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  • #983824
    bees
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    Hi everyone, this is my first post here and I’m not sure where to put it, so mods, please remove if this isn’t the right spot.

    I’m looking at a business that I’m keen to buy. It’s very new, (only about a year old) and the current owner simply can’t stay on top of it or grow it. She has a contract with a distributor with minimum purchase amounts she hasn[‘t come close to meeting, although she tells me they are very relaxed about this. Her business summary is full of glowing ‘potential’, which could all be quite feasible, but how do you price this? I see this potentia, but it’s only really turned over 75K, around 30 of which was profit. The owner is asking 100K, which seems very steep to me. I’d like to make an offer, but I have no idea how to value what the owner is labelling potential and Intellectual property.

    I need help with the following:

    • Placing a $ value on the business
    • Checking the contract in place with the distributor to ensure I know what i”m signing up for
    • Renegotiating this contract if necessary
    • Helping to draw up an offer to purchase, along with guidance through the sales process

    I really can’t find any one place that offers such services, and my accountant tells me she can’t offer business advice. She’s happy to look at figures, but won’t consider putting a value on any ‘potential’ or IP.

    Can anyone point me in the right direction? Is it a few different people I need to guide me through this? I’m stuck for where to start.

    Thanks in advance.

    #1144470
    Anonymous
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    Hi bees,

    Welcome to the forum, and thanks for introducing yourself.

    We have a number of members around here that offer business valuation services, so stay tuned and hopefully someone will pop in with some recommendations for you.

    Good luck with it all,
    Jayne

    #1144471
    John Debrincat
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    bees, post: 165383 wrote:
    Hi everyone, this is my first post here and I’m not sure where to put it, so mods, please remove if this isn’t the right spot.

    I’m looking at a business that I’m keen to buy. It’s very new, (only about a year old) and the current owner simply can’t stay on top of it or grow it. She has a contract with a distributor with minimum purchase amounts she hasn[‘t come close to meeting, although she tells me they are very relaxed about this. Her business summary is full of glowing ‘potential’, which could all be quite feasible, but how do you price this? I see this potentia, but it’s only really turned over 75K, around 30 of which was profit. The owner is asking 100K, which seems very steep to me. I’d like to make an offer, but I have no idea how to value what the owner is labelling potential and Intellectual property.

    I need help with the following:

    • Placing a $ value on the business
    • Checking the contract in place with the distributor to ensure I know what i”m signing up for
    • Renegotiating this contract if necessary
    • Helping to draw up an offer to purchase, along with guidance through the sales process

    I really can’t find any one place that offers such services, and my accountant tells me she can’t offer business advice. She’s happy to look at figures, but won’t consider putting a value on any ‘potential’ or IP.

    Can anyone point me in the right direction? Is it a few different people I need to guide me through this? I’m stuck for where to start.

    Thanks in advance.

    Hi bees,

    What type of business is it and what does it do? The value of the business depends a lot on what it does.

    In general terms if the business is only a year old then there will be no real value in the Good Will or IP.

    Have they provided you with a full set of audited accounts? Also check that there are no tax obligations or unpaid superannuation requirements.

    If it is an owner operated business then check what they have taken out of the business for themselves as it can be a hidden cost to the business that will mean that there is no real profit.

    The business summary that has been built is probably of no real use when it comes to valuing the business. Meaning that it has been developed as a marketing document. You need to work on only the financial information that is real. If the total profit in the first year was $30,000 then the value will be a factor of that + any stock that is on the shelf + cash in the bank – any liabilities.

    On the distributor agreement you really need to speak directly with the distributor. If there is an agreement has it been made with the business or the owner? If there are minimum targets in the agreement then you need something from the distributor that waives those targets or they will come back to burn you.

    If you are serious about buying the business you need to get legal advice and there are plenty of lawyers that can help. Make sure that you nail down a fee structure with whoever it is that will do the legal review for you. Reality is that it will cost you some money to get the right advice but it will be money well spent and could save you making a bad decision.

    Tread carefully but also follow your instincts.

    John

    #1144472
    Kennethti
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    Actually lawyers can’t give financial advice either. We can help you out with the details of the transaction, but we can’t tell you if it’s a good business decision or the value of the business. We’re just not qualified.

    What you’re looking for is a valuer to value the business. Your accountant may not be able to do this, but lots of other accountants can, including forensic accountants. Have a chat to accountants like Condon and Associates, or Moore Stephens There are multiple ways how to value the business.

