a decision.
Important thing as said before is Net Profit after all salaries etc have been paid already.
Then you can check what the assets are, and put a real value on them. You can also see if he is in any debt on the books, loans etc if he is a limited company and has proper accounts.

A good place to start the valuation would be 3 or 4 times Net Profit + the value of the assets. You could argue your using a standard valuation system for purchasing companies as advised by your solicitor.

However if he's going under or business is really slow you have more bargaining power. So its up to you then to make your case on why it should be less then the amount above and hammer out a deal.

If he's not willing to hand over the books, tell him you'll sign a non disclosure agreement. If he's still not willing to do it then walk away.

makeandcreate

thanks everyone for all the info and links. I've also had some invaluable advice from a Boardsie via PM and so I'm sorted.