whats a lawn business worth?

Discussion in 'Lawn Mowing' started by smoothbore2004, Jun 28, 2005.

  1. smoothbore2004

    smoothbore2004 LawnSite Member
    from Indiana
    Posts: 71

    Hey guys was just wondering what the formula is for figuring what a business is worth? I have heard several different methods but what is a way to come up with a fair price for a well established lawn company. Any suggestions would help.
     
  2. Fantasy Lawns

    Fantasy Lawns LawnSite Bronze Member
    Posts: 1,913

    There are a lot of ways to value a business. There's no "right" way, though you could probably come up with several wrong ones. Ultimately, the business is worth whatever you think it's worth, based on the criteria you set forth. But you can make your estimation by using several different ways to value the business and then choosing the mix that reflects your final value estimate.

    You can start by looking at the value of the business's assets. What does the business own? What equipment? What inventory? After all, you'd have to buy all the same stuff if you were starting a LCO from scratch, so the business is worth at least the replacement cost. The balance sheet can give you a good indication of the value of the company's assets. If the company doesn't have a good set of books, think twice about buying it. You can get badly burned if the current owners don't even know accurately whether or not the business is profitable.

    Customers is hard to "sell" but contracts do give a base in order to try n "keep" the customer


    The other valuation approaches all think of a business as a stream of cash. They value a business by trying to come up with a value for that stream of cash.

    Revenue is the crudest approximation of a business's worth. If the business sells $100,000 per year, you can think of it as a $100,000 revenue stream. Often, businesses are valued at a multiple of their revenue. The multiple depends on the industry. For instance, a business might typically sell for "two times sales" or "one times sales." If you have a good stockbroker, he or she may be able to help you research typical sales multiples for your industry. A good business broker can also help you if he or she has done valuations in the industry you're investigating.

    But alas, revenue doesn't mean profit. If you're in doubt, just look at Amazon.com: It had 2002 sales of almost $4 billion, but no profit. In fact, it hasn't made one cent of profit since the day it was founded. How much would you pay for an ongoing $4 billion per year that you have to pump an additional $380 million per year into just to keep it afloat?

    That's why earnings matter and why multiples of earnings may be a better way to think about valuation. If a company had a profit of $10,000, that cash can be used for growth or dividends to you, the shareholder. Estimate the earnings for the next few years and ask how much that income stream is worth to you. Be careful, though. Don't just assume earnings will be stable. Competition, supplier price changes and a declining industry can affect earnings. Make sure to reflect that in your projections.

    Warren Buffett uses what's called a discounted cash-flow analysis. He looks at how much cash the business generates each year, projects it into the future and then calculates the worth of that cash flow stream "discounted" using the long-term Treasury bill interest rate. There's no room to explain the theory or calculation here, but you can do it in Excel using the NPV "net present value" function.

    Ultimately .... a "turn-key" is your best bet .... it will cost the most ...but with a turn key .... employees, equip n customers are already in place .... you as the new owner must fill the shoes of the past owner to keep em

    Good Luck
     
  3. rodfather

    rodfather LawnSite Fanatic
    Posts: 9,501

    An excellent reply Steve. I can only add one thing.

    There are A&D firms (Acquistion & Divesture) that specialize in this. I know very well of one company that does this. They come and review everything for a period of time depending on the size of the firm being bought or in need to sell.

    I seem to remember they get a % of the sale just like in RE.
     
  4. meets1

    meets1 LawnSite Gold Member
    Posts: 3,787

    I have purchased two other business in the past and that is how I was able to grow our company.

    No right or wrong way of doing things but I would highly suggest a lawyer, an accountant, and a banker.

    Next value his equipment, ect. I kinda overlooked this on one deal. Suddenly we were fixing everything - nothing major but nickel and dimed to death.

    Customers are also key. One business we retained 98% of customers and even gained new ones cuz they knew my company's work ethic. 2nd business - I hate to say but we lost about 16% of clients, which equalled 18% of total revenue and that bites. Nothing I did, our guys did, but a local guy decided that now was a good time to go into business and he did gain all those accounts by seriously underbidding our work.

