Appraising A Business...what Is Your Business Worth?

win4win

I was asked recently to help appraise a business for an acquaintance. His boss is offering to sell him 1/2 of the business. With so many accepted methods for determining a business' worth I am finding it hard to give him a way to arrive at a number.


This is primarily a sheetrock contracting business. The company has a leased office with one office manager that handles all record keeping, payroll and accounting. They do work for general contractors in 8 or 9 states. The current owner is the license holder in all of those states. Their smallest contracts are probably in the $50k to $75k range and top out around $1.5 million. There are less than 20 employees on the payroll. The majority of all their labor is subcontracted.


They have very few, less than $10,000, in tangible assets. No company vehicles, few tools, little office equipment etc. On the other hand they currently have between $5 and $6 million of work under contract which obviously has some value. Since they work all over and don't advertise or have a real brand name image, I don't think there is a whole lot of goodwill value there but I would imagine the owner's G.C. connections are worth something.



I am working off of estimates and numbers taken from his observations and information given to him by the owner. Kind of tough to assign a value to a business like this. Here is what I am thinking. I think he should go through a due diligence checklist and verify everything including all the numbers the owner has given him. Add the tangible assets and goodwill value to a 3 year average of the owner's salary, perks and excess earnings.....then multiply that total by 1.5 on the low end and 2.5 on the high end to get a value range.



Does this sound right? I am kind of poking around in the dark here. I told him he would be getting my uneducated opinion only, but he insists. How would you determine the value? Anything else you would consider, look for or do differently? I appreciate any input on the subject.


Thanks

AtlanticWBConst

Honestly,

I would suggest getting either a:

Certified Financial Planner

Business Lawyer

Appropriate experienced Accountant

... involved in determining the realistic value of the business. The proper person with the right experience will know EXACTLY what to take into consideration and what to look at, to calculate the actual dollar value of the whole business....

__________________
- Build Well -

mdshunk

There are vaulation experts who appraise businesses for a living. What you're doing (or rather, trying to do), is akin to a DIY trying to perform your work. Plus, to provide a proper valuation, you'd also need E&O insurance, which I'm sure you do not have. I wouldn't suggest you operate without insurance. Leave this one to the valuation experts.

My personal opinion... once the present owners leave, this business is worth about zilch. Maybe another person could make a good living at it, but I see it being worth almost nothing on the open market.

Mike Finley

Take a look at this site and look under

http://www.bizbuysell.com/

Construction>Specialty Trades

After about 3 hours of reading the details of the dozens of pages of construction companies for sale I think you will start to recognize some common traits on how they are valued.

It might also be worth your friends time to spend the $39.00 and get a quick valuation report by plugging in all the details you have so far.

There is so much left out in your post, it's totally impossible to help you in my opinion. We don't know anything about how the sales are generated, what the back ground is of the buyer, how the licenses will transfer, what the profits are...

For me the better the books are the more accurate a number I would be able to come up with to offer somebody.

Also I've always found that 50% of businesses are way over-valued, pie in the sky sellers numbers that are totally unrealistic, 40% are on their last legs and the owners are desperately trying to get out before it all crumbles and try to market the sale as if it's all just waiting for the right person to take it to the next level. 10% are viable and out of thoes I would only ever be interested in the ones that are being sold for health reasons or the owner is ready to retire, all the other reasons are just excuses covering up problems.

plazaman

big stuff, id hire professional help for a situation like this. Might cost some $$, but if he is serious, then it will be worth it.

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agentsmith68

Probably the easiest way to value a business is through price to earnings multiples.

If this is a business with stable year over year profits, then the business is likely worth about 10x last years earnings.

If this business is constantly growing, and it is clear that it will continue to grow, then the following equation will give you a good estimate:

Value = Last Year's Profits / (0.1 - growth rate)

Appraising a business is not an exact science. You could hire two people who've been appraising businesses their whole lives and get two completely different numbers. One thing that is for sure is you do NOT use a goodwill estimate to value a business. Goodwill is a plug number that accountants use, and can only be calculated from the sale of a business.

I'm not saying you should use the above equation to appraise the business, just make sure the value calculated is somewhat close to what the equation would predict.

Mike Finley

10 x earnings? You must be figuring earnings in some different way.

Highest multiple I have seen that was even something to consider was 4x. Usually 2-3xs. But like I said we would have to be talking apples to apples to make these comparison. I'm talking net profits, no consideration to owner's salary, assets not included. If you've got 300,000 in hard assets I would include that in addition, if you've got 3 million in hard assets I would include that in addition.

Second Look

Have the books been audited? Not by the IRS, but by an independent auditor. If not, a savvy buyer will wonder why and lower their offer accordingly.

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Handyman and Home Repair Specialist in Rhode Island
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SeanATL

no a chance in hell I'd ever by an business that hasn't been audited.

My first career was as an auditor with Arthur Andersen. You can't do a business valuation if you aren't sure the numbers are correct....you'd be crazy to do so.

If we're talking about a small transaction, like $100k or less, then an audit my not be needed.....but, if I wasn't a "numbers savy" person, I'd have an audit done before I bought anything.

MarkNoV

It is worth nothing. Construction businesses are like no name convenience stores. Barriers of entry are practically non existent, there is no need to pay for something that you can get yourself with very little effort.

Mark