Forums: Discussions for entrepreneurs and small business.

Happy cyber Monday everyone,  Here is a question that I have been trying to figure out the answer to for a couple weeks now.  How do you valuate a business that has been open only 2 months, and has generated a profit the first month of $13,000 and second month $4,000.  The business has approximately $35,000 MSRP in inventory and accessories for the product. Monthly overhead around $1000 a month. They are asking $50,000 for business.  So how do i determine the  offer price for this corn stove business?

Thanks,
Clint

From what I have gathered from business associates, this business should not be worth $50,000.  What I have heard is that the inventory I should still be able to make some type of profit on when I sell it, and the business has only 2 months of sales to go by. They do not even have their quickbooks set up right yet, so I cant even get any P&L statements etc. out of it.  I am thinking more like $30,000 should be the value. What do you guys think?

Clint

Hi

 

Ask yourself who will still love me if I get this wrong and how much do you value them?

That was the question I didn’t ask when I was in your situation. By knowing who could get hurt you will know just how high to set the bar when conducting your due diligence on this potential “deal”.

Just from your two posts these would be questions I would want satisfactory answers to before I would be comfortable in even making a decison:

2 months trading: what can you point to as an indicator of future performance?

With figures like this what would month three look like $4000 + $9000 or $4000 - $9000. a big difference and which is more likely given past figures? You really need to understand what their business plan figures are and how they are compiled?

If this is a rocket ship, why are they interested in selling now?

Haven’t got their QuickBooks right yet, if the most important structure of the business is not right then what is?, business registrations, warranty claims procedures, product liability protection, Tax Liabilities?

Without auditable figures from QuickBooks,  How can these sales figures be correct or verified?

 if i understand you corectly $35k of stock at srp that is not much supply and why would you be valuing it at srp? If you are buying it at SRP then what price are you going to sell it at for Profit?

In terms of inventory control, can new stock be easily reordered? What supply guarantees do you have to be able to replenish stock in the future?

What would stop the owners taking your cash and restarting a very cashed up new business in competition to you?

Asked a few of your associates and mentors for advice, that is great, because the more impartial views you get the better. I just hope that they were CPA, and lawyers.  Proper financial and legal review is “mandatory” for any business purchase. Better to spend the money on an expert who can punch holes in a deal than to punch an even bigger hole in your future with a deal that is not right for you.

Apart form working of a discounted cash flow model which wouldn’t work due to a lack of historical figures a valuation based on Fire sale prices would be more appropriate.

A good starting point for buying liquidation stock  would be to take product off their hands for a price as low as possible and preferably less than one third of verifiable wholesale price. Then the rest of the assets you will take for $1. leaving the corporate structure and any undisclosed debts and or liabilities to the outgoing owners.

I am not a lawyer, accountant or expert in any way, I have simply walked in your shoes and paid a high price for not asking the right questions at the time.

Good luck and keep us all posted.

Regards

J

True that to everything you said, what makes this worse is I work with the guy and he is my friend. But this is business, and Ithink I can make a very valid arguement with him that his business is definately not set up in any way yet. He does not have a business plan, and he seems to be unorganized. I almost feel sorry for him. So essentially I would be starting the business from scratch. As far as people affected by my decision, of course my family will be impacted if I fail, so the objective is not to fail. So more due diligence it is. Thank you so much for your insite into all of this...

Clint

Ok, here is the update... after talking with a very wise man I just met, I decided to pass on this business.  Come to find out, my friend was actually having second thoughts about selling his business.  So, I made the right decision all around. Now I can focus on what I really want to do with the Garage Interior`s.  Thanks for your advice again Brains.