How much is business worth?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Nissan350
Posts: 12
Joined: Fri Nov 11, 2016 10:54 pm

How much is business worth?

Post by Nissan350 »

We are due to have our second child in a few months. We are therefore contemplating selling my wife's business so she can take care of the kids. We may have a few interested parties but without prior experience selling we are not sure of the ball park.

Business type is fitness studio all instructor led class based with memberships for the clients.

Gross around 300,000 wife takes home 100,000 before taxes. This number was higher prior to the first kid now she doesnt instruct as much and has higher payroll.

Open 3 years numbers are relatively the same for all three years. It opened well and hasn't slowed down.

We know the cost to open another franchise is approximately 250k and we have the rights to the entire city.

Does anyone have suggestions for a ball park value prior to paying for a formal appraisal.

How much is established client base worth over just the startup costs?

Are having the franchise rights to the city worth anything? Someone with less kids should be able to open 2-3 more studios in the area.
User avatar
White Coat Investor
Posts: 15146
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: How much is business worth?

Post by White Coat Investor »

$100K isn't much if you also have to subtract out her labor which you would presumably have to pay someone else to do. I mean, if you can pay someone $60K to do her job, then the business kicks off only $40K a year. I'd expect a 20-25% return at least on something like that, so I don't think I'd pay more than $150-200K at most for it, and probably not that much. I'd probably aim to try to make my investment back in 2 years, so $80K. That, of course, is in addition to whatever it can be liquidated for (real estate, equipment etc.)
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
casualflower
Posts: 335
Joined: Thu Jul 16, 2015 9:36 am

Re: How much is business worth?

Post by casualflower »

You may get a lot of opinions on this, including one to consult a professional business appraiser.

For a ballpark, I'd start at $300K and take $250K for the existing studio. I'd license the franchise rights for 10% of annual gross revenue.

You'll want to get familiar with the accounting terms around selling a business. If I were a buying, I'd want to see good books and be able to speak with the owner about how those books were created.
Topic Author
Nissan350
Posts: 12
Joined: Fri Nov 11, 2016 10:54 pm

Re: How much is business worth?

Post by Nissan350 »

I think we have to focus on a longer period of return these are established franchises that have been around roughly 10 years or so. Most of the new studio owners are taking out 15 year loans to pay for the startup costs.

Just to startup a new studio is 250k which includes build out and franchise fees. Therefore shouldn't our value start at that number at a minimum. Then add to that value for the studio being turn key ie no carryING costs during 3 month build out. Value for a secured low rent etc... then add value for already having a secured client base and trained instructors greatly reducing startup risk?

Does anyone know if a certified business appraiser factors those items into the value? Also does anyone know how much an appraiser costs?
Stormbringer
Posts: 1026
Joined: Sun Jun 14, 2015 7:07 am

Re: How much is business worth?

Post by Stormbringer »

I entertained the idea of selling one of my businesses about 15 years ago. What I was told by the business broker was a formula that went something like this:

value = (profit + owner's wages) x multiplier + value of assets

The multiplier, I was told, varies by industry but in my case it was 2.5. The broker said that buyers of a small business would want to make 30% on their money. The valuation turned out to be appallingly low, so I hung onto the business and never looked back.

Also, if you do sell it you need to consider capital gains taxes and the commission to the broker (~10%) as well.
“The greatest shortcoming of the human race is our inability to understand the exponential function.” - Albert Allen Bartlett
User avatar
mcfroggin
Posts: 60
Joined: Fri May 20, 2011 7:14 am

Re: How much is business worth?

Post by mcfroggin »

Nissan350 wrote: Just to startup a new studio is 250k which includes build out and franchise fees. Therefore shouldn't our value start at that number at a minimum. Then add to that value for the studio being turn key ie no carryING costs during 3 month build out. Value for a secured low rent etc... then add value for already having a secured client base and trained instructors greatly reducing startup risk?

Does anyone know if a certified business appraiser factors those items into the value? Also does anyone know how much an appraiser costs?
You say the company opened well and income has remained similar. Without steady double digit growth in customers (and profit) the first few years, it signifies you have reached your potential. Profit is less than $100k as an investment as hiring an instructor to take your spouse's instructing hours will pull from the profit.

Studio assets are depreciating and at a higher rate than other industries. Biggest growth years are often when equipment is new. The older the equipment, the harder it is to add customers.

2-2.5x profit seems fair to me. The best way to get more value would be selling to an instructor that may pay a little more for the prestige factor.
Enjoy life but save vigorously!
LeeMKE
Posts: 2045
Joined: Mon Oct 14, 2013 9:40 pm

Re: How much is business worth?

Post by LeeMKE »

Just to startup a new studio is 250k which includes build out and franchise fees. Therefore shouldn't our value start at that number at a minimum. Then add to that value for the studio being turn key ie no carryING costs during 3 month build out. Value for a secured low rent etc... then add value for already having a secured client base and trained instructors greatly reducing startup risk?

Does anyone know if a certified business appraiser factors those items into the value?
Sorry, but I must echo what others have told you, and the business is not worth what you are thinking. I used to do business appraisals, and got tired of folks arguing that the business was worth so much more, using the same logic you are using. Listen to the advice being given. The value at sale is way under $100k IMHO and if your wife slows down and works fewer hours, the value will fall precipitously and fast.

