Sale price of business directly relates to profit?

for me it all comes down to numbers, and repeat numbers,

if it was something like a 7-11, id expect no good will, because I personally think nobody is loyal to a 711 or expects a shopping experience, and they will go to what ever is conveiennt, and hence repeat customers are just coincidence

however id expect a similar degree of good will of turnoever, ignoring outside factors such as economy, competitiors etc.

 

so if a business is making say $2m a year with good staff, strong contracts, good systems etc you would expect to just pay the value of the net assets?

 

No - as we both know there is more to a company than "net assets" ... but we would argue this until the cows come home. In my personal opinion, and with my business dealings of the past, this is the position I would take.

Each to their own.

 

And I think these need to be factored in when assessing the viability of the business into the future.

It's no different to buying an IP - all of us here will look at the point in the cycle, the interest rates and likelihood of them moving up, the location, the condition, the demographics of renters and so on.

The house by itself is only part of the equation. The good thing about a house is it can be insured against loss, and the chances of the income from it disappearing are fairly remote, generally - whereas a business can go backwards and even go broke.

For me; given the state of the industry, the fact that the business has been for sale for a year now (no buyers), the ongoing issues with staff, increasing competition, liabilities and regulations, escalating costs and so on, and given my current bad experience after having bought what appeared to be a viable and profitable business; unless you can buy it very very cheap to mitigate all of the above; it's not worth it.

I hear from customers every single day their sob stories about XYZ mechanical workshop and how they were not satisfied with whatever; there is very little good will from my 6 years experience in this industry.

I reckon cafes and to a certain degree restaurants would be the same; a change of Chef can destroy the business, or improve it greatly...it is a fleeting circumstance, and there are a million of them out there doing much the same thing.

 

Conversely; would you pay the asking price for business as you've described above?

 

... and - as BV said before - depends entirely on the business. Would you invest in a post office, or video store, that did a $2mil turnover with loyal staff?

There is no real customer loyalty nowadays - even with Maccas who are struggling in certain areas. They only reason I stop at Maccas while travelling is that their coffee is halfway decent and quick - and the toilets are clean. If a competitor put out the same conditions then I'd use them.

Only have to look at the taxi drivers' dramas to realise the world is changing from the norm. Who knows what the next change holds ... I see 3D houses are now being printed for around $5k ... does that mean builders might struggle as the technology improves?

 

If the price was right sure id pay it. How ofteb do you come across a business as described above making 2m a year profit?

Lizzie i agreee there is a lot less loyalty these days in retail type businesses but i wouldnt buy a retail business to begin with.

 

Would you pay the full asking price of that hypothetical $2m profit business if it was a service business?

Would you still pay the full asking if was sitting unsold on the market for over 12 months?

 

Did u miss my previous post?

If the price is right ill pay it, if it's not i wont.

 

I get the impression you think I'm being a smart @rse, Sanj; but I'm not - I'm asking legtimate questions and am interested in your opinion.

I was referring to the type of business - you said you wouldn't buy a retail; I asked if you would by a service business.

What about the timeframe sitting on the market? Wouldn't that affect your mindset about what to offer? (it would for me)

I mean; folks look at properties that have been sitting there for ages, and the first thing on their mind (usually) is to offer low because either noone wants it, or the price is too high.

 

well exactly, if you saw a restaurant for sale that was owned and run by hubby and wife and were full everynight,
you wouldnt go up to them and say hey, your equipment is worht $30k, ill buy it off you for $30k, when you are advertising for $1m!
definitely the easiest way to have a knife thrown at you

 

yeah that too, but as you are aware selling businesses is hard and not like selling a second hand car.

it also depends on the market too, some industires are really hard to see

and yes the price might be too high too

 

Im not being a smartarse either. Maybe im looking at it differently as some of the businesses ive bought into were well worth the asking price

Anyway my whole point here was that in my opinion the right businesses are worth more than just the value of equipment etc.

I generally wouldn't buy into retail (partly because it doesnt interest me, i think it's a struggling sector innthe country, too high labour component and it's too easy to get into so many competing businesses out there)

 

But does the husband and wife and/or chef come with the business? What is not to say that they aren't the reason (as BV found out the hard way) they are full every night, and if they were to leave, custom would die right back.

Asides form equipment, you have to include things like fitouts, location and lease periods in your figure, but excluding those for the moment ...

If the area is successful for such a business, and it only cost $30k to setup (your equipment figure value) why would you not set up your own nearby, instead of paying $2mil? That is why new cafes open all the time in successful areas.

However, the only types of businesses that really have "goodwill" are retail or service ... and "would you pay for goodwill" formed part of the initial question.

 

well setting up a business takes all sorts of skills time effort and headaches, some people just dont want or cant handle it. thats why dud franchises seem to always have a steady queue of people prepared to sign cheques of $300+k for them to set it up. even I find it tempting.

obviously if the husband and wife were the chef that makes things more not black and white, obviosuly for a industry like food where the product is very depnedant on the chef and the service providfed, you would have to take that into consideration,

as for BV and his business, im no expert, plus I rarely go the mechanics, but frankly if the people there werent rude or pricks to me, I wouldnt remember nor try to remmeber the person serving me or the person I spoke to.

there is a steak restaurant near where I live, its new and its pumping, booked out every day basically, food is quite good, alabeit quite expensive,

I am very tempted to open a similar one in a adjoinging suburb(no it wont be a direct competitior), that is just as affluent, but doenst have the foot traffic, plus parking is a pain, however, there is no competitors around, and Ithink it will work.

 

My GF bought 2 x sandwich shops in good areas, (not at the same time) one at Alexandria NSW and the other Parramatta NSW. On average, they made about $3000 net each a week (average) depends on you changing the menu and if it's raining etc. Setting up suppliers was easy, they came to you. The downside is the early starts, normally being there at 5am to turn the stove on, boil the chickens and get the coffee machine ready, put away the milk and organize the papers for the day. Everything was cash cash cash. If you buy at Woolies and Coles for stock, your laughing, coke, pies etc. Plus you get to eat for free and take home what you dont sell during the day. Think from memory, we averaged about $200k per year clear. Oh your smokes are free as well, if your a chuffer.