# Buying a company



## MSLiechty (Sep 13, 2010)

I've been approached by the my employer who wants to make an exit strategy about buying the company... He's been in business for 45 years and I've been with him for 24 years and PM/ estimator for last 12 years. 

Anyone ever done this and how you you place a value on a company

I know what our sales are. About $5M with about 1.5M in net profit we run about 30 installers out of 2 offices 

ML


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## Mort (Jul 18, 2012)

We tried to buy a business once upon a time. The bank explained that there was the actual value of the assets and the "blue sky" value, i.e. the value of the reputation, name, whatever else. 

The bank didn't want to loan on the blue sky value. Maybe because we were poor with s**ty credit but more so because it was completely subjective and not recoverable if you default.


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## GregB (Jan 8, 2016)

So its a one-owner company that does about $5M in sales. You say $1.5M in NET profit. That would mean the owner is making $1.5M, which means he can take that amount home or possibly reinvest that in the company. If so then he will have buyers lined up and we want to be first in line.

Did he work for 45 years and suddenly decide he wanted out?

Does he have a real CPA firm that knows how to do this?

Does he want to be cashed out? Borrowing a lot of money for something like this could be tough. 

Does he want to take you in as a partner, while you gradually take over the business?

My CPA firm has a section that specializes in this type of work and is probably the area expert in this. If you have some idea of what you would like to do, I will get some free advise for you when I see him later today. Yeah, I know its Sunday. Best to post only generalities on a public forum.


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## We Fix Houses (Aug 15, 2007)

If you say there is a 30% return, 1.5 mil, there should be buyers lined up around the corner.

90 % of all business purchases are owner financed if that helps. Paid off in 5-7 years.


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## Metro M & L (Jun 3, 2009)

When establishing a price you could agree that you both will have appraised by your respective cpas and then average the values. I think it might come in around 3 million plus inventory.


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## pcplumber (Oct 12, 2008)

The first thing you might want to ask yourself is:

What would it cost me to start my own business from scratch since if I think I have what it takes to run a business that I purchase.

The safest way, money-wise, to start a business is with as little cash as possible and then make your mistakes and learn as you grow. You are dumping a lot of cash with a lot of risks when you only think you can run the business just as well as your boss. You can bet that your boss has some knowledge and some personal traits that you don't have at this time and may never have.

just think about what you could do with $1-1/2 to $3 million to start your own business in the next two or three years. Think about what will happen if you don't have what it takes to manage all the employees, insurance, lawsuits, bad customers, unpaid contracts, OSHA crawling up your butt with a microscope and the hundreds of critical decisions you have to make every day regarding employees issues, purchase prices, selling prices, scheduling, customer service, paying bills, etc.

You had better be prepared to work 18 hours every day for the first few years. I am 66-years old and I still work 6 days a week from 5:00 am until midnight almost every day and about every 4 to 5 weeks I work on Sunday from 5 a.m. until midnight going over the books, creating ads and company forms, creating reports and forms for OSHA and the only time I can really get something done in the office is after-hours when phones are not ringing and when nobody interrupts me.

Owning my own business is very rewarding, but a very high percent of the people in this world start a business because they love the idea of having tons of cash cash and after they start a business they never understand that they don't have the energy, ambition nor the drive to make the business work and then they end up hating their business, hating their employees and they hate their customers. 

Most people in this world do a very bad job when it comes to evaluating themselves. Everyone in this world thinks they are just as smart, or smarter than everyone else. Again, I want to say that the successful business owner often have special traits that most people cannot see.

Again, the safest approach is to start your own business from scratch. If you already had a very successful business that already accumulated tons of cash then I would consider buying someone else's business. If you have to ask other people about whether or not you should buy a business then I will guess that you are not prepared to purchase a business just because you are not sure about yourself and had to ask the question.


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## MSLiechty (Sep 13, 2010)

True we are a sub contractor with only about 5 peers locally and he was not been involved directly for 20 years more of an absentee owner since the co. ran itself with 6 pm's and he just took his draw weekly to keep up his sport fishing / private pilot lifestyle. 

He has a long term large CPA firm that has been ha delving his. Books for 40 years and since I'm the senior employee he came to me first


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## MSLiechty (Sep 13, 2010)

It's not that's I'm not sure of it more curious how one goes about doing it. I assume it would require owner financing as I don't have a few million laying around. 

Also how does one place a price on a well established business? 

ML


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## griz (Nov 26, 2009)

Does his absentee ownership keep old clients returning and new ones coming in?

I'll bet lunch he knows exactly how much he wants and how he wants it. Talk to the guy, not like you don'i know him.

Your 24 years of loyalty may have a significant effect on the outcome.

