Figuring My Business Value

[Dimple]

How do I figure a dollar amount for my business? With depreciation of equipment and the current customer list how would I figure out my companies inherent value?

For some reason, I thought you took the used book value of equipment and then added that to what your accounts will pay over a three year period and that is it. Am I off or is it that simple?

Thanks fellas~

[32vld]

A business usually should earn enough profit to equal what was paid for the business in 2 to 3 years.

The point is that you don't want to spend 20 years to earn back what you spent to buy a business. You want to spend the last 18 of those years making enough money to be able to retire.

Assets are worth what someone is only willing to pay for them. A book may say your truck, mowers, etc are worth $20,000. Many people looking to start doing landscaping usually have some of the needed equipment. Or already have a LCO business and do not need half of what you have. They just want your customers. At best they may only be willing to pay $10,000 for the equipment.

Then are your accounts tied to long term contracts for at least 3 years left on them and without 30 day termination clauses. Because if theses customers leave then the buyer has bought nothing of value.

[Dimple]

Originally Posted by 32vld

A business usually should earn enough profit to equal what was paid for the business in 2 to 3 years.

The point is that you don't want to spend 20 years to earn back what you spent to buy a business. You want to spend the last 18 of those years making enough money to be able to retire.

Assets are worth what someone is only willing to pay for them. A book may say your truck, mowers, etc are worth $20,000. Many people looking to start doing landscaping usually have some of the needed equipment. Or already have a LCO business and do not need half of what you have. They just want your customers. At best they may only be willing to pay $10,000 for the equipment.

Then are your accounts tied to long term contracts for at least 3 years left on them and without 30 day termination clauses. Because if theses customers leave then the buyer has bought nothing of value.

Not to sound condescending but I don't do work that way in my neck of the woods. I only contract on very rare occasion. Never had to because a handshake, smile and hard work keeps most of my customers returning year after year. And new jobs come in some too. That is why I wanted to address this to see what I'm worth here.

Thanks on the equipment answer, it helps.

[32vld]

Originally Posted by Dimple

Not to sound condescending but I don't do work that way in my neck of the woods. I only contract on very rare occasion. Never had to because a handshake, smile and hard work keeps most of my customers returning year after year. And new jobs come in some too. That is why I wanted to address this to see what I'm worth here.

Thanks on the equipment answer, it helps.

Instead of condescending how about prodescending?

So you don't use contracts out in the sticks. Is that because the courts there have ruled that signing a contract with an X is not a valid binding legal document?

Well down in the big city, well outside to be slightly more exact, but not a lot more I don't use contracts either.

That is what makes your accounts not worth much. There is no loyalty on your customers parts for who ever buys your route.

Example you have 40 customers that gross $1,000 each a year so total income is $40,000.

So your business is worth $80,000 (equipment not included) because it will take two years to earn that money back.

Well half of your customers decide they don't like the buyer and take their business else where. Now the new owner will only gross $20,000. Then it will take him 4 years to earn the purchase price back.

Your business lost half of it's value because of ownership change. That is why without long term contracts your business can't be valued on full gross.

Do restaurants need contracts to get full value when the owner wants to sell?

No.

A good restaurant will have in one night more customers then a LCO will have in one year. Some customers that may be lost and with such a large customer pool they are of no importance to judge what a business is worth.

What is important that there are 10 years of IRS income to judge that restaurants worth.

[Dimple]

Originally Posted by 32vld

Instead of condescending how about prodescending?

So you don't use contracts out in the sticks. Is that because the courts there have ruled that signing a contract with an X is not a valid binding legal document?

Well down in the big city, well outside to be slightly more exact, but not a lot more I don't use contracts either.

That is what makes your accounts not worth much. There is no loyalty on your customers parts for who ever buys your route.

Example you have 40 customers that gross $1,000 each a year so total income is $40,000.

So your business is worth $80,000 (equipment not included) because it will take two years to earn that money back.

Well half of your customers decide they don't like the buyer and take their business else where. Now the new owner will only gross $20,000. Then it will take him 4 years to earn the purchase price back.