    NOTE: While your accountant might be able to value the business, there is no way that your accountant can assess the “potential” of the IP that you are going to buy.

    Generally a popular method is by calculating Future Maintainable Earnings or Maintainable EBIT (earnings before interest and tax), or EBITDA (earnings before interest, tax, depreciation, and amortisation) multiplied by a multiple dependent on a number of matters such as what comparable businesses are doing and risks inherent in the industry.

    Generally for small businesses in a competitive market the multiplier is between 2 to 5. The multiplier depends heavily on a number of matters and different accountants or valuers may come to a different conclusion in relation to what is the appropriate multiplier to be used.

    The multiplier will be affected by:

    • History of trade
    • Goodwill, including trade marks and patents held
    • Risk involved in the business
    • Market share
    • The state of the industry
    • Reliance of the company on key people
    • If the business can continue to operate without key people / owners

    A full on valuation will cost anywhere between $2k and $5k depending on the size of a business (although one of my clients ended up paying $10k for a valuation once). A quick valuation would probably cost less.

    I do put it to you that any owner that wants to sell their business to you will obviously sell to you, painting a glowing and rosy picture of their business. Of course business is going well. Of course it will improve. Of course the IP is solid. Pft, you don’t need a three year history, just look at my margins!

    Yeah yeah. Question is – What are they NOT telling you? What are their costs? Are their customer base easily transferable? Or will they follow the owner once they leave? Will their employees be staying? Will they provide training to you on how to run the business? What about the lease? Why is it on the market only after 1 year of operation? Are they having issues with the distributors? Costs? Licensing? Upcoming litigation? What is the owner’s previous business history? Can you even renegotiate the contract with the distributor? What happens if you cant?

    John said, “Tread carefully”. I echo that sentiment.

    #1144473
    Pratib
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    Hello,

    Great questions and comments so far.

    1) valuation
    Values as you might know depends on buyer and seller. Its a commonly agreed price. Saying that, a price for a business can be estimated in many ways. You can definitely get accountants or financial projection services that we are running (silverwhale.com.au). Accountants usually use past records…past years financial statements to value the business. Alot of tips have already been shared..so I wont go in detail here.

    Potential investors…usually use multiplier of earnings or profit depending on personal preference. I have came across both set of investors. So lets say this business is profiting $30,000…then the value is ($30,000 x 3/4/5). Usually this multiplier is 5 or less than 5. One way to find the multiplier is to do some research on the industry that your potential business is at. I have also seen investors buying using multiplier of one as well.

    Kennethti shared many good tips there. I support his thoughts.

    The cost of company valuation is really depends on the valuer. There is not standard market rate here…so you might have to shop around. Getting a valuer who have valued a similar business would be easy to deal with.

    I am not sure about all the other questions. Valuation and financial projection is what my clients come to me and this is something that I love doing and happy to share.

    #1144474
    bees
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    Thanks everyone, some great advice, my head is swimming. I found a local firm that have a combination of accountants/lawyers/business advisors. They came via recommendation to me and as a starting point an accountant has looked over the books free of charge to assess if it’s viable to go ahead. His advice was to let him come up with a price, and then he’d do a quote for the legal team to look into contracts and help navigate the sale.

    Seems to be the solution I needed!

    He’s just gotten back to me today with a figure of 50K, of which he’s included stock, plant and equipment and around 30K goodwill.

    He’s out of the office today…can someone explain to me what it means exactly when he says that the “ROI is $37500 (industry standard is 75%)”??

    Kenneth, I hear you about the hidden info, what’s not being said. I find that suspicious also, hence writing to you guys and delving into other things I should be looking into. Each and every question you have listed is exactly my concerns. As John has also advised, if and when we can agree on a purchase price, I’ll retain the services of the legal team to really help with the negotiations. There is no point in taking things further if the distributor contract is watertight, or conversely, likely to fall over.

    Thanks everyone….great info. So far I’ve put the 50K offer to the owner and she’s come back with 75. I know it’s not sheepstations, but now we are talking about a much greater component of goodwill that I can’t write off. I’m not prepared to go there.

    #1144475
    John Debrincat
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    bees, post: 165425 wrote:
    He’s out of the office today…can someone explain to me what it means exactly when he says that the “ROI is $37500 (industry standard is 75%)”??

