How do I value this business we might buy?

If you’ve never seen it before, I would very much recommend some binge-watching of The Profit.

No amount of “advice from friends” and even those of us who have experience in this (not me) would do you as much good as having guidelines and yardsticks that you can see applied in action. Highly recommended. You’ll see how Marcus reviews a company’s financials and on-site inspections to come up with business valuations – and then makes money in the process (and in his case, generally helps the business owner, too). If you take his lessons to heart you could do very well.

I watch The Profit now and then. I like the show.

I don’t have much experience with a service buiness I know many of the tricks owners use to make their business look appealing. Much of it is hiding expenses. If there are 3 trucks I have to assume there are three employees (maybe two plus the owner). Make sure those employee costs are fully loaded, not just base salary. Insurance costs are typically not included, you have to figure that out. Hopefully any inventory is figured at cost not retail and you need to insure it’s not old obsolete crap. I don’t know what licensing costs or environmental costs there are but you need to know.

I would think the cost of the business wouldn’t be more than 1 years profit. I am assuming that there is no store front since it is a mobile business. That means the only thing you are really buying is the name and customer list. there is a lot of information available on the internet to help you price a business but finding it can be quite time consuming.

Obviously the tax returns will provide a much better picture of how well the business is doing. Be wary when they tell you that the profits are much better than the tax returns show. It’s not uncommon for that to be true but it is also not uncommon for their stated profits to be much lower than actual profits.

You’ll definitely want more than the owner’s say-so as to all of the above. Has he offered to share audited financial statements with you? That would be a sign to me that he’s on the up-and-up (even if he may still attempt to inflate the value of all that he’s selling – including the customer list).

I’m also a big fan of The Profit, and agree with the above advice from @Jaxk. I think the general rule is 3x annual profits when valuing the business, but that can vary widely (especially with fixed assets). It’s harder to fake income than to mask expenses, so that’s a big part of the equation.

Things to consider: are there existing contracts in place with local country clubs? if so, what are they and how would your purchase of the company affect those agreements? Are there any outstanding legal issues (e.g. an ongoing lawsuit like one of the drivers got in an accident and the company is being sued for running over a kid with the company van)? I’d also want to know about the company’s marketing to-date, web presence and it’s Google ranking (have they used a black-hat SEO service and gotten blacklisted by Google, or ranked #1 organically in your area)? Received terrible/glowing reviews on Yelp, the Better Business Bureaux, Facebook, etc? How does the competition stack up? How does the website look?

In a business that has employees driving all over town, I would want to know about how the owner keeps them honest (i.e. you can’t directly supervise them, how do you know they’re not providing services on the side for cash?). That and the insurance risks associated with having several mobile vans driving around is not insignificant. Be sure they have a solid insurance policy in place.

Finally, I would hope either you or your husband have passion/experience with repairing small vehicles, because that’s going to be important domain knowledge to have. Between maintaining/repairing your fleet of company service vehicles and being able to manage/train your staff, that will be a critical component of keeping you competitive.

Extremely helpful! I was wondering about insurance expense, and you all gave me some other things to think about also.

The trucks are old, so I know they will require fixing now and then, and I doubt that’s included in the statement provided to me.

What is an audited tax return? All businesses are audited?

In addition to the excellent advice above, I believe it imperative that you and your partner invest the time and effort to familiarize yourself with the business prior to committing. This means riding around with whoever is driving those trucks and servicing the carts. Were I the current owner of the business in question, I would be hesitant in selling it to anyone not familiar or experienced in operating a comparable enterprise. And my reasoning for this goes beyond mere ethical considerations. I have no idea about the mechanical aptitude of you or your partner, nor your skills at assessing or managing people, but I urge you to seek as lengthy a “training” period with the current owners as they will afford you.

The general rule was 3 times profit when I was in the game.

3 times profit works for a store front but if there is no shop or place of business the location advantage is lost.

Yes the price can vary considerably based on the nature of the business. From the description of this one, I would think about offering an amount equivalent to the previous year’s gross plus the value of the equipment. But even that offer would hinge on the ratio of expenses to profits.

A few more things to consider. You could find out the milage of each vehicle and figure out roughly how many miles were driven by all vehicles in total per year. If they don’t keep milage reports on the vehicles, you may have to look at the purchase info on the vehicles and get the milage from that (which they should have since they’re fixed assets) or 0 miles if they were bought new. You could come up with come crude averaging based on the number of months from the date of purchase and the difference in milage to get an average annual milage for each vehicle.

Once you have the annual average milage, you divide that by the number of service calls, and you’ll have a rough idea of the miles per call which you can use to estimate expenses.

If the trucks are really old, I might negotiate the value of the business separately from the value of the trucks, and then agree to have a 3rd party value the vehicles for resale.

The assets will have a book value on am asset register. Do not offer money for any assets. Ask for their last year’s accounts given to the tax department.

Just to give more details:

We have met the owner already and have seen the basic set up. A week from Monday we are spending a week up in the area (it’s a few hours from where I live now) and my husband will shadow the owner to make sure my husband likes the “job” because he will be the third truck. I will be checking out the competition better, talking to people, exploring work opportunities for me, and looking around a little at housing.

We already requested three years of tax returns, but haven’t seen them yet. My husband knew what an audited tax return is and told me he doubts this business is audited.

From everything mentioned above I’m making an additional list. Things that really stood out to me were the insurance question regarding vehicles and the business, if the inventory is estimated based on cost or retail, if estimated expenses for maintaining the vehicles are in the math, and also how much will it cost us to register the vehicles? FL is very expensive to register, but I do have two extra plates under our name so that should make it cheaper, unless I can’t use them because these are commercial vehicles? Are they commercial vehicles?

We actually already have a contract in play, we are in the due diligence period. I’m nervous I might have overpaid. We can always try to go back and renegotiate, but I think that’s really hard to do usually. We are paying about double the gross income and it includes all the inventory and trucks. He actually came down a lot from his asking price.

Look at the books from yrs back , scrutinize them . Speak to their clients. Observe them at work. Just simply get as much information that you can and don’t let them rush you.