How would you value an existing business?

[MTpockets]

The most critical component of a business is a customer base.

 

[Stomper]

If it were me, I would calculate the net income of the business, the stability of your clientele base, what you think you (realistically) want for it, and work out the ROI for someone purchasing it while making a around six-figure income every year of that ROI duration. A 3-5 year ROI would not be out of the realm of reality.


For those of you in Rio, Linde, CA, "ROI" means (in this case) Return of/on Investment.

 

[Longwalkhome]

Just for discussion, business is mostly about the economy but what destroys them is over regulations by governments.

114 goes through and I believe it will really hurt gunshops. The election goes wrong and gunshops will be constantly hurt more. Inflation is going to kill small businesses, government is destroying them.

What's a small business worth as the economy crashes?

 

[Stomper]

Just for discussion, business is mostly about the economy but what destroys them is over regulations by governments.

114 goes through and I believe it will really hurt gunshops. The election goes wrong and gunshops will be constantly hurt more. Inflation is going to kill small businesses, government is destroying them.

What's a small business worth as the economy crashes?

ANYTHING is ALWAYS worth EXACTLY what someone is willing to pay for it.

 

[Meridian7750]

I get all that. What got me thinking more about this stuff was I had a customer ask what it would take to buy my business so I shot him a totally random number as a land swap. Turns out he wanted ownership but to have me manage it for him. That was a hard no from me.

Maybe I'm missing something, but this sounds exactly like what you're asking for…
-A buyer
-An income for a few years until your wife retires

Sell to him, bank his $$, work for a pre-determined income with pre-determined hours, shed a TON of uncertainty and legal liability…sounds like a pretty good solution to me.
Good luck

 

[oremike]

Years ago Marvin sold me my first Glock, before glocks were cool. He knew his guns and could sell them to ya, tore it apart and put it together just slick as pudding. He told me when he ran his shop that he didn't like gun shows because they compete with him selling guns. I liked him and his dog, some folks didn't.

I'd done a bunch of business with Marvin over the years. To say it was the best gun shop in Eugene is a bit of a stretch IMHO. Sometimes I'd walk out with my purchase, other times I'd just walk out shaking my head. It was fun to wind him up by telling him that you'd seen a gun he had for less at some other store and try to get him to beat that price. It was like you were taking food from his kids mouths, hence the nick name Starvin' Marvin.

 

[Helocat]

First off I'm not looking to get out of the ammo business at least not yet. That being said, I am 66 and my wife can retire in another 6 years so we might want to do some traveling/snowbirding or whatever rather than run an ammo business. So how to value all this? I'd want to keep a few guns the I like but quite a few are just test fixtures I use in my business. Then there is the equipment and supplies. All of that stuff is easy more or less to figure out he fair market value of but how to value the business itself? Name, reputation, suppliers, customers, pet load data and other non tangibles like licenses and insurance all have value so how do I determine what that is worth? I know when the time comes I can just shut the doors and "go out of business" but I've put a lot of energy in to this and would like to see it continue beyond me so selling as a turn key business is attractive.

The value of the equipment and inventory is the easy part. The "blue sky" part, value of the name, customer base etc. is the hard part. Value over hard. assets is directly related to how profitable your company is on the P&L. This gets hard for allot of small bis as they run their company to not show a lot of profit due to tax reasons. BUT the mindset of building a profitable (thus valuable) business is key and paid taxes, well that's part of showing the value. The number for the value is somewhere in what your actual profit is. This is where the formula of EBITDA comes in to help. Earnings before Interest, Taxes, Depreciation, and Amortisation. Just google EBITDA lots of articles and examples out there.

EBITDA is a sart but other key factors are Cash Flow, how much actual cash flows though the biz.

I get all that. What got me thinking more about this stuff was I had a customer ask what it would take to buy my business so I shot him a totally random number as a land swap. Turns out he wanted ownership but to have me manage it for him. That was a hard no from me.

He wanted the investment idea, with you as the EE. That can actually work as a way to transfer ownership. He owns it you work it for set number of months 3-24 whatever, then it's his to run or pay someone to run it for him once your out.

Issue with your business as any of us that reload know, the tribal knowledge that you have to assemble custom loads, test, adjust and test again is not something you just pull off a shelf. The value of what YOU know and do is a very large part of the value of your biz. This can be resolved by sold documentation ( you prob already have that) and some training for the next person running it.

This is great your thinking about this now. Too many small biz dont and have the "my retirement is the sale of my biz" thinking it will have some huge payday. Then that day comes planned or unplanned (medical need) and the business is not set up to be profitable for transfer of ownership so no buyers. Instead it's a fire sale of the assets only. This can be avoided by the owner if they keep asking themselves would I buy this business if they did this or that? Other thing is knowing who your buyer might be. If you biz is now just a one man show where the owner does all the work, well that would be your buyer most likely. Thus someone retiring and wanting to work a little but not support a family of 5 and put the kids through college. Push that P & L to have solid profits and build the business more that anyone could be dropped in and run it. Now you start picking up buyers like your customer asking, since he would own it but not be buying another job.

 

[solv3nt]

The benchmark that I've always heard was 1 year of sales. There may be multiples attached to that if there is a new product or if business is booming. But it gets down to what someone would pay, and that's not necessarily calculable.

This. A small business valuation would start at the one year sales and go down from there for a one man shop.

