Buying a retail business? Determining FMV?

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I have an opportunity to purchase an existing retail business (a private postal and mailing center). It's small, and doesn't generate much gross revenue, but even so, it is something I'm strongly considering (for reasons too lengthy to describe here).

Is there a formula for determining fair market value of a retail business?

The seller of the business is telling me that the standard sales price is 49% of gross annual receipts. Other than my own ignorance, he has given me no reason to doubt his word (I've been acquainted with the man and his business for at least seven years).

Thanks,

General Tsao

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This may sound like a weird question... But, is he Jewish? 49% sounds like an 7X7 Old Testament instruction. That is why I ask.

I'm not an accountant, and I know there are a few on here that will likely show up to assist, but as a small business owner these are the things I would consider:

1. Gross Revenues less Expenditures. What will you have left over to live on? Can you live on that amount?

2. What assets are you buying? For example, if annual rev. is 100,000 and you pay 49,000 for the business, what part of that is physical assets, and how much would be "good will" or customers? I can't imagine there are 49,000 in physical assets for the type establishment you are talking about.

3. What type of lease would you be taking over on the property or is the property part of the physical assets owned outright by the seller?

4. How many employees are required?

5. Have you had a look at the real books and tax returns?

I would want a lot more info before deciding that 49% is a fair value.

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Pay attention to that woman in addition to disregarding the 49% figure. Gross in most businesses is a meaningless figure; accept as a factor in determining the net. I've seen businesses that net over 90% of the gross and others less than 1%, sadly. 49% of the gross sounds like an interesting sales prop but is utter nonsense.

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Gee, I agree with Bill on this one! LOL 49 percnet is so much BS, don't buy it. The way you value any retail business is to 1) look at their income tax returns for the past three years to determine a) gross sales, b) cost of sales, c) gross profit, and d) net income. Also find out what he's paying in rent, and if the rent is based on some formula. Find out if there's a lease agreement for x number of years. And finally, don't pay his cost for equipment and supplies. Agree to pay pennies on the dollar. If you have any specific questions, we're here to try to help. Next time he says 49 percent, offer him 4.9 percent.

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squinney wrote:

This may sound like a weird question... But, is he Jewish? 49% sounds like an 7X7 Old Testament instruction. That is why I ask.

No, not Jewish. Just a businessman. Unless, of course, there are fair-skinned, red-haired Jews.

I'm not an accountant, and I know there are a few on here that will likely show up to assist, but as a small business owner these are the things I would consider:

1. Gross Revenues less Expenditures. What will you have left over to live on? Can you live on that amount?

The answer is "no," I can't live on the net profit, but this question has been considered and fits into the category of "too much to explain here." Gross receipts is about $50,000. The net profit is about 10% over the last 12 months.

2. What assets are you buying? For example, if annual rev. is 100,000 and you pay 49,000 for the business, what part of that is physical assets, and how much would be "good will" or customers? I can't imagine there are 49,000 in physical assets for the type establishment you are talking about.

I have not done a physical inventory of the hard assets, but they include client list, business equipment (postage meters, scales, computer, customized software), counters, desks, worktables, cabinets, 166 PO boxes, various merchandise display racks, current store inventory (about $3,000 wholesale worth), business logo and name (12-15 year established history, same city, same location).

The location is leased. Approx. 1000-1200 sq ft. $700/mo.

3. What type of lease would you be taking over on the property or is the property part of the physical assets owned outright by the seller?

Property is a leased space in a strip mall. I believe there are two more years on the lease.
4. How many employees are required?
One. This man and his wife ran the company the past 10 years with one person in the store.

5. Have you had a look at the real books and tax returns?

I have seen some rough computer printouts, and have requested itemized ones. They are to be faxed tomorrow.

I would want a lot more info before deciding that 49% is a fair value.

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You must demand to see his tax returns for the business. Verbals are unreliable and not defensible in court. You must look at legal documents. Otherwise, stay clear.

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Here is some more info that may be useful to know. I'll try not to get too verbose.

I don't have the money nor financial backing to buy this, or any, business.

Part of the attractiveness of this deal to me is that it is a turnkey business, proven longevity, even though the gross and net profit are not what I'd like to see, it does cover the overheads every month.

The couple has cut the store's hours over the years (I've been doing business there for about seven years myself, and have known the business for over a decade). This has accounted for the lesser sales over the last few years. They were apparently retiring slowly, LOL. Now they want to retire altogether.

They know I run a few different businesses, and have been a steady customer for many years so they offered me their business, thinking it would go well with my other businesses (which is absolutely will!).

They proposed the following deal:

(approx. figures)
1. No money down.
2. $150 per month for 24 months, no interest.
3. Their personal support for perhaps one year to help me as I get used to the business, software, and all other aspects of running the company.
4. Their pesonal assistance during the busy Christmas shipping season.
5. I may pay off balance at any time or begin $1,000 monthly payments at the 25th month, at Prime, to be paid off within two years.