Good Luck....:thumbsup:


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## MSLiechty (Sep 13, 2010)

Thanks griz I agree. Yes all our work is for return GC's it's the same pool of GC's and subs on virtually every TI project 

ML


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## robotnbr1 (May 30, 2014)

pcplumber said:


> You had better be prepared to work 18 hours every day for the first few years. I am 66-years old and I still work 6 days a week from 5:00 am until midnight almost every day and about every 4 to 5 weeks I work on Sunday from 5 a.m. until midnight going over the books, creating ads and company forms, creating reports and forms for OSHA and the only time I can really get something done in the office is after-hours when phones are not ringing and when nobody interrupts me.



Holy delegation batman! Could this be a little self inflicted? I find it hard to believe that every company of your type and size (which admittedly, I don't exactly know) has to have the owner/manager working that many hours to make is successful.


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## GregB (Jan 8, 2016)

Its was $5000 for a valuation on the last one in which I was involved. Don't spend that money unless you have some general idea of how this works. 

The last one I had valued was valued by the goodwill registry method, the multiples of gross receipts method, the multiple of the owner's cash flow method, and the excess earnings method. There is a substantial amount of expertise in knowing how to come up with reasonable numbers from those. The fact that he has been an absentee owner makes it more likely that you won't lose any business when ownership changes. Any abrupt change is to be strongly avoided.


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## KAP (Feb 19, 2011)

MSLiechty said:


> I've been approached by the my employer who wants to make an exit strategy about buying the company... He's been in business for 45 years and I've been with him for 24 years and PM/ estimator for last 12 years.
> 
> Anyone ever done this and how you you place a value on a company
> 
> ...


Based on what you provided, I question those numbers... with 30 installers, plus I assume sales staff, admin staff and PM('s) to support them, that might be a GROSS profit of $1.5 million, not NET...

If you're telling us that with $5 million in gross sales, he can pay all those people, run two offices, pay for overhead and materials, insurance, vehicles etc. and still be left with $1.5 million in NET profit (even assuming before taxes) in California, no less, I'd be drilling down on those numbers because that seems like a manipulation (and may not be intentional) of the numbers to me...

If the numbers were real, you could have this guy paid off in 3-4 years assuming it maintained it's current sales position which is why some are saying people would be lined up around the corner... Consider... it took him DECADES to bring it to the $5 million dollar range and develop it's current reputation... 

Banks will only lend on the assets of the business as collateral because it's all they collect on if you go belly up... and that's more common in business takeovers than not...

Before moving ahead, and before any commitments, have an impartial third party review the numbers... after that many years in business, your boss will understand why...


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## MSLiechty (Sep 13, 2010)

Good point KAP I will pull up last years financials tomorrow . And see if he has his numbers mixed up. 

ML


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## DaVinciRemodel (Oct 7, 2009)

I’m with KAP here. If that’s “Net Profit”, I’d be very interested in looking at this purchase opportunity. “Gross Profit” makes more sense.


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## MSLiechty (Sep 13, 2010)

Yep, He was confused. 

TWELVE MONTHS ENDED DECEMBER 31, 2015
Sales $ 12,099,315
Cost of Sales 9,611,064
Gross Profit 2,488,251
General & Administrative Expenses 2,247,098
Net Operating Profit $ 241,153


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## GregB (Jan 8, 2016)

The first 4 items are fairly straightforward but can still be moved around quite a bit. The last two can be moved around A LOT. It will also change by large amounts according to the structure of the business. I'm guessing it is a Corp and will have the owners pay in #5. But that leaves HUGE room for getting to the numbers used for business valuation. 

This is why these numbers get looked at, adjusted, standardized, and argued about during a real valuation.

Just a small example would be if there is an airplane and all the associated costs in item #5 and how much of that is "real" business use. The numbers that go on P/L for taxes will be very different from the numbers used for business valuation.

I will also add that 20% GP seems normal in this economy but 1.6% net seems way low. What were those numbers in 2008-2010 and were they calculated the same way?


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## KAP (Feb 19, 2011)

MSLiechty said:


> Yep, He was confused.
> 
> TWELVE MONTHS ENDED DECEMBER 31, 2015
> Sales $ 12,099,315
> ...


That's a whole other story... Just curious, how did you come to the conclusion sales were $5 million but they ended up being almost two and a half times that?... :blink:

If his salary is in General and Admin Expenses, he may be including and/or calling that "NET profit" being that you mentioned he's an absentee owner... if that's the case, you might have an opportunity here...

Assuming you still want to move forward with the above numbers, I'd encourage you to get an impartial third party for numbers review/valuation to clarify the companies actual position...


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## MSLiechty (Sep 13, 2010)

$5M for the office i work out of. I know what my sales are. but never thought it was $12M total. i think 8-10 is more realistic. 

and Greg is correct there is a twin engine turbo prop involved that the balance sheet shows as a $735K asset.

Theres a lot of fluff that the owner charges off and calls ita business expense.. 
When i look at the totals I just shake my head as i know what we have and there is no $252K in machinery, no $18K in travel, no $24K in entertainment. 
I realize he is sheltering lots of $$$ to show low net profit, on top of the spending he does that the company also pays for, But assume thats fairly common for business owners.