Let me give you one typical example: The value of a medical practice falls by 10% EACH 3 working days that the doc is unavailable. Why? Because the major value is in the client list, not the lease and equipment. As soon as clients are turned away and find another practitioner, they are no long of any value whatsoever. In a business with plenty of available competitors, once the customers move on, you have a tough time dumping the used equipment and settling the lease, so you can go into negative value territory in a matter of weeks. If you are a doc or dentist, and have valued your practice as part of your estate, you need to actually have a buyout agreement in place with a current partner to get much value. Most families are shocked to find that even a short illness has gutted the value of the practice, and while they dally, hoping for a better offer, the value continues to fall until it is a liability instead of an asset.
The mightiest Oak is just a nut who stayed the course.
michaeljc70
Posts: 7470
Joined: Thu Oct 15, 2015 3:53 pm

Re: How much is business worth?

Post by michaeljc70 »

mcfroggin wrote:
Nissan350 wrote: Just to startup a new studio is 250k which includes build out and franchise fees. Therefore shouldn't our value start at that number at a minimum. Then add to that value for the studio being turn key ie no carryING costs during 3 month build out. Value for a secured low rent etc... then add value for already having a secured client base and trained instructors greatly reducing startup risk?

Does anyone know if a certified business appraiser factors those items into the value? Also does anyone know how much an appraiser costs?
You say the company opened well and income has remained similar. Without steady double digit growth in customers (and profit) the first few years, it signifies you have reached your potential. Profit is less than $100k as an investment as hiring an instructor to take your spouse's instructing hours will pull from the profit.

Studio assets are depreciating and at a higher rate than other industries. Biggest growth years are often when equipment is new. The older the equipment, the harder it is to add customers.

2-2.5x profit seems fair to me. The best way to get more value would be selling to an instructor that may pay a little more for the prestige factor.
That's what struck me as well. The numbers should be increasing, not staying the same unless it is already at full capacity.
michaeljc70
Posts: 7470
Joined: Thu Oct 15, 2015 3:53 pm

Re: How much is business worth?

Post by michaeljc70 »

Nissan350 wrote:I think we have to focus on a longer period of return these are established franchises that have been around roughly 10 years or so. Most of the new studio owners are taking out 15 year loans to pay for the startup costs.

Just to startup a new studio is 250k which includes build out and franchise fees. Therefore shouldn't our value start at that number at a minimum. Then add to that value for the studio being turn key ie no carryING costs during 3 month build out. Value for a secured low rent etc... then add value for already having a secured client base and trained instructors greatly reducing startup risk?

Does anyone know if a certified business appraiser factors those items into the value? Also does anyone know how much an appraiser costs?
I don't know that how much it costs to duplicate a business that doesn't make much money really means. If you hire someone to run it to replace your wife, how much profit will there be? No one is going to invest $250k to make $40k a year.
User avatar
thecarrotfund
Posts: 68
Joined: Sat Jan 09, 2016 10:20 am
Location: Scottsdale, AZ

Re: How much is business worth?

Post by thecarrotfund »

Our business is in escrow now, buyer using SBA backed loan through Wells Fargo and it has been a nightmare for buyer and seller. Paperwork lost multiple times, staff changes mean starting over, very little transparency or communication. What could have been a three day deal has been a 2 1/2 month long project. :confused
Just a warning in the event you do decide to sell.
"not all storms are in the forecast"
bb
Posts: 325
Joined: Wed Apr 25, 2007 10:04 pm

Re: How much is business worth?

Post by bb »

No one is going to invest $250k to make $40k a year
I have wondered to what extent small businesses that are for sale are akin
to buying a job.
bsteiner
Posts: 5537
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: How much is business worth?

Post by bsteiner »

bb wrote:
No one is going to invest $250k to make $40k a year
I have wondered to what extent small businesses that are for sale are akin to buying a job.
One of my mentors, long deceased, described it that way about 30 years ago.
imyeti2
Posts: 129
Joined: Fri May 31, 2013 3:45 pm

Re: How much is business worth?

Post by imyeti2 »

I'd look at a sales multiple rather than income. Can you find out what other similar businesses cost to buy? Plus some added benefit of a franchise.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

Re: How much is business worth?

Post by randomguy »

michaeljc70 wrote:
Nissan350 wrote:I think we have to focus on a longer period of return these are established franchises that have been around roughly 10 years or so. Most of the new studio owners are taking out 15 year loans to pay for the startup costs.

Just to startup a new studio is 250k which includes build out and franchise fees. Therefore shouldn't our value start at that number at a minimum. Then add to that value for the studio being turn key ie no carryING costs during 3 month build out. Value for a secured low rent etc... then add value for already having a secured client base and trained instructors greatly reducing startup risk?

Does anyone know if a certified business appraiser factors those items into the value? Also does anyone know how much an appraiser costs?
I don't know that how much it costs to duplicate a business that doesn't make much money really means. If you hire someone to run it to replace your wife, how much profit will there be? No one is going to invest $250k to make $40k a year.
So a 16% return isn't good enough for you?:) To some extend you have to look at the alternative. If opening a new studio is going to cost 300k (250 for franchising and 50k build out) + growth (takes 6 months to build a customer base that costs another 100k), buying this business for 250k sounds like a steal. Granted this might not a be a business you want to be in with those numbers unless you think you have a good growth plan (i.e. you think you can up the profit from say 40k to 100k) or you value self employment a lot.

In the end these business are come down to how motivated the buyer is. If I thought I could buy it for say 300k, invest 500k more to open 4 studios and rake in say 250k/year in profit, I am going to value it more than the person buying a job (i.e. at say 40k of profit for year, you are looking at like 10 years to pay back a 250k valuation).

In the end business are only worth what buyers want to pay. Often times there is very little demand for this type of business. You have a franchise. But there are probably a dozen some what related fitness franchises out there that a new person could chose from. You paying 250k doesn't matter if I can find one as much as I like for 50k.
michaeljc70
Posts: 7470
Joined: Thu Oct 15, 2015 3:53 pm

Re: How much is business worth?