 

[USMC1911]

After my dad passed unexpectedly a few years ago we were in the unfortunate position to sell his long owned and successful business. It had been in the same location for decades and was well known in the industry it operated. We got about 2.5 years profit (dads salary) and some for the equipment.

 

[Longwalkhome]

I'd done a bunch of business with Marvin over the years. To say it was the best gun shop in Eugene is a bit of a stretch IMHO. Sometimes I'd walk out with my purchase, other times I'd just walk out shaking my head. It was fun to wind him up by telling him that you'd seen a gun he had for less at some other store and try to get him to beat that price. It was like you were taking food from his kids mouths, hence the nick name Starvin' Marvin.

I rate a gunshop in a lot of ways, Marvin always gave good customer service and knew what he was talking about. It was his place with his name on it and he cared about his name. Yet he could take a joke when folks called him "Starvin Marvin". He watched his money pretty close and I never tried to talk him down on price. If I wanted teeth pulled with pliers I would go to the dentist and listening to him talk prices to others told me no thanks.

 

[oremike]

Helocat gets it.
I don't need the money so if I decide to sell and all I get is pennies on the dollar fire sale offers I'll just keep shooting my ammo and let my boys figure it out when I'm gone. Right now I'll just keep pulling the handle and making inventory.

 

[Jay Walk]

Buddy purchased a plumbing company, couple of trucks and some tools, pipe, fittings etc...
The client list was what he really wanted though.

The seller said "I just need $2,000 per month" so my buddy paid him that for 4 years and it was done.
Sales are about $500,000 per year now.
He has owned it for eight years I think.
He does very well at it.

 

[gmerkt]

Specialty businesses might have special considerations. In this case, the future of ammo sales might become cloudy. Taking California as an example. Lead bullet ban, background checks for purchases, etc. Eventually heavy-handed government might discourage gun hobby activity severely. We can't know how far this will go.

Politics can change markets. So can technology. A sister-in-law has an established, one person business creating crossword puzzles. She set up a syndicate that markets to many US newspapers. However, we all know the situation with print journalism in the cyber age, it's a downward spiral. This situation being the case, her business that she once wished to sell and retire from becomes less salable by the year. Because finding a buyer becomes more and more challenging, she has trapped herself into working longer. Not because she can't do without the income, but because she can't stomach not getting anything out of her business when she gives it up!

 

[OldBroad44]

Seems to me neither the FFL nor the licenses or the insurance would be transferable. I think the main value beyond guns and equipment would-be the load data and the customer list.

 

[OldBroad44]

Specialty businesses might have special considerations. In this case, the future of ammo sales might become cloudy. Taking California as an example. Lead bullet ban, background checks for purchases, etc. Eventually heavy-handed government might discourage gun hobby activity severely. We can't know how far this will go.

Politics can change markets. So can technology. A sister-in-law has an established, one person business creating crossword puzzles. She set up a syndicate that markets to many US newspapers. However, we all know the situation with print journalism in the cyber age, it's a downward spiral. This situation being the case, her business that she once wished to sell and retire from becomes less salable by the year. Because finding a buyer becomes more and more challenging, she has trapped herself into working longer. Not because she can't do without the income, but because she can't stomach not getting anything out of her business when she gives it up!

Where the business is owned by and depends on the creativity of one person, there is nothing to sell. The creative owner IS the business. Thats true even if the overall type of business were not dwindling.

 

[oremike]

One thing I'm sure of is ammunition is and will always be a valuable commodity.

 

[tinhorn]

Where the business is owned by and depends on the creativity of one person, there is nothing to sell. The creative owner IS the business. Thats true even if the overall type of business were not dwindling.

If you were right, I'd agree with you. But if OP has a "brand", a client list, any trade secrets, those all have value even though the business is small enough to be operated by one person. (I noticed that client lists of a one-man business drop by about half after the sale.)

I've bought a few small businesses, but they were usually turnarounds that I bought for asset value or less. If a business has a bad reputation, there is no value to the business name and it should be changed, so a buyer is kind of starting from scratch. If the name has a good reputation, it has some value and should be maintained and probably paid for.

When I bought a business I wanted a two-year payback on any "blue sky"--anything besides the hard assets. And when I sold them, that's how I valued them: tangible assets, reasonably priced, plus two years gross income (revenue minus cost of goods).

 

[Helocat]

If you were right, I'd agree with you. But if OP has a "brand", a client list, any trade secrets, those all have value even though the business is small enough to be operated by one person. (I noticed that client lists of a one-man business drop by about half after the sale.)

I've bought a few small businesses, but they were usually turnarounds that I bought for asset value or less. If a business has a bad reputation, there is no value to the business name and it should be changed, so a buyer is kind of starting from scratch. If the name has a good reputation, it has some value and should be maintained and probably paid for.

When I bought a business I wanted a two-year payback on any "blue sky"--anything besides the hard assets. And when I sold them, that's how I valued them: tangible assets, reasonably priced, plus two years gross income (revenue minus cost of goods).

@oremike meet your buyer.

 

[Dust2Dollars]

YAWN!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

 

[oremike]

@oremike meet your buyer.

Thanks, but maybe in 5 or so years.
Next question for those more savvy about these things than me. Would a trade for property keep the tax man out of my pocket? My thought is if I take a cash out I have to pay capitol gains tax but if there is no cash gain like a straight across trade then I shouldn't have to take the big hit.