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buying a doming business
As you may have seen from my introduction I am looking at buying a small business that produces domed name badges. The business has been established for a few years now, has a turnover of about 6K and profit margin of about 60% (TBC) and 90% of business is repeat orders as the current owner has never looked to expand.
The asking price is £6K and included in this is a website (rather poor TBH) a Summa cutter about 1 year old and a Canon 9000 pro printer, and a few bits of stock but nothing really worth mentioning.
In your opinion does this seem a reasonable deal, especially given that I want to to expand this business.
thanks
Jason
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3 Replies
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It doesn’t sound like it to me Jason.
It depends on whether, as I suspect, that 60% is gross profit, or net.
The way to value a business, any business, is to take the net profit, after ALL expenses, including your wages, and to see how that stacks up against what you could earn on that same money elsewhere.
So, for instance, if you can get 4% interest on your money in a Building Society for doing nothing, why would you invest in a business that only gives you 4% return on your money. You wouldn’t of course.
When you take into account the risks involved, the business needs to be earning a multiple of that risk and effort free return. That multiple will vary from trade to trade, depending on many factors, but in this case a multiple of three times would be about right.
Don’t fall into the trap of thinking that you can run the business alongside your existing operation and reduce the overheads. Hopefully you can, but that would be an added value that you are putting into the business, and the rewards for that should therefore be yours. It’s not what the vendor is selling you, so why should he benefit?
I could go on for hours on this subject, but have a think about this point first. If that basic principle stacks up, we can always go into more detail if you need to.
Just one thought though, if someone was to offer me the turnover figure of my business, I would snatch their hand off.
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Jason,
It does not look like a big risk. Sure, you could buy new equipment for a lot less, but your 6k does not buy only equipment – it buys sufficient turnover for you to cover expenses, and then some. You only make profit once you exceed break even, so you kick off from a good point.
I also bought a "going nowhere" business 14 months ago. I changed the name immediatly, replaced all the staff during the the first 12 months, as well as most equipment, computers etc. Only the Roland cutter remained, and that died last week! Now only the telephone and fax numbers of the original business remain! Working from a "break even" point, we were able to quadruple the turnover, and now have new vehicles, computers, vinyl cutter, and added 2 Roland digital printers.
Go for it. The best that can happen is you succeed. The worst, you fail, wasting 6k and a few months of your time.
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That looks more like a sideline than a business.
It seems unnatural to set up a business but to stall at such a low turnover with no expansion plans.
There’s no guarantee that the repeat customers will stay with you, as I have learned over the years, that as far as customers are concerned, nothing is for ever.
I think Jason that if you have it in you to make the business really pay, then you also have it in you to start out from new at far lower cost.£6000? Personally I think the guy is dreaming.
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