Post by michaeljc70 »

randomguy wrote:
michaeljc70 wrote:
Nissan350 wrote:I think we have to focus on a longer period of return these are established franchises that have been around roughly 10 years or so. Most of the new studio owners are taking out 15 year loans to pay for the startup costs.

Just to startup a new studio is 250k which includes build out and franchise fees. Therefore shouldn't our value start at that number at a minimum. Then add to that value for the studio being turn key ie no carryING costs during 3 month build out. Value for a secured low rent etc... then add value for already having a secured client base and trained instructors greatly reducing startup risk?

Does anyone know if a certified business appraiser factors those items into the value? Also does anyone know how much an appraiser costs?
I don't know that how much it costs to duplicate a business that doesn't make much money really means. If you hire someone to run it to replace your wife, how much profit will there be? No one is going to invest $250k to make $40k a year.
So a 16% return isn't good enough for you?:) To some extend you have to look at the alternative. If opening a new studio is going to cost 300k (250 for franchising and 50k build out) + growth (takes 6 months to build a customer base that costs another 100k), buying this business for 250k sounds like a steal. Granted this might not a be a business you want to be in with those numbers unless you think you have a good growth plan (i.e. you think you can up the profit from say 40k to 100k) or you value self employment a lot.

In the end these business are come down to how motivated the buyer is. If I thought I could buy it for say 300k, invest 500k more to open 4 studios and rake in say 250k/year in profit, I am going to value it more than the person buying a job (i.e. at say 40k of profit for year, you are looking at like 10 years to pay back a 250k valuation).

In the end business are only worth what buyers want to pay. Often times there is very little demand for this type of business. You have a franchise. But there are probably a dozen some what related fitness franchises out there that a new person could chose from. You paying 250k doesn't matter if I can find one as much as I like for 50k.
16% is a guess. I don't know how much it would cost to replace the owner with an employee. Then you have to wonder if the business will drop off. Maybe if the owner leaves, so will some of the customers. Fitness tends to be very cyclical in terms of what is "in" also. Crossfit and TRX have been the rage, but before that were yoga, pilates, kickbocing, etc.

I agree, anything is only worth what someone will pay. If someone spends $250k or $300k to start their own, it can be in the exact location they want and exactly (within franchise parameters) how they want it.

I don't know the area, how many other businesses like this exist, etc. to say what the rights for the city are worth.
michaeljc70
Posts: 7470
Joined: Thu Oct 15, 2015 3:53 pm

Re: How much is business worth?

Post by michaeljc70 »

To add on to what I said above, if you can get several offers, that is the best way to determine what the business is really worth. Particularly if a couple offers are close and you have them give their best and final offer.
amphora
Posts: 216
Joined: Fri Jun 26, 2015 10:44 pm

Re: How much is business worth?

Post by amphora »

I agree with other responses, especially that there is a wide range of potential valuations and it could be worth much less than you imagined. I think you might reconsider selling the business if your wife can earn say 50 - 70 K as a nearly passive owner, though of course that would still entail work.
Topic Author
Nissan350
Posts: 12
Joined: Fri Nov 11, 2016 10:54 pm

Re: How much is business worth?

Post by Nissan350 »

First, I don't know what the company is worth, so I am not arguing with any of the suggestions below merely exploring some thoughts.

Like some have mentioned you have to want to be a studio owner that works the studio and does part of the teaching. You are absolutely buying yourself a 100K a year job with your purchase.

In that regard if you want to be a studio owner in this line of fitness it will cost you a minimum of 250k to open a studio. This includes build-out to franchise specs and franchise fees etc... However most of that is just build-out. We have a number of friends that own small retail oriented small businesses and their build-outs are all generally in the 200k range. So it seems that if you want to be in the retail small business world your startup costs are at least equal to 200-250k.Therefore I do not see how the business cannot be worth at least that amount.

Then like a few have mentioned there is the value of the client contracts the business already holds. These contracts already cover all the costs and the 100k salary for the owner that in my mind has to be worth at least 50K+.

Given we owe 90k on the startup costs still and the business is generating a relatively passive 100k a year if I pose the question in a different way to say not "what is the business worth" but "How much should we sell it for?" does that change any of the answers.

Thanks in advance for the good conversation.
michaeljc70
Posts: 7470
Joined: Thu Oct 15, 2015 3:53 pm

Re: How much is business worth?

Post by michaeljc70 »

Nissan350 wrote:First, I don't know what the company is worth, so I am not arguing with any of the suggestions below merely exploring some thoughts.

Like some have mentioned you have to want to be a studio owner that works the studio and does part of the teaching. You are absolutely buying yourself a 100K a year job with your purchase.

In that regard if you want to be a studio owner in this line of fitness it will cost you a minimum of 250k to open a studio. This includes build-out to franchise specs and franchise fees etc... However most of that is just build-out. We have a number of friends that own small retail oriented small businesses and their build-outs are all generally in the 200k range. So it seems that if you want to be in the retail small business world your startup costs are at least equal to 200-250k.Therefore I do not see how the business cannot be worth at least that amount.

Then like a few have mentioned there is the value of the client contracts the business already holds. These contracts already cover all the costs and the 100k salary for the owner that in my mind has to be worth at least 50K+.

Given we owe 90k on the startup costs still and the business is generating a relatively passive 100k a year if I pose the question in a different way to say not "what is the business worth" but "How much should we sell it for?" does that change any of the answers.

Thanks in advance for the good conversation.
Just playing devil's advocate here and flipping this around, but if it can generate $100k almost passively and you are into the business for $250k or so, why not just keep it? Even if you have to pay someone 50k to run it, it seems like you'd be making a good return ($50k on $250k = 20%).
LeeMKE
Posts: 2045
Joined: Mon Oct 14, 2013 9:40 pm

Re: How much is business worth?