    ROI = Return On Investment.

    I don’t believe that there is any “industry standard” rate for ROI. He is basically saying that you will make $37,500 by investing the $50,000 to buy the business. How he came up with that number is anyone’s guess as you would need to know the term over which it was calculated.

    bees, post: 165425 wrote:
    Thanks everyone….great info. So far I’ve put the 50K offer to the owner and she’s come back with 75. I know it’s not sheepstations, but now we are talking about a much greater component of goodwill that I can’t write off. I’m not prepared to go there.

    Negotiate, negotiate and then negotiate……

    Always remember that the price is also based on how badly the owner wants to sell the business. There are many ways that you can find a gap filler and one way is to offer to pay more based on the business results over your first year of ownership. It often has a way of clarifying everyones positions. Do a Benjamin Franklin – quote from Ben:

    • Be clear about exactly what you’re after.
    • Understand the issues; so that you are fully prepared to discuss every aspect and respond to every question and comment.
    • Don’t give in. Don’t expect to “win” the first time. You have to start the process.
    • Make friends with the person with whom you are negotiating. Negotiate in terms of their needs, advantages, and benefits.
    • Keep your sense of humor and always be positive.

    #1144476
    Pratib
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    Hi again,,

    Sweet. Can you please give me the name of the service provider. Might be helpful for some of my clients sometimes.

    On the question regarding ROI..these are my thoughts..but please check with him.
    He is basically saying the return on investment (ROI) that you can expect to get from buying the businss. The business price is $50k…and ROI is 75% of that which is $37,500.

    So by purchasing this business, and everything goes as planned, you should expect $37,500 as the return on the invested capital. Anything mroe than this, you have outperformed your target and vice versa. That is basically a target number that you should expect the business to perform. If you have a few businesses that you are considering, usually you would pick a business with higher ROI. But in this case, only one business…so it works as a target number.

    On the goodwill.
    1) It is good in the sense that someone has done all the work for you. The name is in the market..there are a few customers and stuff. Try to compare the value of the goodwill with the cost that you have to spent to get additional customers. Getting a new customer for an unknown brand *assuming if you are starting the similar business under a new brand, is quite difficult and there is cost associated to getting a new customer. You can compare that and see if the goodwill component is valued. Your accountant might have used one way or the other to value the goodwill component..and if I am you I will ask him how he measure this. This will give you some insight on whether it is something that you want to believe in.

    2) Price of the business
    If the seller does not want to reduce the asking price of 75k, what you can do is buy the business using option. Check with the legal team for this. What you can do is to buy the business now with an agreed price (might be 50k or any other amount) and pay the remaining portion depending on the performance of the business. You can offer her the total price that is higher than 75k…maybe 85k but with a condition that your business achieve some targets such as what she had promised to you in her business plan. She has an incentive knowing that if the business performs well she can get 10k higher than what she wanted. This might only work sometime, but hey you wont know if you dont ask the seller if she is interested. So your initial outlay might only be 50k.

    Hope this helps.

    #1144477
    bees
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    Fantastic! Thank you both, I didn’t know those options existed. It makes perfect sense that if she really has the faith in it she claims to, then she’ll be willing to stand behind that.

    John, I understand now, he’s obviously calculated that ROI over an 18 mo period. Thank you. Negotiation is not my strong point! I just don’t understand why people don’t state their bottom line and get on with things. Love the quote, timely reminder :)

    #1144478
    bees
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    • Total posts: 81
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    We’ve just now agreed upon a price of 60K. So it’s time to draw up a contract. Obviously I need to make it conditional upon the legal team reviewing the contract with the distributor. Any other handover clauses I should be considering. While I’ve been in business for 8 years, I set it up from scratch, so the whole ‘buying a business’ is completely new to me! I’m madly researching but would be grateful for any points in the right direction.

    #1144479
    Kennethti
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    Get your legal team to handle the purchase as well – you’re going to pay at least $50k for the business, spend a little more to make sure that the transaction is done right.

    #1144480
    bees
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    Great advice Kenneth, we’re going to do that next week. In the meantime, we’ve been advised to get the owner to put together a draft of the contract so I have something to take with me to the legal guys. Are there any hard and fast rules about the handover of a business, who pays for relocation of stock? Who needs to foot the travel bills etc? or is it all just agreement between the parties?

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