Hope this helps you help me.

Thanks,
General

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cicerone imposter wrote:

Gee, I agree with Bill on this one!

That is the formula to absolute certainty! Laughing

the general wrote:

(approx. figures)
1. No money down.
2. $150 per month for 24 months, no interest.
3. Their personal support for perhaps one year to help me as I get used to the business, software, and all other aspects of running the company.
4. Their pesonal assistance during the busy Christmas shipping season.
5. I may pay off balance at any time or begin $1,000 monthly payments at the 25th month, at Prime, to be paid off within two years.

Hope this helps you help me.

Thanks,
General

Unless that's a front for another business, walk away. Are you kidding? Depending on the value of the assets... 4.9% is probably more than it's worth. They are either delusional or they think you are. Sorry.

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General, Once a great while, some lucky people buy used cars at bargain prices. Does it happen often? I think not. That's the reason you must be extra careful of candy offers from 'strangers' at an unbelievable price. If you trust this couple, and you feel you can swing it, it's your decision to make. At 69, I'm still leary of getting candy for free - even on helloween.

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Hey, Everyone,
Thanks for your help thus far! Just FYI in case you're dying of curiosity, I got the P&L today.

Having reviewed the P&L and other reports supplied by the owner, I have to really wonder if his recordkeeping was accurate--or if he is just ignorant of how business should operate.

For year 2003, his documentation shows Gross revenues were 60K but COGS and overheads brought the net profit to approx 5% for the year.

Now, to make matters worse, the overhead does not account for any wages nor salary--the owner worked the store alone and did not count his own wage as an expense to the business (in other words the owner worked 40+ hours per week for an annual "salary" of $3000.00).

So now I'm thinking that this owner is trying to unload his biz on me, thinking that I'm totally ignorant of how to buy a business, or too naive to check with qualified people.

As much as I'd like to buy his store (for many reasons), it does not appear to be a good value at his asking price of 49% of gross revenues. And I won't die if I don't buy his biz.

However, his P&L indicates to me that he must either:
1) build sales, 2) sell the biz, or 3) close.

I think 1) is out of the picture since his wife (who runs the store) wants to retire.

I think if he can't sell the biz, he'll close it anyway, so maybe I can be present to buy its assets at the fire sale. The only disadvantages would be that I won't get client list of some 2000 persons and addresses, and I probably couldn't get the rights to the name/logo.

General Tsao

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General, Glad you got ahold of his P&L. That's more reliable than anything the owner might say to sell his business. Wink

Having worked as an accountant for the better part of my career, old habits die hard. P&L worth a 1000 words. Wink

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C.I., I liked that agreement thing. Take a look at the parts I bolded, I think you might have missed that last part. According the those numbers, off the top of my head I'd say 5 years from now he'll be in the black with nothing but the assets to show for labor. That's a sentence, not an investment.

GeneralTsao wrote:

The answer is "no," I can't live on the net profit, but this question has been considered and fits into the category of "too much to explain here." Gross receipts is about $50,000. The net profit is about 10% over the last 12 months.

GeneralTsao wrote:

1. No money down.
2. $150 per month for 24 months, no interest.
3. Their personal support for perhaps one year to help me as I get used to the business, software, and all other aspects of running the company.
4. Their pesonal assistance during the busy Christmas shipping season.
5. I may pay off balance at any time or begin $1,000 monthly payments at the 25th month, at Prime, to be paid off within two years.

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Oops, I see I was late... see what happens when you multi-task. Sorry it wasn't better General, you know what to do.

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General, I have a bridge in Montana I can sell to you real cheap. Only $12,500, no money down. Wink

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OCCOM BILL wrote:

Oops, I see I was late... see what happens when you multi-task. Sorry it wasn't better General, you know what to do.

Naw, you're not late! I really appreciate your input. I kind-of know what to do...

I'm thinking I'll get an asset list, and offer him FMV for the assets and a small percentage for Goodwill and see if he goes for it.

If he does, I will really appreciate it, as it will benefit my other businesses to have the location and assets of his business. I can also make his business profitable--he and his wife have just gradually quit "working" the business over the last few years, so the revenues are slipping.

But I'm not going to pay for a business's potential worth, I'm buying what it's worth now.

However, if he doesn't sell to me, I'm no worse off. I hope I get it, though. I've got plans for it already, ROR.

General Tsao

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Sounds like you have a plan that has nothing to do with what he's done and I wish you the best of luck. You couldn't give me that liability.

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General, I think you're on the right track now; offer what it's worth to you - not to him. He can take it or leave it. He has to get rid of it anyways, and you're doing him a favor by "taking it off his hands." Good luck!

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Buying a retail business? Determining FMV?

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