Buying An Existing Small Business - Help please, How Much is it Worth?

I am looking at buying an existing small business and would greatly appreciate the input from some more experienced operators than myself. My first venture into business.

The business is a sewing and alterations business in Hobart, Tasmania. Nothing glamorous, but the current owners have owned it for over ten years and it has been trading for over 100 years. I have no skills as a seamstress, so I am looking at purely managing it and getting it to a level where I solely work on the business in a part-time capacity.

Owners are selling as one owner is going back to University full-time and wants to be paid out. Not sure if I buy that, as the casual owner could easily be replaced and then she could receive a passive income of $15-$20k per annum to support her during University?

Current Details Retrieved:

Total Revenue 2017: $194k plus apparently $400-$500 cash per week
Cost of goods: $15k
Expenses: $63k (Rent & Outgoings, wages, Maintenance of machinery etc)

Net Income: $115k (Split between two owners $61k/$53k) - One owner works full-time as a seamstress and doing quotes etc and the other works two days per week on average, doing books , rostering, admin etc. and sewing during peak times. There is one casual who works 24 hours per week.

The Net income has increased Each year over the past three years of Tax returns: 2015 $75K, 2016 $102K 2017 $115K. I was told this is because two competitors shut down and they got a lot of their clients. Also in 2015, there was $19k of depreciation and $23k in contract payments and none of these in 2016 and 2017 tax returns. Advertising and promotional spending has been decreasing, I assume due to less competition. Also in 2016 there was $15k spent on replacement tools.

The asking price also includes over $200k in Plant and Equipment (Broker has said that the plant and equipment is industrial and lasts for decades? Not sure how I could confirm this?)

Features

Solid Gross Profit Margins (75-85%)
Simple and Systemised Operation
Growth Potential - New Business, Online presence, website etc. Hem Drop off and pick up, BDM, More promotion, open Sat's for half day, Current owners have no online presence, still using MYOB are very old school.
Located in CBD, near car parks etc.

Cons

- I cannot jump in and do the physical work if staff were off or it was required. One of the current owners is willing to stay on in a part-time or full-time capacity as a seamstress. Total wages for her would be around $50k full-time and $25k for the casual (24 hours per week). Meaning if I worked in the business full time and increased Net profit by 10% to around $130k, I would receive $75k. I could probably get it to this level only working 3 days per week. Obviously these will fluctuate with unforeseen costs.
- Lack of experience in running a business
- I do not have a passion for the service, but I have a strong interest in learning how to run a business and scale it.
- Growth potential is limited to about 10-15% Max, I would think.
- Business is reliant on owner having some type of operational input. This could be reduced, and replaced, but then the Net profit of the business would decrease significantly. If I could increase Net profit to $140k with wages of $130k for 2.5 staff, without me working in the business at all then the Net profit is only $10k - $15k.

Asking price is offers over $90k. I wouldn't think it's worth anymore than $80k, but I am no expert in small business acquisition, hence my post.

As an investment if I could get a passive income from the business with minimal input, of $15k per annum on average and the investment was $80k, that is a return of 18% with more risk. It is an established business in a niche market, but there are still associated risks. Compare that to shares (Index with an average return of 9% not accounting for inflation and property between 7-10%, depending how active you want to be. I have achieved higher than 10%, but it has required a lot of input (cosmetic makeovers, research and analysis etc.)

I am in a position to finance the business, so there is no interest. I see it that $80k is equal to a 20% deposit on a good IP.

I know it's a bit of a post, but I thought the more information I could provide the more detailed response I could get.

Thanks

John

 

This to me shows you're looking at it all wrong. For a small business you need to get involved to make it work. The landscape is constantly evolving. It's not like property where you sit back and collect a return every week. Also the fact you can't jump in if needed is a worry.

 

You want to learn how to scale a business, but growth potential is only 10-15%? Doesn't really sound like this business will assist you in achieving that learning outcome.

Could any of the ~$200k in plant & equipment be immediately sold (if unused or used for irregular jobs that aren't core to the business) to lower the upfront purchase cost?

Why not look for a business opportunity where you also have some skills / personal interest?

TBH @ $80/90k with limited growth prospects, it sounds like you would be buying yourself a well paid part time job....

 

It doesn't appear to be worth anything from what you have said. You would be buying yourself a job but are unable to do the work.

What would the equipment be worth - how much could you sell that for separately?

 

In regards to plant and equipment I wanted to get Someone in to asses it's value and determine if it could be sold of easily if needed or if any could be sold if it's not needed etc.

But yes the more I think about it I could potentially be buying a part time job with a reasonable income. Basically I guess I'm paying for the plant and equipment and good will.

I guess my interest in it is the ability to derive an income working part time in and on the business, leaving me time to also build up other assets. But even though the broker says it only requires minimal input 2 days a week, I'm guessing that probably means double.