Post by LeeMKE »

The business is worth exactly what another user will pay for it.

It matters not what you chose to finance and have not yet repaid.

Having an exit strategy is key to getting value out of this type of a small business. If one of the instructors is groomed to take over, and you can carry the financing for them, that is the usual successful exit strategy.

Without that, most of these types of businesses struggle to find a buyer and often sell for nominal amounts. Once the word gets out that the owner is getting out, the value starts to fall immediately as clients drift off to other providers. If the offering fades in popularity, none of the TIs will be recoverable, and the equipment may actually have a negative value. If the type of offering is on the rise, the TIs are valued at their rental value for the remaining period of the lease and equipment is valued at used value. The client list, well, we've discussed this plenty already.

I doubt you'll get better news from a business appraisal, which runs $1,000 to $4,000 in most markets. And I wouldn't list this with a broker because as soon as they start showing, the value starts falling. Your wife knows the best prospects to buy the business, so a quiet inquiry of interest among her network would be the first thing to do. If there is no interest, you have a very strong indicator of value.

It behooves her to be open to ANY offer and be willing to find someone to take over the lease, rather than trying to shop someone's offer.

You may have spent $XXX on TIs, but consider what a prospect is seeing: Your space or another space that is also built out but the landlord is renting without the need for a franchise, no need for a new build out, etc.

My own husband has a small business and originally thought he was going to build a business for sale. Over the last 8 years, he's gotten an education about business valuation. After not finding a suitable partner to take over, we are set to close the business and hold an auction for the equipment. We built this assumption into the business plan so we didn't get too far out on TIs and have always bought used equipment rather than suffer the depreciation of new equipment.

Good Luck!
The mightiest Oak is just a nut who stayed the course.
carguyny
Posts: 353
Joined: Mon Aug 08, 2016 4:56 pm

Re: How much is business worth?

Post by carguyny »

If I was looking at it based on the information posted, I wouldn't pay more than $200k. I need to assume some customer attrition when your wife leaves. Customer acquisition cost is high and would plan on investing about $50k to try to acquire new customers and offer things like free classes/months to keep existing ones during the transition.

Just my opinion since you asked. I wouldn't hire an appraiser as it's something you can't rely on at all.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

Re: How much is business worth?

Post by randomguy »

Nissan350 wrote:First, I don't know what the company is worth, so I am not arguing with any of the suggestions below merely exploring some thoughts.

Like some have mentioned you have to want to be a studio owner that works the studio and does part of the teaching. You are absolutely buying yourself a 100K a year job with your purchase.

In that regard if you want to be a studio owner in this line of fitness it will cost you a minimum of 250k to open a studio. This includes build-out to franchise specs and franchise fees etc... However most of that is just build-out. We have a number of friends that own small retail oriented small businesses and their build-outs are all generally in the 200k range. So it seems that if you want to be in the retail small business world your startup costs are at least equal to 200-250k.Therefore I do not see how the business cannot be worth at least that amount.

Then like a few have mentioned there is the value of the client contracts the business already holds. These contracts already cover all the costs and the 100k salary for the owner that in my mind has to be worth at least 50K+.

Given we owe 90k on the startup costs still and the business is generating a relatively passive 100k a year if I pose the question in a different way to say not "what is the business worth" but "How much should we sell it for?" does that change any of the answers.

Thanks in advance for the good conversation.
Think of your business as a used car. You paid 200k. The person buying it for 200k today though is getting depreciated property so it could be worth less.

How much to sell for? If I could get 100k with an acceptable level of work (i.e. you can define what the number is), I would be looking for 200-600k. If I got offered anything 600k+ , I would take the money and count on investing the money and working in the future to result in more net money. If it was much less than say 200k, I would gamble that the income stream would last 3+ years and that I could potentially get some money back in the future with a firesale. In between you get the tough choices which will to some extend depend on how "minimal"t he work is and your guess at to how long the business will last.

Note it is very possible for a business to be worth more to you than to an outside investor.
CFM300
Posts: 2033
Joined: Sat Oct 27, 2007 5:13 am

Re: How much is business worth?

Post by CFM300 »

Nissan350 wrote:Like some have mentioned you have to want to be a studio owner that works the studio and does part of the teaching. You are absolutely buying yourself a 100K a year job with your purchase.
...
Nissan350 wrote:the business is generating a relatively passive 100k a year
Which is it?
renue74
Posts: 1874
Joined: Tue Apr 07, 2015 7:24 pm

Re: How much is business worth?

Post by renue74 »

I consult with YMCAs on software and website/digital marketing. So, I have a little background in the fitness market.

For a studio this small, most of the worth is in the goodwill, the relationship the membership units have with the staff and owner. If the owner plays an integral part of the day to day operations, the sale of the studio may adversely affect membership numbers. As a perspective buyer, I would look at that is a very large negative.

If the owner was more of an absentee owner or the studio was a franchise like operation where the members go because of the name/brand, the numbers are different.

I sold a mobile app company a few years ago. The running joke is "a business is worth as much as a buyer is willing to pay."

Small businesses can stay on the market for years with no takers and the value can fluctuate dramatically, depending on inside and outside market pressures. What happens if a new LA Fitness with free classes comes to town or if Planet Fitness expanded and offered group ex and yoga?!?!

Also watch out that the word gets out about you trying to sell. Employees and/or members may see that as a distress signal.

Gut feeling...if you get $80K to $100K, you won.
Topic Author
Nissan350
Posts: 12
Joined: Fri Nov 11, 2016 10:54 pm

Re: How much is business worth?

