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GreenGiant94
10-28-2010, 05:19 PM
Hey everyone,

I have a question I wanted to ask y'all. If your trying to determine how much your company is worth, what is the way to find out how much value your accounts add. Is it something like a % of what you get from it annually? I'm not sure I just thought I heard something like that before. Thanks for the input.:)

fl-landscapes
10-28-2010, 05:27 PM
you will get a lot of crazy answers to the question just wait and see. Most business are valued on a scale of 1.5 to 3.5 times "owner benefit" meaning the owner or owners salaries plus any benefits. I believe the method was an article in lawn and landscape but this valuation is something used in all industries not just landscape. Basically a buyer wants to know how soon they will see a return on their investment. Now determining where your particular company falls in between the 1.5 and 3.5 thats the tough part

Mowingman
10-28-2010, 06:17 PM
Here is a good rule of thumb you can use.
If there is not a written contract, figure it is worth about 10% of the annual gross, averaged over 3 years.
If there is a written contract, so you know FOR SURE the customer is going to be your's for a full season, then use 15% of the annual gross.

fl-landscapes
10-28-2010, 07:31 PM
Here is a good rule of thumb you can use.
If there is not a written contract, figure it is worth about 10% of the annual gross, averaged over 3 years.
If there is a written contract, so you know FOR SURE the customer is going to be your's for a full season, then use 15% of the annual gross.

not to argue but annual gross means NOTHING! Its about net profit. GM had a multi billion dollar annual gross but was bleeding money........annual gross means absolutly nothing!!!!!!

Mowingman
10-28-2010, 07:45 PM
NET profit means NOTHING. One business owner can run his company to where he is making no profit on a given property. The next business owner may run his company more effeciently, and make a nice profit in the same property.
The gross income is a whole lot more meaningful, in deciding what a property is worth to a buyer.

jbell36
10-28-2010, 08:00 PM
not to argue but annual gross means NOTHING! Its about net profit. GM had a multi billion dollar annual gross but was bleeding money........annual gross means absolutly nothing!!!!!!

ya you are wrong, i see your point and not to argue with you but when a company is sold it is always based off annual gross, that's just a rule of thumb for all businesses in all fields...now when talking about how much you make (as in net profit) then you can say that gross means nothing, if you gross 200,000 and only net 20,000 then you can really only say you make 20,000, in that situation gross means nothing...unfortunately for the seller, in our field a lawn care business will usually never go for more than 1 years annual gross as opposed to many other fields that average 3-5 years annual gross

and yes there are others way to sell a business i'm just saying this is a general guideline

jbell36
10-28-2010, 08:09 PM
i forgot to add a couple things...i've seen quite often that strictly mowing accounts go for about one months gross, and obviously equipment would be additional...contracts also make a huge difference, the more the better, although we do contracts and i do not think they are completely necessary...there are many variables to consider when selling/buying a business

fl-landscapes
10-28-2010, 08:50 PM
NET profit means NOTHING. One business owner can run his company to where he is making no profit on a given property. The next business owner may run his company more effeciently, and make a nice profit in the same property.
The gross income is a whole lot more meaningful, in deciding what a property is worth to a buyer.

your clueless. Ill take your example as my example. One owner runs his $100,000 company like a donkey at little profit and the other owner of a $100,000 company runs it efficiently and shows a nice profit. Remember its your example and a good one to support MY POINT. In your example using your 10 - 15% of gross both companies are worth the same??????? Only by looking at NET PROFIT will you realize in your example the second more efficient company is worth more. You are dead wrong. Gross sales mean nothing to the value of a company....PERIOD!

fl-landscapes
10-28-2010, 08:53 PM
ya you are wrong, i see your point and not to argue with you but when a company is sold it is always based off annual gross, that's just a rule of thumb for all businesses in all fields...now when talking about how much you make (as in net profit) then you can say that gross means nothing, if you gross 200,000 and only net 20,000 then you can really only say you make 20,000, in that situation gross means nothing...unfortunately for the seller, in our field a lawn care business will usually never go for more than 1 years annual gross as opposed to many other fields that average 3-5 years annual gross

and yes there are others way to sell a business i'm just saying this is a general guideline

what does this even mean???? Are you talking net profit? which is exactly what I said matters and once again you have also pointed out the way to value a business.......by figuring the net profit. GM and Blockbuster should have sold to both you guys instead of going bankrupt they had great GROSS SALES NUBERS:laugh:

fl-landscapes
10-28-2010, 08:54 PM
i forgot to add a couple things...i've seen quite often that strictly mowing accounts go for about one months gross, and obviously equipment would be additional...contracts also make a huge difference, the more the better, although we do contracts and i do not think they are completely necessary...there are many variables to consider when selling/buying a business

very true there are many variables.....gross sales is about the least important to valuation!

fl-landscapes
10-28-2010, 08:57 PM
NET profit means NOTHING. One business owner can run his company to where he is making no profit on a given property. The next business owner may run his company more effeciently, and make a nice profit in the same property.
The gross income is a whole lot more meaningful, in deciding what a property is worth to a buyer.

this is nominated as the most self conflicting post ever posted on lawnsite. Maybe you dont know what "gross and net" mean:dizzy: Maybe Michael donovan or someone with business expertise in valuation can chime in.....PLEASE!!!!