 

For a start, ignore the alleged cash component. If you can't see hard evidence, including tax returns, then only calculate income on what is formally recorded.
Marg

 

What you gonna do when the existing staff leave, as there's a high chance of that happening or long after the business is sold.
If you cant easily replace with other competent staff who can work unsupervised, the business may be worth less than nothing as you will still be locked into a lease.

 

That was actually a major concern of mine. I guess there are a million what if's in business though. Running a business is solving problems.

I guess it's a matter of risk v reward.

If I can find a niche market to sell products, than I guess ecommerce is the least risky in terms of capital outlay. It's just a matter of finding the market and te product and setting up an ecommerce platform. I've heard shopify is good to use?

 

What all of them said.

Total Revenue 2017: $194k plus apparently $400-$500 cash per week

What The?

Are you looking at the real books or the BS books?

And if you answer the BS books, then there is your answer.

Give them an equivalent BS offer, say $5k, or some other BS, because you were bored.

Is it a proper business or not?

 

The concept of being tangled up in this business sounds like a lot of work and headaches. Getting a part time job at Coles would be leagues more appealing. You get a bit of money without all the worries and risks.

 

It's a job not a business. P&E would likely go for nothing at auction, find a local auctioneer to value the equipment for you. Other issue is that you have rent and overheads that you can't service if staff leave. How easily can you replace them if they leave, if very easy then it is not such an issue. If $50k is wages for doing it and you allow another $50k in wages for management (and that figure is probably light, owning or managing a business takes a lot of time and effort) then you are eating $100k of the $194k revenue.

 

Tips for running a small business:

• Understand the business from the ground up ie. upskill yourself to do the tasks (main functions of the business) - that means learning to sew, to use an over locker, cutting material, minor machine repairs, use a steam press/steamer, colour matching, fashion knowledge/trends
• Business management can't be outsourced or delegated, it's hands on.

The equipment required is minimal (not much more extensive than I've listed - overlocker, 2-3 different commercial sewing machines, steamer/press, iron, rolling racks, scissors) - $20-30k max.

Fitout is minimal - counter, work benches, sewing stations, change room, sink/cupboard.

What is the value of stock? Is it part of the cost purchasing the business or additional?

What's being depreciated? Owner's cars?

What % of turnover is going to rent?

Is turnover inclusive of gst?

Who is your lessor?
Is it a retail lease?
What is the term remaining on the lease? Is there an option?
Whose responsibility is it to secure the new lease if there's no option available?
What are the make good obligations in the lease?
What are the redecoration requirements & when?
What are the rent review provisions?

 

Staff leave and open up in competition. There might be a restraint of trade agreement but are you willing to spend the money to enforce it.
So they have "$200,000" in equipment and only want $90,000. If you accept the $200,000 is correct I've got a harbour bridge I can let you have at a reasonable price. Passive income from tolls.
I'm sure there is good money in it if you work in it and can do some of the work. Where's the cash go when you're not at the business?
Look at what you would need to enter into competition - tape measure, sewing machines, not much. If it's so good, find a sewer set up in an area with several clothing shops on a short lease with an option and make the money.
Just bear in mind you will probably never find a buyer if you own the business.

 

All this talk about business makes me appreciate how hard business is

And full respect to any of those that have done it and do it

 

Honestly I don't think operating a business is the right avenue for passive income. In fact running a business is quite literally the opposite of passive. It is very much hands on, every day.

 

The fact you have no skills as a seamstress. therefore no idea how much time an alteration etc may take and you cant cost the work rings alarm bells for me. Rule 1 for business - dont buy if you dont understand the business.

 

A couple of things I noted - they have included Goodwill in the cost of the valuation ... I'm sorry but Goodwill is worthless in this day and age.

I am concerned that you don't have the skills, as there will be moments when you staff might be off sick (been a bad flu season this year) or on holidays, and you basically have to close shop for those periods.

As pointed out, you need to ensure you understand what your lease would entail and get the equipment costed as second hand. I personally would price the business at maximum 10% of gross income (excluding cash) and cost of machinery as is. But - again - that very much depends on whether you feel the business itself (don't confuse the "business" with the assets - equipment. lease. location etc) is worth that much.

Our last business purchase was a token $10,000 for a gross $270,000 turnover on $900,000 worth of assets (tourist accommodation) - so we took the $10,000 off the asset column and paid $890,000 for the assets and $10,000 for the "business" . Basically the business itself was worth nothing - and we ended up changing most of it operating processes (website, signage, management, phone number, advertising etc) anyhow - but both sides in the sale had to show "something" on the books to keep the tax man happy in relation to the transfer.

On the plus side, I do see little "hole in the wall" alteration shops doing quite well as no one seems to know how to hem trousers, sew on a button or even own a sewing machine anymore. On the negative, clothes are so cheap that people tend not to get them repaired unless it is a special outfit.