Post by Nissan350 »

CFM300 wrote:
Nissan350 wrote:Like some have mentioned you have to want to be a studio owner that works the studio and does part of the teaching. You are absolutely buying yourself a 100K a year job with your purchase.
...
Nissan350 wrote:the business is generating a relatively passive 100k a year
Which is it?
Depends on who you ask...for some answering a phone call while shopping at Target is an hour of work...I'll leave it at that.

I used "relatively passive" to mean she has spent considerably less hours on the business this year taking care of our first child.
psteinx
Posts: 3570
Joined: Tue Mar 13, 2007 2:24 pm

Re: How much is business worth?

Post by psteinx »

I think the key point that hasn't been detailed by OP is EXACTLY how much involvement his wife has had in the last year or so.

i.e. If gross profit, before owner's comp, was $100K (off $300K in revenue), and wife was working 80% time (say, ~1600 hours), then a new owner is almost definitely buying a combination of full time job + small business. I'm not sure what someone talented enough to/with:

1) Successfully operate such a small business
2) Skills to teach classes and build up nice reputation with clients and employees
3) Enough prior financial/career success to have some equity and/or credit-worthiness sufficient to buy the business...

...would get if they were a regular employee at a similar business, full-time. But I'm guessing $50K plus. (This might be higher than a typical instructor might make, but a potential business buyer/operator is probably more talented than a typical instructor).

In turn, that leaves ~$50K in gross (pre-tax?) profit, if all goes reasonably well. More likely, there might be a slight dip in revenue, equipment might be aging, etc. Since we're already excluding owner salary from this calculation, I think you could use a multiplier maybe a little higher than 2-3x - perhaps 4-5x, against $25-50K in true profit (allowing for some profit slippage. So $100-200K, ish.

OTOH, if OP's wife really is fairly hands off, working only, say, 5 hours per week on this business, then it's reasonable for a buyer to assume he/she could be more hands off also, or generate higher profit if hands on. In this scenario, I might allocate only, say $20K for owner comp and the rest for business profit, and a figure above $300K might be realistic.

All that said, I'm not a biz broker, and OP would be well advised to either consult one or read up on resources on small business valuations and sales. In general, I agree with others though, that the likely value OP's wife could achieve is probably going to be disappointing, relative to where OP's expectations seem to be...
psteinx
Posts: 3570
Joined: Tue Mar 13, 2007 2:24 pm

Re: How much is business worth?

Post by psteinx »

Nissan350 wrote:I used "relatively passive" to mean she has spent considerably less hours on the business this year taking care of our first child.
OP responded while I was composing the above post. But OP is still being cagey about how much effort his wife has been putting into this business, of late. If I were a buyer, I'd want some documentation of that, and/or to have discussions with employees and perhaps customers as to their views on current owner's recent involvement, as well as tracking data to see trends in revenue, and any signs that recently reduced owner involvement has led to slippage in business success...
Topic Author
Nissan350
Posts: 12
Joined: Fri Nov 11, 2016 10:54 pm

Re: How much is business worth?

Post by Nissan350 »

Quick point of clarification, but if we currently have 90k outstanding in small business loans and I sell for the 100k that people are suggesting, then after taxes on the sale then aren't we paying the buyer to take our business over from us?
CFM300
Posts: 2033
Joined: Sat Oct 27, 2007 5:13 am

Re: How much is business worth?

Post by CFM300 »

Nissan350 wrote:Quick point of clarification, but if we currently have 90k outstanding in small business loans and I sell for the 100k that people are suggesting, then after taxes on the sale then aren't we paying the buyer to take our business over from us?
I don't see how you'd actually be paying the buyer, but you might not make any money. And now look at it from the buyer's perspective. S/he will have spent $100k and then will have to work for a year just to get that money back. Sure, the hope is that going forward, s/he will have a $100k job, but that's not guaranteed.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

Re: How much is business worth?

Post by randomguy »

Nissan350 wrote:Quick point of clarification, but if we currently have 90k outstanding in small business loans and I sell for the 100k that people are suggesting, then after taxes on the sale then aren't we paying the buyer to take our business over from us?
Why does that matter? Your costs are not your buyers costs. Depending on your cost basis in the business, you could be very well ending up with a loss that you can write off against your taxes.

If someone offered you a 100k (and lets say that is the value that an appraiser assigns to the business) would you sell? FMV doesn't always mean that selling at that price makes sense for either of the parties involved.
chocolatemuffin
Posts: 155
Joined: Thu Apr 28, 2011 1:56 am

Re: How much is business worth?

Post by chocolatemuffin »

OP, I think you need to look at this from the buyer's perspective. It doesn't really matter how much it costs to start up the business. If it costs $1 million to start up a business that makes $0, it doesn't mean the business is worth $1 million dollar, it just means it's a very bad business.

I think the key question is to clarify the $100k pre-tax profit you mentioned:

- How much of that can be attributed to your wife's labor?
- Does that number take into account non-cash expenses like depreciation of assets (e.g. equipments getting older and would need to be replaced eventually)?
- If your wife is no longer involved in business, how much would that hurt the business?

You also mentioned that you have exclusive rights to the whole city. That may or may not worth money. It depends a lot on whether the city has enough demands for expansion. However, it seems that the startup cost is high, which argues against expansion.
psteinx
Posts: 3570
Joined: Tue Mar 13, 2007 2:24 pm

Re: How much is business worth?

Post by psteinx »

Another thought on "buying a job" vs. "buying a business"...