GreenGiant94
10-28-2010, 09:11 PM
Thanks for the info guys. This is more then I knew before so it still helps!

Mowingman
10-28-2010, 09:13 PM
You do not understand the meaning of "net" and "gross". I have bought/sold/ owned more companies than you will ever think about owning in a lifetime. I also was on teams that evaluated potential acquisitions/buyouts for two large, NYSE-listed corporations.
I will say it again. NET income is all but meaningless when evaluating what a company is worth when considering an acquisition.
Period, end of sentence.
Gross income= income before expenses
Net income= income after all expenses= profit
Given the same gross income from a property or business, the new buyer may see a profit to be made, while the seller is losing money on the property/business due to no net income after his expenses.
now do you get it???
If not, I give up.

GreenGiant94
10-28-2010, 09:14 PM
you will get a lot of crazy answers to the question just wait and see. Most business are valued on a scale of 1.5 to 3.5 times "owner benefit" meaning the owner or owners salaries plus any benefits. I believe the method was an article in lawn and landscape but this valuation is something used in all industries not just landscape. Basically a buyer wants to know how soon they will see a return on their investment. Now determining where your particular company falls in between the 1.5 and 3.5 thats the tough part

Alright. Yeah I bet your right, lot of different answers haha. Thats okay though. Thanks for the info.

GreenGiant94
10-28-2010, 09:17 PM
Here is a good rule of thumb you can use.
If there is not a written contract, figure it is worth about 10% of the annual gross, averaged over 3 years.
If there is a written contract, so you know FOR SURE the customer is going to be your's for a full season, then use 15% of the annual gross.

Cool I was hoping there was a % i could go by. Thanks for the advice!:)

jbell36
10-28-2010, 10:32 PM
i'm not really trying to get into this any further but annual gross is what companies key off to buy/sell, this is one of the first things i learned at the university of kansas about business, it's honestly business 101...you're not 100% off by saying net doesn't have something to do with it but it's not a huge factor, especially not the starting point, that other guy was right by saying someone else might run a business more efficiently therefore make more money, so net profit would be inaccurate for that situation

fl-landscapes
10-29-2010, 09:10 AM
i'm not really trying to get into this any further but annual gross is what companies key off to buy/sell, this is one of the first things i learned at the university of kansas about business, it's honestly business 101...you're not 100% off by saying net doesn't have something to do with it but it's not a huge factor, especially not the starting point, that other guy was right by saying someone else might run a business more efficiently therefore make more money, so net profit would be inaccurate for that situation

call me crazy but the only way to figure out if company A with the same gross sales as company B is worth more or less would be to figure out what, like you said which one is run more efficiently.....how do you do that, look at net profits. Sorry but I also disagree with your kansas state education. Did you click the link I posted? I think its very simple to to know a company who has large sales volume and is run poorly is worth less than a company with the same sales volume (gross sales) and run very efficiiently....how do you tell which one is worth more? Net profit. But whatever.....Im done with this thread. Thats why yard boys will be yard boys as ric always says. The bold print in your statement is what net profit will determine and what proves my point.

fl-landscapes
10-29-2010, 09:47 AM
heres one more link, the first part describes exactly what I said.....multiple of the "owners benefit" anyone else care to post a link backing the "percentage of gross sales model"? Didnt think so. http://thebizsellerblog.blogspot.com/2010/04/business-valuation-rules-of-thumb.html

jbell36
10-29-2010, 12:23 PM
Directly from the article, which is backing up what i said...
"If your industry has one widely accepted rule of thumb you may want to use it as a starting point." - damn, almost exactly word for word what i said
"Knowing your industry's rules of thumb can be helpful though. Applying them to your business will at least let you know how realistic you are being in your pricing."
"Two similar types of businesses with exactly the same amount of sales may have nothing in common when it comes to profits." - for example, an owner who wants to get out and has let his company be ran into the ground, and like you said which is one thing we can agree on, one owner being able ro run a business more efficiently therefore make more money AND yes, back to your point about one business being worth more, if company A has been going the wrong direction and company B has been doing great yet still making the same gross then company A would be worth more which is one of the variables...it's all based on gross plain and simple

Mowingman
10-29-2010, 12:29 PM
jbell 36,
Don't waste any more time with this fl-landscapes character.. He is not going to be convinced by anything you or I say. He knows it all.

