WOULD YOU PAY $899,000 TO BUY THIS BUSINESS? FORBES ARTICLE
I found this article this morning, and thought it would be helpful to other searchers:
https://www.forbes.com/sites/joshpatrick[redacted]would-you-buy-this-business/#23877af215e2
I found this article this morning, and thought it would be helpful to other searchers:
https://www.forbes.com/sites/joshpatrick[redacted]would-you-buy-this-business/#23877af215e2
And no, I wouldn't buy this business. And I would not have listed it for this price. The buyer's sanity test doesn't work. BTW, professional and knowledgeable business intermediaries prepare a buyer's sanity test BEFORE taking the business to market (note the words "professional and knowledgeable'). Also, in most cases, this intermediary will do a valuation report and review with the seller. If the seller believes the business is "worth more", then the intermediary has calculated, that intermediary has a couple of options which are 1) walk away from the deal, or 2) list the deal and hope to get the seller to reality when the buyers make low offers.
Also keep in mind, there are generally TWO kinds of business brokers which include: 1) those who take fewer listings and price them appropriately based on proper valuation techniques and 2) those who list everything and hope the market weeds out the crazy stuff. Guess which type I subscribe too?
The author of the article suggested that the business should be sold through a liquidation sale, Do any brokers or potential buyers have an alternative viewpoint? What do you think the business is worth and why?
Same thing applies to businesses with high asset value and low cash flow. A machine shop with $1 million in iron on the floor and $100k cash flow is NOT worth $1 million. Educating sellers is paramount. I have walked away from plenty listings like this example. Especially when I hear them say "Well what about goodwill?" Goodwill is a function of value beyond yous asset value created by cash flow multiples in excess of asset value.
I will argue with the premise of a 5 year note on this business acquisition. Generally SBA financing (almost a guarantee for a business this size) is 10 year. That obviously changes the debt service quite a bit. I would also argue with not including owner comp in the available cash flow for debt service. EBITDA plus (a single) owner comp is a basis for value in the small business market. Then you have to analyze a prospective buyer's lifestyle expense plus debt service on the business to see if it's a good fit. I go through this analysis with all my prospective listings to make sure they understand what they can expect re: value and (most importantly) WHY they can expect that. Hard to argue with that math. At least logically.
Based on available information, I would have listed this business somewhere between 2-2.5x multiple ($400-500k) including inventory AND let the seller know the value might be lower depending on the actual involvement of the seller in the business. Yes, that might be close to the value of the inventory, but at least the seller gets to exit at once, and not have a protracted exit. Then it's up to the seller to let me know if that fits their goals.
To me it seems this broker is either young in the business and/or needs education on how to value a business appropriately. Find a mentor.
My primary takeaway from a valuation perspective is that 2x SDE plus inventory might work if inventory is $50-100k (0.25x SDE or 0.50x SDE) but definitely doesn't work if inventory is $440k (2.2x SDE).
BTW - I still argue that a 5 yr term and debt service of $167K/yr is not representative of the norm for a deal this size. Though I will agree that even at 10 yrs this deal doesn't work.