If your wife is truly able to manage/operate this thing almost hands off, working perhaps 5-10 hours per week and, say, paying an instructor to teach most of whatever classes she once taught, and perhaps supplementing with some extra hired bookkeeping and the like, THEN it seems reasonable to just keep the business, at perhaps somewhat lowered profitability (to account for extra hire(s), services). Even with 2 kids, 5-10 hours of work shouldn't be too hard, and would give her an avenue to easily expand her working hours when the kids get a little older.

But if running this thing is truly a fairly big task, demanding, say, 20 hours+/week, plus being on-call many other hours to troubleshoot, then I can see how that would be a serious conflict with a mom hoping to mostly stay home with 2 kids, at least one a baby.

But, if the latter is the case, then it really is hard to think of this as much different, for a prospective buyer, than "buying a job". If the founder, who is already up to speed, has the knowledge, connections, etc, can't run it on less than half or two-thirds time, then a new owner would likely need to commit two-thirds to full-time, plus capital, for a "job" that pays decently, but not spectacularly...
Last edited by psteinx on Mon Nov 14, 2016 6:03 pm, edited 1 time in total.
Topic Author
Nissan350
Posts: 12
Joined: Fri Nov 11, 2016 10:54 pm

Re: How much is business worth?

Post by Nissan350 »

Posted while others posted so

I think a differentiator is this is a Franchise, meaning if you want to open this franchise in this city, you can't because we own it and the rights to the city. So if you then look around and say ok I'll just open up a similar type franchise in the city, well again you can't because someone owns the competing franchise and the rights to the city. Obviously if you don't want to own a franchise like this and just view it as an investment I agree, its not worth more than 100k, too much risk. However, these studios are mostly prestige purchases with family money funding most of the purchases. So I think the evaluation needs to push the pay back period out a little to say 5-10 years, assume 50k for owner labor and 50k profit with a valuation of 250k - 500k.
Last edited by Nissan350 on Mon Nov 14, 2016 4:56 pm, edited 1 time in total.
chocolatemuffin
Posts: 155
Joined: Thu Apr 28, 2011 1:56 am

Re: How much is business worth?

Post by chocolatemuffin »

Nissan350 wrote:Not quite sure how the remaining depreciation of assets plays into it but:

Sell for 100K I assume we pay some amount of Tax on that 100k assume 20% that nets us 80k after tax. We still owe 90k on the loan 90-80 = -10k for selling the business.

What am I missing? If nothing then this gets me back to how is the business not worth replacement cost at a minimum?
If you only sell for $100k, you may even be able to claim a tax loss. If the business is really completely hands-off, and you can net $100k profit, I would say the business would be worth $300k - $400k.

Regarding what you are missing, I think you are still trying to look at it from what price you are willing to sell, which is different from what price the buyer is willing to pay.
psteinx
Posts: 3570
Joined: Tue Mar 13, 2007 2:24 pm

Re: How much is business worth?

Post by psteinx »

Nissan350 wrote:I think a differentiator is this is a Franchise, meaning if you want to open this franchise in this city, you can't because we own it and the rights to the city. So if you then look around and say ok I'll just open up a similar type franchise in the city, well again you can't because someone owns the competing franchise and the rights to the city.
You're assuming that franchisors in this market segment are rare, and perhaps that they somehow carve up the market and extract super-high profits from franchise sales.

I don't know much about fitness centers, but it seems there are many competing brands. Some somewhat nationally known, some probably not so much. Exclusive territorial rights to a nationally known (and advertised) brand probably should have some premium attached to them. Such rights to a relatively unknown or little known brand, OTOH, are probably not all that valuable.
Last edited by psteinx on Mon Nov 14, 2016 5:09 pm, edited 2 times in total.
CFM300
Posts: 2033
Joined: Sat Oct 27, 2007 5:13 am

Re: How much is business worth?

Post by CFM300 »

Nissan350 wrote:I think a differentiator is this is a Franchise... So I think the evaluation needs to push the pay back period out a little to say 5-10 years, assume 50k for owner labor and 50k profit with a valuation of 250k - 500k.
So there you go. Your business is worth between $250k and $500k. Hopefully, you'll find a buyer who agrees.
psteinx
Posts: 3570
Joined: Tue Mar 13, 2007 2:24 pm

Re: How much is business worth?

Post by psteinx »

Do you have information on resale values achieved of the franchise in question? Have you tried contacting the franchisor about this?
User avatar
3CT_Paddler
Posts: 3314
Joined: Wed Feb 04, 2009 5:28 pm
Location: Marietta, GA

Re: How much is business worth?

Post by 3CT_Paddler »

Nissan350 wrote: So I think the evaluation needs to push the pay back period out a little to say 5-10 years, assume 50k for owner labor and 50k profit with a valuation of 250k - 500k.
Nissan, you need to step back and think about what you are proposing a little more objectively. On the high side, you are proposing a ten year payout for a very risky small business venture in a highly competitive field where trends are constantly shifting. If you find anyone willing to purchase the business for $200-300k, you should take it on the spot.

Good luck, and I echo other's opinions that based on the business debt and the existing earnings, I would try and leverage the existing workforce and be able to actually generate $50k passively. Put half of the profits toward ($25k) debt service and in four years, hopefully earnings will continue to grow and you have a great business that continues to generate solid cash flow.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

Re: How much is business worth?

Post by randomguy »

chocolatemuffin wrote: You also mentioned that you have exclusive rights to the whole city. That may or may not worth money. It depends a lot on whether the city has enough demands for expansion. However, it seems that the startup cost is high, which argues against expansion.
Often time scaling to say 3 stories triples revenue but doesn't triple costs as some of the costs don't scale up as fast. Obviously doesn't work well if the demand isn't there.
User avatar
mcfroggin
Posts: 60
Joined: Fri May 20, 2011 7:14 am

Re: How much is business worth?

