How Do You Value A Business?

Discussion in 'Business Operations' started by rocky224, Jan 12, 2007.

  1. rocky224

    rocky224 LawnSite Member
    Posts: 10

    I'm looking at an existing business right now. I'm trying to figure out how to put a value on the seller's client base. There are no contracts and it is 90% residential.

    I have been told 1 month's receipts is fair.

    Any help would be greatly appreciated.
     
  2. paponte

    paponte LawnSite Silver Member
    Posts: 2,366

    Depends, really. I could taell you one thing... no signed contracts I'm not buying anything! If they are good accounts I believe guys are getting 6 weeks worth of cutting per acct. I would also like to see some books.
     
  3. rocky224

    rocky224 LawnSite Member
    Posts: 10

    I agree that without contracts they're not worth much. I have seen the books and everything looks legit. Only 30% of the revenue is cutting. The rest is clean ups, maintenance, etc.

    I don't mind paying one month because it's a big company. One month isn't bad and I am planning on around 20% leaving just because of the change.
     
  4. EJD Lawnpride

    EJD Lawnpride LawnSite Senior Member
    Posts: 313

    I just bought my neighbors accts. 2.5 x mowing price. However, they come with contracts. No contract = No guarantee. I would offer 2 cuts with no contract. Your work should keep them with you, however, only pay for the accts. that are willing to try you first. Contact first(through seller),then pay.
    Eric
     
  5. rocky224

    rocky224 LawnSite Member
    Posts: 10

    Thanks for the advice. I am confident that many will stay with me because they will still be seeing the same trucks, equipment, workers, etc. Billing address would be the same as well as the phone number. The seller will allow me to use his name for 9 months so I wouldn't even notify of the sale until mid-summer.

    I'm thinking giving one month's revenue plus a fair price for all equipment. If he doesn't take it, oh well. I don't think there are many people jumping up to buy everything and letting this guy move on. Equipment is around $25,000 and one month's revenue is around $17,000.
     
  6. topsites

    topsites LawnSite Fanatic
    Posts: 21,653

    If you don't plan on notifying the customers about the sale, perhaps I might advise not to do it later, either.
    Because the customers will likely find out anyhow, so don't go getting funny on them.
    Just a thought...

    While the contract may act as a safety blanket, I do find contracted customers tend to be pickier.
    But since you're buying, contracts may be a good idea (especially from a stranger, not so much with a friend).
    You should, as a rule, plan on losing 10% of them the first year.
    I would guess that many employees as well.

    I find a month's revenue is fair.
    6 weeks, ok.
     
  7. GELAWNS

    GELAWNS LawnSite Member
    Posts: 66

    There is a difference between buying a business (name, contracts, assets, liabilities, cash on hand, all office equipment, in other words EVERYTHING) or buying just the assets (equipment and consideration for existing customers).

    I would consult an attorney about the contracts first. Maybe they won't be valid anyway in an asset purchase. The customers may need to sign new contracts.

    The agreement could include consideration (money paid) only for customers who sign up with the new "management" with a certain time period.
     
  8. paponte

    paponte LawnSite Silver Member
    Posts: 2,366

    Another insurance policy is by paying with sweat money. Tell the guy you'll cut the accounts for a month and he can collect the $$.
     
  9. jbailey52

    jbailey52 LawnSite Bronze Member
    Posts: 1,089

    Yes, contracts will not be legit... I had this problem before... since the contract is between X Client and X company, even if you still have the same company name, ownership has changed, and it will void the contract... so best bet you need new contracts anyway
     
  10. PTP

    PTP LawnSite Bronze Member
    from Tulsa
    Posts: 1,383


    GELAWNS hit it right on the head here. If you are only taking over a couple of accounts from a guy who did this for beer money, then 1 month gross may be fair. However, if you are taking over an established business, then it is worth much more. This is regardless of if you have contracts or not. Try to take over any other established business for 1 months gross and you won't get very far.

    Here are a couple rules of thumb that are used when purchasing an established business - 1 years gross or 5 times yearly net. Now, there are other factors but that gives kind of a general idea of things.

    Also, contracts are often overrated. They do have value but they are not the only thing that matters. What if I was running a successful business for 5 years, and was servicing 200 customers - none with contracts. Suppose that I was able to pocket 1/2 of gross. I had equipment, employees, a name/reputation in the community, and everything that makes a company successful. Is my business worthless because I don't have contracts? If the answer is yes, then does that mean that your local McDonalds is worthless as well? How about the dealer you do business with? How about your local hardware store? Your plumber? I think you get the point.
     

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