Where's the value?
If you are just beginning your investigation into finding
a business, there is a lot more to consider than ROI. (return
on investment) Not to mention ROOPM. (return on other people's
Every broker and seller has their own formula that they use
to arrive at a asking/selling price. Every buyer and buyer's
consultant has their formula. Rarely, will everyone's formula
Cash flow is cash flow. Are you willing to pay one times or
five times? Do you want 100% return or is 20% reasonable? In
addition to cash flow, what else are you purchasing? Unless you
have started a business from zero, you won't understand the intrinsic
values associated with an ongoing or failing business. Yes, even
a failing business might be worth more than the face value of
it's assets. But, only to an educated buyer.
- Customer list. If there is an up to date customer
list, what is the value? Do you know where to sell it? I met
with a closed down mailing company that wanted to sell the assets.
I only wanted to sell the customers. Seven million customers
that had purchased over the last five years
to me, I knew
buyers who would pay more for that than a warehouse full of assets.
The seller could not be bothered and did not believe someone
would pay for old customer names, addresses and purchase records
- Yellow Page listing. If you can get a business (open
or closed) and take over the phone number and yellow page contract,
that is worth a small fortune. If you can't, you need to figure
out how you will get customers for the next 12-18 months until
you can get into the next directory.
- Accounts payables. If you are buying a business that
buys merchandise at wholesale, then sells at retail, or assembles
and resells, are they on a net 30, 60 or 90? Do you understand
the value of someone fronting you merchandise and letting you
sell it and earn a profit before you have even paid for it? (ROOPM)
If you do not have those accounts, your shipments come in COD
(bank check), or pre-paid on a credit card, or you give money
in advance to your supplier and they send you merchandise until
your deposit is used up. This can go on for 6-24 months until
they 'try' you at net 10-30.
- Procedure manuals. A business plan, operations manual,
employee manual and independent contractors agreements all add
value to a business. They all have a cost associated with them.
And each good business has one.
- Supplier list. Arriving at a good supplier list is
trial and error. Profit and loss. Spend a few days price shopping
with the telephone for whatever item you want to sell or service
and see if you can see a value to having someone hand you years
- Grandfather clauses. call the building department
of the city/county where you are thinking of opening/buying your
business. Ask for a list of all the permits, inspections, zoning
ordinances, allowed use, licenses, engineering requirements,
architectural requirements, ADA requirements, sign ordinances...
well, you get the idea. A savvy business buyer will buy a business
with grandfathered use codes in order to not have to comply with
today's more stringent codes. For example a new business may
only be allowed to have four square feet of signage per 1,000
square feet of occupied building space. A business that was established
ten years ago may be unlimited and using that billboard for the
last ten years. Which one is more valuable?
- Equipment. Most any equipment older than 5-8 years
is worth little if anything. Or is it? Equipment built today,
is built to 'throw away' when you are done. Equipment built twenty
years ago was built to last 100 years. They were built with bearings
instead of bushings. (If you don't know, you won't understand
or believe it!) When South Florida changed the building codes
after Hurricane Andrew, it was more expensive to re-tool the
newer equipment than the older equipment! Who on earth would
spend eight hundred thousand dollars to re-tool equipment that
was valued at $300,000 tops? The same person that saw sales jump
from $3 million to $8 million while his competitors scrambled
or closed their doors.
You can agree or disagree. Just define the formula you wish
to use, and let your broker know. That way neither of you will
waste the other's time.
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