Your business lost half of it's value because of ownership change. That is why without long term contracts your business can't be valued on full gross.

Do restaurants need contracts to get full value when the owner wants to sell?

No.

A good restaurant will have in one night more customers then a LCO will have in one year. Some customers that may be lost and with such a large customer pool they are of no importance to judge what a business is worth.

What is important that there are 10 years of IRS income to judge that restaurants worth.

Yeah there is an automatic contractor law that covers Huskers if ya did work for someone and they don't pay. Contracting them in doesn't work, they wriggle out if they want to and the only accounts I've ever had significant problems with are the ONES I DID CONTRACT. I know go figure. But it makes sense that its hard to get a guaranteed price on me for that reason. Life isn't guaranteed unfortunately anyhow. Only the fact Earth and Heaven will be here tomorrow.

My customers wouldn't retreat unless the buyer was a slacker, or screwed them somehow. They are all pretty easy.

[jrs.landscaping]

Value of equipment plus 3 months gross if all accounts are under contract. Equipment paid in full upon purchase and accounts paid monthly subject to customer retention

[Efficiency]

under 100k per year in gross sales, the clients are worth nothing; the only value comes from fair market value of assets. 100-500k annually, 2-3 times EBITDA plus fair market value of assets. 500k+, 3-5 times EBITDA plus fair market value of assets.
Some segments of the industry simply have higher EBITDA and consequently higher valuations.

[grassmasterswilson]

I wouldn't think a contract would be valid if a company I sold but I'm no attorney.

So you contracted customers would be forced to continue service if the new owner had terrible service?

I've never had to do contracts and let my service speak for itself. My only contracts are with commercial customers and there is a very lenient opt out clause.
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[32vld]

Originally Posted by grassmasterswilson

I wouldn't think a contract would be valid if a company I sold but I'm no attorney.

So you contracted customers would be forced to continue service if the new owner had terrible service?

I've never had to do contracts and let my service speak for itself. My only contracts are with commercial customers and there is a very lenient opt out clause.
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Many people post on how they won't take customers that will not sign a contract. Yet they put in a 30 day opt out for them and the customer. Makes no point to have a contract. A service agreement yes.

This is why Landscape businesses without having long term contracts to service clients makes placing a high value on them next to impossible.

As I stated before many businesses have so many clients as restaurants that you can judge that businesses worth by it's pass tax records for the last ten years.

Watching Anthony Bourdain (sp) on TV today. He went back to work in a restaurant for 1 day where he worked many years ago. This one fact is that this restaurant had 757 covers. That means 757 customers. That had not just main courses cooked, but appetizers, deserts, etc. And this was an expensive restaurant.

If this restaurant was sold tomorrow and the new owners were not liked by 57 of these customers and they took their business else where it would not effect the new owners.

However many LCO's don't even have 57 customers to lose.
And those that have their 100 to 120 customers to loose 57 over night would greatly diminish their businesses worth and would most likely such a rapid drop off may put them put of business because 57 good paying accounts can not be replaced over night.

[3238DPW]

I have read a whole lot on this subject and talked to many people (some consultants) but I am by no means an expert. I looked into this so I know what I am talking about when it comes to buying businesses or accounts.

This is what I feel it really comes down to. Are you selling a business or a job. A true business is an investment. If you go out and mow every day yourself, manage employees yourself or the business would just stop without you, then you are selling a job. It is a management job but still it is a job. If your business has systems in place, employees, a management person or team and a person or people besides you selling your services and you can take a day off almost anytime you want then you are selling a business.

Which one do you think is more valuable? In my neck of the woods a business as described above is worth a multiple of the yearly income. 2 to 3 times. A job as described above is worth a multiple of gross weekly income plus equipment. About 2 to 4 times depending on the pricing and contracts(this for lawn mowing, landscaping I would think would work differently). Also if I was buying a route and you have quality accounts and I agreed to pay 4 times, I would pay a maximum of 3 times this year and pay for one cut of the accounts I still had the following year.

Take this advise for what it is worth. If I sold today I would be selling a job and not a business. I still have a ways to go but I will get there.