jbell36
10-29-2010, 12:33 PM
"call me crazy but the only way to figure out if company A with the same gross sales as company B is worth more or less would be to figure out what, like you said which one is run more efficiently.....how do you do that, look at net profits."

we are getting off subject a little, this is a comparison of two businesses, the original post was about how to determine what 1 business is worth...what you said in quotations is true although it's getting off point

fl-landscapes
10-29-2010, 01:01 PM
"call me crazy but the only way to figure out if company A with the same gross sales as company B is worth more or less would be to figure out what, like you said which one is run more efficiently.....how do you do that, look at net profits."

we are getting off subject a little, this is a comparison of two businesses, the original post was about how to determine what 1 business is worth...what you said in quotations is true although it's getting off point

no I am not off point. The original question was how to determine the value of a company and I posted the formula and subsequent links to people who actually do valuations as a profession to back up my statement. I am making the point that two business with equal gross sales can be worth two very different values and it all depends on profit to tell the difference. NOT 10 - 15% gross sales. Gross sales has little to do with the value of a company. Yes it is part of the equation to figure future growth or potential profit but only the net profits can be considered when doing a business valuation......plus assets and equipment etc.

jbell36
10-29-2010, 01:36 PM
no I am not off point. The original question was how to determine the value of a company and I posted the formula and subsequent links to people who actually do valuations as a profession to back up my statement. I am making the point that two business with equal gross sales can be worth two very different values and it all depends on profit to tell the difference. NOT 10 - 15% gross sales. Gross sales has little to do with the value of a company. Yes it is part of the equation to figure future growth or potential profit but only the net profits can be considered when doing a business valuation......plus assets and equipment etc.

i'm not arguing the point that you are trying to make because i do agree with that, however it's still a comparison of two established values...

Company A: Gross = $200,000 Net = $150,000
Company B: Gross = $200,000 Net = $100,000

owner of company A still does a lot of the work himself and company B has employees do all of the work...both companies still have the same potential therefore net can't be the largest factor

obviously if i was going to buy a business i would definitely look at net just to see how well they are doing at that moment...and yes back to your point you have to evaluate the business, if they aren't making much of a net profit then ask yourself why? if it is something they are doing wrong (not running the business efficiently) and you think there is potential there to make a lot more then that is the buyers decision...it also helps if you know the field that the business is in, such as landscaping, i would know how long it takes with what equipment and how much labor to get certain jobs done, therefore you have to evaluate the business and see if it makes sense to you

4CORNERS
10-30-2010, 10:38 PM
If I'm going to buy a business...I want the net....agree 100% with Fl land. Pretty simple logic.

Mow Man
10-30-2010, 11:37 PM
I am negotiating with my partner and we are thinking about 10% of receivables of each property involved for 18 months. Any thoughts on this aproach

wbw
10-31-2010, 12:28 AM
You do not understand the meaning of "net" and "gross". I have bought/sold/ owned more companies than you will ever think about owning in a lifetime. I also was on teams that evaluated potential acquisitions/buyouts for two large, NYSE-listed corporations.
I will say it again. NET income is all but meaningless when evaluating what a company is worth when considering an acquisition.
Period, end of sentence.
Gross income= income before expenses
Net income= income after all expenses= profit
Given the same gross income from a property or business, the new buyer may see a profit to be made, while the seller is losing money on the property/business due to no net income after his expenses.
now do you get it???
If not, I give up.

Not trying to be a jerk but you are comparing apples to oranges. Small owner operated business are typically valued at 2.5 times benefit to owner. That factor is not set in stone, there are obviously variables. This is much different than buying a "real" business, which it seems is where your expertise lies.

NatesLawnCareLLC
12-20-2010, 08:55 PM
I think that there are many key points of buying a business. I don't believe that there is only one method of valuing a company. I think that there are a lot of methods. If your buying strictly names and addresses for mowing, then maybe look at the potential cash flows you can earn. From those numbers you should weight how much you are willing to pay.

If you are doing a straight buyout. You should evaluate ALL aspects of the business. You can't be too through in this. You must make sure that you take a look at the companies Financial Statements. You'll also want to check other aspects of their business such as if they have any current contracts, equipment inventory and the condition of it. Also take a look at the way the company is set up, weather it's vertical or horizontal. Serious buyers of larger companies should look at the payroll and see what kind of money you'll have to shell out if you are keeping the acquired companies employees.

It's always good to have a lawyer and a trusted accountant (not theirs) to look over everything! I know I didn't touch on everything so make sure you look at as much of the business as possible!.

Good Luck!

khutch
01-02-2011, 09:10 AM
Microsoft = Net profit HUGE
Google = Net profit ZERO

This was the case not long ago...Which one do you want to be involved with NOW?

Net profit is not the only issue, but it is very important.

Hey guys, it's complicated and when it gets to I'm right and you are wrong, well, I think you are wrong.