Sale price of business directly relates to profit?

iam trying to figure out whether many business for sale based their sales price against the 2x to 3x of the profit per annual?

Examples below

1. sale price $100K - profit 30K PA

2. sale price $300K - profit 100K PA

3. sale price $500K - profit 312K PA

The sales price disregard the revenue per year or rent or expenses.

Anyone can share some insight as to how business sales prices comes along?

 

Its quite common for business price to be a multiple of its profit. Exactly what multiple depends on the industry, the type of business, the health of the business, current state of economy, current business confidence, and a host of other variables.

 

The sales price needs to disregard the revenue per year or rent or expenses as the profit calculation is revenue less expenses.
So you could have a business that brings in $500K in revenue with $450K of expenses making $50K profit and being valued at $150K (multiple of 3).
Or same business revenue of $500K with expenses of only $100K being valued at $1.2M (3 x $400K profit).

 

Are you saying the sales price is depended a upon the profit? approx 2 to 3x ?

 

The way some franchises and other small operations out there are going, you should actually get paid to take them over based on the figures.

 

thanks guys.

Iam looking into buying a food business and they the vendor happy to provide a 2 weeks trials. As with many businesses they deal with cash and not many of them put the full statement to the ATO.

Any hints as to what i should look out for during my 2 weeks trials?

For me iam specifically looking for:

1. Confirming sales per week
2. Cost of goods
3. Wages
4. other expenses????
5. daily/ weekly net profit

any others?

 

I would research:
Historical cost of goods for the past few years.
Historical expenses for the past few years.
Historical net profits for the past few years.
Lease conditions and history of lease.

See if anything stands out or spiked anytime.

 

Yes, don't just rely on what might be 2 x good weeks. The vendors may craft those 2 weeks to be the biggest on record for sales and the lowest on record for costs.

Seek advice too from an accountant who deals in small business sales / purchases.

 

Agree with Ace & Prop ... remembering a near relative's past experience (he eventually had to sell his family home) ... it was not one thing but a misfortunate combo of things that did go wrong within the first year ... food distrib bus ... in addition to understated cost of goods s.. over discounted customer sales prices ... a number of equip failures incl major del truck repair items, coolroom failures leading to destoryed food (lack of or lapsed warranties) ... From day one (after the trial) things started to go wrong ... he just rang out of fight. So your risk mitigation must include due diligence across all assets and equip - notbjust the figs.

 

... and remember that nowadays "goodwill" is worthless.

For our holiday accommodation business we paid a nominal pittance for the business for the above reason - with the actual value being in the real estate.

I personally would be very reluctant to pay for "virtual" income ... and definitely nothing for goodwill as BV has found out ... I prefer owning the actual the bricks and mortar housing the business as well. At the very least - pay no more than the value of the equipment in it's current state plus a reduced percentage of the income ...

 

Remember too, it's an easy entry, but difficult exit.
Don't rush into something only to regret it later, all due to lack of research and evaluation prior.

 

Sale price will also depend on other factors too, such as; are there any client contracts in place, time remaining on contracts, scalability of the business, current competitors in the industry, government policies..

A plumbers business might be worth day 600k pa, but with a council contract to provide x service for x years it may be worth 6m.

There are basic rules of thimb for certain industries though. Do your research on that industry. Also get the financials of the potential business purchase but through a thorough due diligence by an accountant and solicitor who specialise in that field, not just average joe accountant who does your BAS return for you.. Measure twice, cut once!

 

In addition to the numbers I'd ask why are they selling? Is the current owner integral to the business? can you fill their shoes?

 

In addition to all the advice given already, I'd look to the future also.
Industries can go bad due to unforeseen circumstances.
I'd scope out any potential threats from either possible future competition or, even potential issues with future suppliers, of which there could be many.

Weird stuff like the power going out for a whole day causing a total loss of stock and takings for the day, happened here in Cronulla last week.
Is there a back up generator?
Got to watch out for sabotage with customers calling food poisoning on you, posting all sorts of stuff on social media and review sites.
This kind of stuff can destroy your reputation and crush you.

So many things to consider....
Is the risk worth the reward?

 

Was chatting to a chef today, he has recently purchased his current business. Enjoying more than his previous 7 day per week business. Still, looking at an exit plan 5-7 years away. This is something to consider, how long do you want to do it, do you need to be hands on, hands off or need to know how to measure it.

 

Agree to everything mentioned here except one.

there are so many factors in buying a business that I think its so daunting and why most would bother. especially for a newbie

however, if you can get a business for stock or real estate value alone then id say its very lucky or the industry/business is in dire stratights

as for good will, I think it still has a place, if I was making offers based on assets/real estate/equiment value only, i reckon id get laughed at

if I was buying a well established restaruant or retail shop, provided there is nothing that I can forsee to drastically change it, eg econmy, competitor etc. etc. I d be happy ot pay good will.

i certainly wouldnt be offering $300k for a 1.5m maccas saying there is no value in good will

anyhoo, I always start at , why are they selling the business

every broker will say due to family reasons/health. but if its such a good business, then why sell it???? obviously genuine reasons range from health, retirement, divorce, or its simply a dud

 

Very fair answer ... but what you are factoring in is "branding" rather than goodwill. I'd pay for branding.