Reasonable return for a business

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
andychan
Posts: 9
Joined: Wed Feb 09, 2011 4:01 pm

Reasonable return for a business

Post by andychan »

My wife is planning to open a pre-school, and we wonder what would be a reasonable return. Let's assume the following scenario:

- Purchasing an existing business with $500k in revenue.
- Wage expense (including taxes and benefits) of $350k, this includes a low salary for my wife too.
- Other expenses of $75k, this includes rent, insurance, advertising, etc.
- This leaves $75k of income before taxes (state and federal, since we live in California).

What do you think would be a reasonable price for such a business? This is just a hypothetical scenario, and we just want to get a sense of what return we should expect from a small business.
skibbi9
Posts: 248
Joined: Wed Feb 09, 2011 10:19 am

Post by skibbi9 »

Does she already have all her credentials, is state cert as a head teacher and have other staff?

That must be a big preschool to have generate 500k/yr in revenue.... 25+ children?

its often tough to transfer and sell these businesses
bb
Posts: 326
Joined: Wed Apr 25, 2007 10:04 pm

Post by bb »

If you hired people for all positions and you just managed the business how much would the business make? It is not clear you are not buying a job. How many hours per week are you going to work in the business?
Topic Author
andychan
Posts: 9
Joined: Wed Feb 09, 2011 4:01 pm

Post by andychan »

skibbi9 wrote:Does she already have all her credentials, is state cert as a head teacher and have other staff?

That must be a big preschool to have generate 500k/yr in revenue.... 25+ children?

its often tough to transfer and sell these businesses
She's in the process of getting the necessary credential.

The pre-school would need to have around 45-50 kids. Pre-school easily costs more than $1k per month here.
Topic Author
andychan
Posts: 9
Joined: Wed Feb 09, 2011 4:01 pm

Post by andychan »

bb wrote:If you hired people for all positions and you just managed the business how much would the business make? It is not clear you are not buying a job. How many hours per week are you going to work in the business?
The $350k wage expense already includes a salary for my wife.
yobria
Posts: 5978
Joined: Mon Feb 19, 2007 11:58 pm
Location: SF CA USA

Post by yobria »

Maybe 4-6x cash flow, defined as $75K + wife's salary.

Nick
skibbi9
Posts: 248
Joined: Wed Feb 09, 2011 10:19 am

Post by skibbi9 »

well, good luck if you guys choose that. my mother has run a nursery school for about 20 years now, I believe she's licensed for 18 children.

The state / health department and such will suck in term of licensing and such and getting all the approvals and unscheduled reviews every two years. although i'm not sure but i'd guess ca laws are probably more lax.

I think you're going to have to work really hard to get a good space and such.

sounds rough to me.
lovetennis
Posts: 20
Joined: Fri Jan 28, 2011 3:07 pm

6x CF

Post by lovetennis »

20% is a typical discount rate used for buying this kind of business. Get the annuity value of $75000, which will be around 6x. Do not include your wife's minimaish low salary because it is reward for her labor and not return to your investment of buying this business. I suppose she can get the same salary by working elsewhere.
User avatar
dm200
Posts: 23148
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Reasonable return for a business

Post by dm200 »

andychan wrote:My wife is planning to open a pre-school, and we wonder what would be a reasonable return. Let's assume the following scenario:

- Purchasing an existing business with $500k in revenue.
- Wage expense (including taxes and benefits) of $350k, this includes a low salary for my wife too.
- Other expenses of $75k, this includes rent, insurance, advertising, etc.
- This leaves $75k of income before taxes (state and federal, since we live in California).

What do you think would be a reasonable price for such a business? This is just a hypothetical scenario, and we just want to get a sense of what return we should expect from a small business.
Here is one way to look at this. Since you say the $350k includes a low salary for your wife, then how much could she earn elsewhere without investing a cent? I assume that would be larger than the "low salary". It could be that buying the business would get her about the same as a "regular" job (taking into account all compensation, benefits, etc. If that is the case, then the business is worth zero as a value for purchase by your wife.
User avatar
Alphonse
Posts: 38
Joined: Fri Jul 23, 2010 7:47 am

Post by Alphonse »

I am assuming there are some assets such as furniture, office equipment, etc.
Is there a valuable business license that comes with the business?

Worth of the business is the value of the assets, licenses that are difficult to obtain (if any comes with it), plus the goodwill (spelled customers). I do not believe that this sort of business could get a multiple of 4 to 6 unless there are some huge entry barriers. You would be buying a few assets and the existing business/clientele they have.

To be provocative on the real value of the business: Alternatively open up across the street, cut the price by 5%, take their customers/business and put them out of business, and then raise the price. You've had to cash flow your startup but you didn't have to pay them to enter in to this market. You have also put up some barriers for other competitors because they aren't likely wanting in the fight.

High entry barriers plus expensive assets = high multiples; low entry barriers and minimal assets = tough competition and very low multiples
Alphonse
Post Reply