Post by mcfroggin »

Nissan350 wrote:Posted while others posted so

I think a differentiator is this is a Franchise, meaning if you want to open this franchise in this city, you can't because we own it and the rights to the city. So if you then look around and say ok I'll just open up a similar type franchise in the city, well again you can't because someone owns the competing franchise and the rights to the city. Obviously if you don't want to own a franchise like this and just view it as an investment I agree, its not worth more than 100k, too much risk. However, these studios are mostly prestige purchases with family money funding most of the purchases. So I think the evaluation needs to push the pay back period out a little to say 5-10 years, assume 50k for owner labor and 50k profit with a valuation of 250k - 500k.
You have had the business 3 years, and you haven't opened a second location in your valuable market? If the business was pulling about 80k+ passively, what has prevented you from opening 8+. Could you not have sold rights to other locations in 3 years?

You have a depreciating asset in the studio, no growth, no demonstration of scalability, and 90k debt.

No offense, but true investors will ask those questions, and anything but good answers will label this a failed business potentially unworthy of even taking over your debt.
Enjoy life but save vigorously!
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

Re: How much is business worth?

Post by randomguy »

mcfroggin wrote: You have had the business 3 years, and you haven't opened a second location in your valuable market? If the business was pulling about 80k+ passively, what has prevented you from opening 8+. Could you not have sold rights to other locations in 3 years?

You have a depreciating asset in the studio, no growth, no demonstration of scalability, and 90k debt.

No offense, but true investors will ask those questions, and anything but good answers will label this a failed business potentially unworthy of even taking over your debt.
I think calling a business that at worse is generating a 100k+/yr job a failed business is a bit of a stretch.:) It might not be an investable business or the value might not be what the OP wants. And believe it or not not everyone is a fan of growth at all costs. The dream may have been to run a fitness studio not to run 10 fitness studios.

The OP said he has a couple of interested people. Ask them what they need to make an offer and let them come to you. If you don't like the number, say thanks but no thanks and move on.
User avatar
mcfroggin
Posts: 60
Joined: Fri May 20, 2011 7:14 am

Re: How much is business worth?

Post by mcfroggin »

randomguy wrote:
mcfroggin wrote: You have had the business 3 years, and you haven't opened a second location in your valuable market? If the business was pulling about 80k+ passively, what has prevented you from opening 8+. Could you not have sold rights to other locations in 3 years?

You have a depreciating asset in the studio, no growth, no demonstration of scalability, and 90k debt.

No offense, but true investors will ask those questions, and anything but good answers will label this a failed business potentially unworthy of even taking over your debt.
I think calling a business that at worse is generating a 100k+/yr job a failed business is a bit of a stretch.:) It might not be an investable business or the value might not be what the OP wants. And believe it or not not everyone is a fan of growth at all costs. The dream may have been to run a fitness studio not to run 10 fitness studios.

The OP said he has a couple of interested people. Ask them what they need to make an offer and let them come to you. If you don't like the number, say thanks but no thanks and move on.
100k includes actual labor hours as an instructor plus manager it seems, not business profit. The OP thinks the franchise rights are valuable but hasn't been able to monetize it in 3 years. Add in a lack of growth or scalability and there isn't much of an enticement.
Enjoy life but save vigorously!
User avatar
White Coat Investor
Posts: 15146
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: How much is business worth?

Post by White Coat Investor »

randomguy wrote:
mcfroggin wrote: You have had the business 3 years, and you haven't opened a second location in your valuable market? If the business was pulling about 80k+ passively, what has prevented you from opening 8+. Could you not have sold rights to other locations in 3 years?

You have a depreciating asset in the studio, no growth, no demonstration of scalability, and 90k debt.

No offense, but true investors will ask those questions, and anything but good answers will label this a failed business potentially unworthy of even taking over your debt.
I think calling a business that at worse is generating a 100k+/yr job a failed business is a bit of a stretch.:) It might not be an investable business or the value might not be what the OP wants. And believe it or not not everyone is a fan of growth at all costs. The dream may have been to run a fitness studio not to run 10 fitness studios.

The OP said he has a couple of interested people. Ask them what they need to make an offer and let them come to you. If you don't like the number, say thanks but no thanks and move on.
How much would you pay for it? Exactly. Those of us who are looking at this objectively are saying if they offer anything close to what you put into it a few years ago, I'd take that offer pretty darn seriously. That assumes that your spouse can find another job paying $100K.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Jack FFR1846
Posts: 13259
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: How much is business worth?

Post by Jack FFR1846 »

As you already know, the business is worth no more than a potential buyer will pay for it. As an uninterested party, I look at it as a narrow group of potential buyers because so few people have both the money or credit, ability to do the fitness stuff and the ability to teach plus the personality to attract and keep clients. This isn't buying a few Subways and run the business without ever interacting with customers. It's very hands on and very specialized.

I would think that if there are interested parties, they'd be the ones to ask offers from first. Other potential buyers would be current instructors who might want to buy into the business over a number of years while running the business (you take the loan).

If interested parties lowball you and nobody currently instructing is interested in taking over the business, the business could potentially have zero value once the wife leaves.
Bogle: Smart Beta is stupid
mako171
Posts: 85
Joined: Wed Dec 03, 2008 1:18 pm

Re: How much is business worth?

Post by mako171 »

Is it a pure barre?
User avatar
snackdog
Posts: 978
Joined: Wed Nov 12, 2014 4:57 am

Re: How much is business worth?

Post by snackdog »

I would take my wife out of the equation before selling. For max value, hire someone to do her role.

