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What A Business Is Worth

Discussion in 'Business Operations' started by 32vld, Nov 10, 2013.

  1. 32vld

    32vld LawnSite Gold Member
    Posts: 3,984

    Something I learned many years ago was the a business is worth two to three times of the yearly profit it makes.

    People buy a business to make money. Make enough money to own a home and some toys, and most important enough money to live well during retirement.

    Most people will own a business for twenty years. This is why when a business is bought it needs to be paid for in two years. You will need those eighteen years to build up a retirement fund and pay off the mortgage on one's home. So one buys a business he can retire at 60.

    Joe buy's a business at the age of 40. He needs ten years to pay off his business then he will still have to work for eighteen more years.

    Because Joe paid too much for his business he will have to work till he is 68before he can retire.

    What happens if Joe has a Heart condition at 62 and is forced to sell? His retirement plan will be under funded by 6 years.

    So if a business is bought it must make enough profit to pay Joe a salary and pay off the business in two years.

    The three years comes in for an exceptional business. Gas station location. On the corner of the two busiest roads in town. Or right next to the on off ramp of the Interstate.

    Another exceptional business is profit margin. Say most restaurants in town operate on a 12% profit margin. The restaurant that you want to buy has a consistent profit margin of 24% for the last ten years.

    You are actually buying the land the business sits on as well as the business.

    Most Landscape company's are one truck, one trailer, two mowers, some hand helds. All of that is usually used and no yard with a shop is included in the sale.

    And even if there are contracts many LCO's here always advocate contracts with a 30 day cancelation clause for both the LCO and the customer. Having customers being able to leave after 30 days is only buying 1 month of income and that is not going to pay off any business.

    Even if the customers are locked into a 1 year contract is not much better because one year of income will not pay off the business. So whether one month or one year you can be left holding the bag.

    I suspect many a business that is for sale. If a business is such a gold mine why is the owner selling it?

    People do not get rid of gold mines that easily.

    Why is the owner not passing his gold mine onto his son/daughter?

    Owner has no kids, why not a nephew or niece?

    No relatives, why not a long term trusted employee?
  2. snomaha

    snomaha LawnSite Senior Member
    from midwest
    Posts: 896

    My experience - there are plateaus in any business/industry that many can't break through 1M, 3M, 5M etc.... They are unable to scale operations and have people underneath them who can't create capacity. There are opportunities out there to acquire other businesses that weren't able to break through the plateaus - with economies of scale larger outfits can buy out the smaller guys customer base/goodwill and make it work.

    I have three kids and would never think of "giving" them a business. If I had a son or daughter with the right attitude and aptitude I might hold a portion of the note for them. People sell businesses (gold mines) all the time - why is the green industry any different?
  3. 32vld

    32vld LawnSite Gold Member
    Posts: 3,984

    I would give it to my kids. As age takes it's toll I would cut back work and decision making giving them a little more and let them grow into the position. And as long as I am alive I would draw a retirement salary and have it continued for my wife if I went first.

    The green industry is not any different. I have seen many people buy non landscape businesses/so called gold mines and they did not even get any pyrite.

    I am not against buying businesses.

    I am against buying businesses that have assets that are not worth the paper they are written on.

    Over paying for anything is never worth it.

    Whether a restaurant, gas station, print shop, buying just the equipment and taking over the lease to me is buying the privilege to pay the Landlord rent.

    I have heard from other that good will was claimed and only to be found out it was non existent.

    To me and from others experiences their is no such thing as good will.

    Then I have seen too many people claim to hide half their income not to pay taxes. So their books will show they made $50,000 a year but claim they really made $100,000. So they sell the business to someone priced at on the higher income level.

    They new owner after buying the after 6 months is struggling to stay on track to make $50,000.

    They only time a businesses income can be believed is what is on the income tax form.

    Yes it is buyer beware but we all work to hard to lose money on a bad purchase.
  4. snomaha

    snomaha LawnSite Senior Member
    from midwest
    Posts: 896

    We agree - ;)
  5. meets1

    meets1 LawnSite Gold Member
    Posts: 3,775

    I dont agree with the income tax form type of thing. I discuss this all the time with our accountant and banker and legal team. Account man say made money, need to re-invest or pay x in taxes. Ok, now it may look like I lost money this year after X purchase. Banker says I want to see a profit, money in the bank, I dont care what the account man says. Legal say pay as much to yourself, pay as little to the govt and put some in saving account at your bank. Gotta be real about assets. Trucks, mowers, big ticket things. Handheld equipment after it is boughten is a dime a dozen. Do you have hard assets such as property? Buildings? To me that is probably the biggest selling factor. I can have all the clients in the world, contracts signed but once I sell to you, at least to me, everything is now fair game.
  6. snomaha

    snomaha LawnSite Senior Member
    from midwest
    Posts: 896

    Not sure what your point is?
  7. meets1

    meets1 LawnSite Gold Member
    Posts: 3,775

    For someone to say you are worth because the bottom line on tax form say "net" or "loss" for the year. NOt a way to place value on a business.
  8. 32vld

    32vld LawnSite Gold Member
    Posts: 3,984

    There are many ways to keep books legally.

    The person that makes a lot then reinvests to not pay taxes has the income tax and records to prove his business made a lot of money and where and why the money went.

    Strategies to reduce tax liability is documentation showing how much the business really made.

    This type of documentation is exactly what is needed to value a business that is for sale.

    This supports what I was saying. You can not take info from a seller at face value. Making claims as income is hidden to not pay taxes is not providing reliable financial information.
  9. 32vld

    32vld LawnSite Gold Member
    Posts: 3,984

    That is correct. You need to see all the financial documents for the last ten years.

    This way you can see if the business has been slipping, no growth, or has been steadily growing for the last ten years.

    What a business has done for the current year is insufficient information to place a value on any business.
  10. Turboguy

    Turboguy LawnSite Bronze Member
    Posts: 1,966

    Valuing a business is no simple task. Two to three times income may be as good a way as any other but there are a lot of other factors that come into play. For example someone is trying to sell a one man lawn care business that netted 20 grand. No one is going to pay you 60 grand for it. They can work at WalMart and make that. Conversely someone has a large operation and has netted consistently a half a millon it might be worth far more than 2 to 3 times income. Service businesses are hard to value.

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