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## MSLiechty (Sep 13, 2010)

GregB said:


> I will also add that 20% GP seems normal in this economy but 1.6% net seems way low. What were those numbers in 2008-2010 and were they calculated the same way?


2008 they show $276K or 1.3% net profit

ML


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## GregB (Jan 8, 2016)

I originally was guessing that the net of $241K could easily be "off" by $1M either way to get a real number for valuation. With the extra info of (probably) personal expenses included in business expenses and the likelihood of airplane expenses included, I'm going to guess the net number will only adjust up.

If this is the only business, it is buying and maintaining a twin turboprop. Even if he doesn't fly it much, that is at least $200K per year. It is only on the books for $735K and may be worth that little but older ones aren't cheaper to maintain. The reason older twin turboprops are cheap is that a typical engine overhaul is still $200K+ each. Figure $12 per minute for just fuel. Does the business insurance include $50K per year for the plane?


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## Kowboy (May 7, 2009)

pcplumber said:


> The first thing you might want to ask yourself is:
> 
> What would it cost me to start my own business from scratch since if I think I have what it takes to run a business that I purchase.
> 
> ...


pcplumber:

I have to respectfully disagree. There is no comparing a solid business with verifiable books and nearly 50 years worth of goodwill to a dream and hard work. You are purchasing a proven money printer.

If the seller finances, what's unsafe?


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## 12shinglemyroof (Aug 30, 2016)

You need a business lawyer who specializes in business acquisitions. I looked into that several years ago too but too much of a headache and it wasn't the right time.


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## pcplumber (Oct 12, 2008)

Kowboy said:


> pcplumber:
> 
> I have to respectfully disagree. There is no comparing a solid business with verifiable books and nearly 50 years worth of goodwill to a dream and hard work. You are purchasing a proven money printer.
> 
> If the seller finances, what's unsafe?


I think my post revolves around what is safer and whether or not the person has what it takes to run the business he purchases. As stated many times, the problem that many people have when it comes to evaluating how well they will do is they think they can do things just as well as the owner of a business, but when push comes to shove they crumble and crash.

Even when the owner finances the sale of the business the buyer often ends up putting up collateral i.e. a house. There will never be a day when I sell my business and say, "pay me if you can" and I risk getting my business back financially destroyed.

If a person doesn't have what it takes to start a business then I question whether or not he can run an established business. Even an established business requires a special type person who can handle the dramatic changes in economic conditions, changes in the way people buy, dramatic changes in prices, demand for supplies, and the dramatic changes in the way businesses advertise. 

I am not sure about aliens, but humans have a tendency do their forecasting based on ideal conditions. Very few ventures produce as well as projected. When it comes to forecasting, you have to do a massive amount of analyzing the risk against the reward. People tend to ignore the risk and focus only on the reward. Start small and there is less risk. 

This past Monday, I backed out of a business venture because the risk turned out to be too high. I worked on the project for 9 months and invested a ton of cash in this project. As the project progressed the building requirements and were going to cause our projected cost to triple. I did my risk to reward analysis on Sunday, called my partner, explained that the risk was now too high for my blood and I completely backed out of the project. 

Rather that feeling like I made bad decisions from the start, I compliment myself for having what it takes to continually evaluate the risk to reward and I don't let greed for money cause me to make bad business decisions.My partner was smoking hot, but if the project is as great as he thinks then he can go find another partner. 

Just so you don't think my partner got the short end of the stick. My partner did not have one penny of his money invested in this project. I paid him a weekly salary to manage the construction. I set him up with another business for himself and cancelling our larger project is no skin off his butt. Now, we are not talking to each other because he feels he was cheated. Oh, well!!! That is the end of two bad partnerships in two years. Maybe, it is me!!!


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## Builders Inc. (Feb 24, 2015)

I have a business where there are propositions of the road I an on being expanded by the department of transportation. My attorney said the value of a business is evaluated by a business broker. That's who would come up with its worth. 


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## fencevictoriabc (Sep 3, 2016)

I agree I want in on this deal also. 1.5M wowza. 

Make an offer quick. I'll lend you money.


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## SectorSecurity (Nov 26, 2013)

I'll give you the 200$ in my wallet but I want a 5% share in the company and I want 4% interest on my money until it is paid back in full


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## Builders Inc. (Feb 24, 2015)

SectorSecurity said:


> I'll give you the 200$ in my wallet but I want a 5% share in the company and I want 4% interest on my money until it is paid back in full




Lol #sharktank 


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## SectorSecurity (Nov 26, 2013)

I was going to ask for royalties but thought that might be pushing it.


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## JBM (Mar 31, 2011)

240k after 12 million, glad im a mason right now actually. 

If the company has a bad month your in the hole for the year probably.


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## GC37 (Apr 29, 2016)

You are an idiot if you buy a construction company unless the owner is willing to sell the assets at less than face value.


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