If sales are not increasing, you may have saturated the market for your location. This depends on the size of the city. People don't like to drive more than 15 minutes to the gym. If you think the franchise has value, prove it by opening a second location yourself or sub-franchising to a third party.

Once you have done all this, you will have a better idea of the profit potential of the business and you can sell it for max value. Five years profits for a stale business or 10 years profits for one with room to grow are round valuation figures.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

Re: How much is business worth?

Post by randomguy »

White Coat Investor wrote:
randomguy wrote:
mcfroggin wrote: You have had the business 3 years, and you haven't opened a second location in your valuable market? If the business was pulling about 80k+ passively, what has prevented you from opening 8+. Could you not have sold rights to other locations in 3 years?

You have a depreciating asset in the studio, no growth, no demonstration of scalability, and 90k debt.

No offense, but true investors will ask those questions, and anything but good answers will label this a failed business potentially unworthy of even taking over your debt.
I think calling a business that at worse is generating a 100k+/yr job a failed business is a bit of a stretch.:) It might not be an investable business or the value might not be what the OP wants. And believe it or not not everyone is a fan of growth at all costs. The dream may have been to run a fitness studio not to run 10 fitness studios.

The OP said he has a couple of interested people. Ask them what they need to make an offer and let them come to you. If you don't like the number, say thanks but no thanks and move on.
How much would you pay for it? Exactly. Those of us who are looking at this objectively are saying if they offer anything close to what you put into it a few years ago, I'd take that offer pretty darn seriously. That assumes that your spouse can find another job paying $100K.
I have said several times I would be paying in the 150-600k ranges if I wanted to be in the fitness business. The high range is if I think the owners haven't maximized their value (i.e. I can invest another 600k and have 4 studios making me 500k/yr passively and I really need their franchise/location to execute.) the lower end range is for the people buying a job (i.e. you get an extra 50k by investing 150k.). Obviously a ton of missing details (i.e. are there 100k worth of bikes, what the heck is that franchise worth, obligations,....)


These discussions come up across a bunch of small business. See the medical practice for another case where it pops up a lot. They aren't the classic growth businesses (i.e. revenue isn't going to be growing 10%+/yr) but when you are solidly cash flow positive enough to provide an upper middle class job (100k) for the owner, you have done a great job. Call that a low bar for success if you want.

As far as the spouse finding another job paying 100k/yr for part time work, I think that is pretty optimistic:) The math is probably more like is it better to get say 250k/yr and in 5 years look for a new job (fitness instructor jobs pay like 30-40k/yr for reference. Granted few people do it full time) or to keep the 250k invested and make say 50k/yr (you have to hire some instructor) while working 10hr/s week for the next 5 years. The first one is a lot more secure (you have the cash) while the second is likely result in more money long term if the business doesn't fold.
michaeljc70
Posts: 7470
Joined: Thu Oct 15, 2015 3:53 pm

Re: How much is business worth?

Post by michaeljc70 »

I don't know what the background of the OP's wife is other than he said she taught fitness classes. Running a business successfully isn't easy. The idea that you can invest $250k (or whatever the business is worth) and get a $100k job is not entirely realistic. If you have the background to run an entire business like this, you are not worth zero. What I am getting at is without the business the person could presumably get some job if they have the skills required to run a business successfully. Therefore you are really buying a job that pays $100k minus whatever you could make on your own.
Topic Author
Nissan350
Posts: 12
Joined: Fri Nov 11, 2016 10:54 pm

Re: How much is business worth?

Post by Nissan350 »

Thank you everyone for the replies and suggestions this will help shape our decision going forward.
User avatar
mcfroggin
Posts: 60
Joined: Fri May 20, 2011 7:14 am

Re: How much is business worth?

Post by mcfroggin »

White Coat Investor wrote:
randomguy wrote:
mcfroggin wrote: You have had the business 3 years, and you haven't opened a second location in your valuable market? If the business was pulling about 80k+ passively, what has prevented you from opening 8+. Could you not have sold rights to other locations in 3 years?

You have a depreciating asset in the studio, no growth, no demonstration of scalability, and 90k debt.

No offense, but true investors will ask those questions, and anything but good answers will label this a failed business potentially unworthy of even taking over your debt.
I think calling a business that at worse is generating a 100k+/yr job a failed business is a bit of a stretch.:) It might not be an investable business or the value might not be what the OP wants. And believe it or not not everyone is a fan of growth at all costs. The dream may have been to run a fitness studio not to run 10 fitness studios.

The OP said he has a couple of interested people. Ask them what they need to make an offer and let them come to you. If you don't like the number, say thanks but no thanks and move on.
How much would you pay for it? Exactly. Those of us who are looking at this objectively are saying if they offer anything close to what you put into it a few years ago, I'd take that offer pretty darn seriously. That assumes that your spouse can find another job paying $100K.
A consistent business with no continued growth where an owner/instructor/manager can work 10-20 hrs/week and continue earning 100k is worth about 200k assuming no company debt. Every year going forward, funds will need to be saved for upgrades as assets depreciate.

Say 90k is left in profit and 10k saved for upgrades. 200k purchase requires 2+ years to actually break even to have a decent job. Assuming the company is 90k in debt, a more fair price is about 110k.

To get more, the current owner should thoroughly review the business to find the less obvious mistakes that caused a stagnant business. If an investor can identify a way to monetize franchise rights, grow the clientele, and/or add # of locations, the business rights may be worth something. Otherwise, very few investors want a stalled business that requires significant effort + years to recoup the investment.

The key is selling this as a potentially lucrative opportunity through untapped x, y, z opportunities. Investors generally accept some level of risk. Few can accept paying even fair value for a peaked business without huge cash flow.
Enjoy life but save vigorously!
Post Reply