    Everyone will tell ya contracts are a must. I thought whatever, people will stay with you as long as our service is excellent, same guys, same trucks & trailers, nothing changed but ownership - well now I say I agree. If contracts are not in place with current owner - I would suggest you get a contract drawn up and at least present it to your commercial accounts.

    Other than that - I say go for it! I wish you the best and let us know what you decide!
     
  5. rodfather

    rodfather LawnSite Fanatic
    Posts: 9,501

    Good points, but unless the contract is transferrable, it becomes null and void is my understanding upon the sale and transfer of the business to the new onwer. Business Law 101 in college taught me that btw...unless I stand to be corrected which is not uncommon too...LOL
     
  6. meets1

    meets1 LawnSite Gold Member
    Posts: 3,787

    yes, that true contracts can be voided with that business when transferred to new owner. I did run into that situation and all but 2 accounts we lost. There reason - contract was with him, he was related to X, I am now in charge of the grounds and I want who I want so were going to bid this out. I said fine, gave him the price, lost the bid. Others with contracts were like, ok, lets see your work and if things are great we'll continue like nothing happened.

    So that is my experience with contracts to date. Hopefully a little insight!
     
  7. cedarcroft

    cedarcroft LawnSite Senior Member
    Posts: 442

    as a precaution, I would also look into having the seller sign a 2-3 year non-compete agreement. this will cover your a$$ if he is shady and tries to get some customers back. around here lawn maintenance companies sell off accounts for about 2-3 months of gross cutting revenue.
    10 accounts
    $20 per account per week = $80 per month
    10 x $80 = $800 x 3 months = $2400

    obviously these are stupid numbers but you get the idea. I don't know what its like elsewhere, I just know this from my experience around here and what I have gone through in trying to buy other businesses.
     
  8. Drew Gemma

    Drew Gemma LawnSite Bronze Member
    Posts: 1,510

    Ok let me skip all the bs and tell you the bare min. First look at the owner is he gonna work with you and help the transition. That is a must cause when you have problems or questions the guy who dealt with these ppl for awhile can give you all the ins and outs it really helps. Second is it a legit and professional business if not just start your own it is way easier than trying to correct a bad habit that has been on going. Don't buy any used equipment just my 2 cents no one takes care of things like I do so I just buy new. Get a lawyer and set up an agreement with defines when payments are due who gets paid and how. Also put a non-compete in their. I paid $900 2 times when I did both buy outs. Payment I give 50% of the sales for the first 2-3 months. But set it up where he only gets paid on the ones that stay and the ones that pay. So if you get stuck so does he that keeps him working for you and helping you because it is in his best interest and a must. You really need to be on the ball cause all the new clients at once keeps you moving. Last year we bought 25 mowing accounts all he did was mow. we paid 3 months at 50% no big deal cause we are full service so we increased revenue on those 25 accounts we sold mulch edging pruning and so forth we basically took 30,000 and made it into 65,000 with little or no effort. We doubled are dollars but we did are home work cut all the crappy accounts and those that didn't fit into are route. Plus we sent lots of letters made lots of calls and so forth to keep our name in ppls minds. Research my post I have tons of info and advice on this.
     
  9. Mdirrigation

    Mdirrigation LawnSite Silver Member
    Posts: 2,767


    If the business is incorporated , and you buy the business , the contracts are still good since the sale only changed the major stockholder of the corporation.
     
  10. Fantasy Lawns

    Fantasy Lawns LawnSite Bronze Member
    Posts: 1,913

    This is the exact reason that in am an "Inc' ..... I started, run & grow my business fore the very reason that 1 day I will sell it .... it's my 401K

    I just got a SBA loan .... thru my business .... fore the very reason to develope "credit" fore my business ..... not a business credit card ..... the loan is much like buying a home ..... many many forms to sign .... credit checks .... P&L review .... Audits .... than finally if all is good .... the Loan

    Thus when I do sell ..... it can only "sweeten" the pot fore me as well as the buyer .... after I have paid the loan off .... the credit just gets better n any new owner will have a business which not only generates + profits .... but has great loan credit .... fore future growth
     

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