How to Value a small business

[wn1998]

Good morning. I have been approached to buy out one of the co-owners of a small business due to some health issues of that owner. The only problem is that the Co-owner looking to sell has severely overvalued his 49% of the business.

This is for a small, 3 year old Crossfit gym with 28 current members that generates roughly $2,945 per month.

Rent is $1600
Utilities are $100 in the summer and $225 in the winter
Staffing is roughly $1,020/month
Insurance- I'm not sure yet of the cost
Affiliation fee- $250/month ($3,000 per year)
Current equipment Value-$14,000
Gym currently holds $10K worth of debt for recent equipment and upgraded registration system.

The "sale" price I was told was $27k. My offer would be somewhere around 7-10K. I have looked into a "Valuation" done by a local accountant but the cost made it too expensive ($1500-$2000).

My question is after I get my copy of the books is there an easy formula to try to show the owner that this business isn't worth what he thinks it is? He is a total Alpha male and built this from the ground up three years ago but it hasn't taken off how he thought it would. Also, he told me he knows a 27K investment will pay me back in two years. No way at the current numbers.

Why would I want to buy into a business that seems like it could fail any month? I think the lack of marketing and the current price structure is poop. I think if we added some marketing efforts and listened to our customer feedback, I can add 2-3 members per month. I know I wouldn't get rich here or be able to quit my day job but I feel like I could double our membership in one year with a proper marketing effort.

Any business GuRU's want to give me some advice?

 

[georgemiller]

Make your offer on what you think the business is worth to you. Not your job to convince him the value of his business. He has sweat equity in the business and only can see from his viewpoint.

Right off the bat you see two red flags trying to convince an owner that overvalues his business and investing in a business that can fail at any month.

Third red flag dealing with a co owner that you never worked with.

This business is a loser don't waste your energy on it. It's making zero money after 3 years.

I think you are being generous with a $7000 valuation.

 

[AZjeff]

So the business is currently operating in the red, you didn't list debt service and monthly expenses and depreciation, and the co-owners says it will turn around and do $55K profit/year starting now? You'd get 49% of profits? With minority share you have no voice. Buy based on it's performance right now, not on what it might do in the future.


To quote the Shark Tank.....I'm out.

 

[Lawn_Care]

At those numbers? Run!

Run far, Run fast. Don't look back.

The ship is sinking and he's looking for a lifeboat.

 

[skyactiv]

What would you do if someone opened up another Crossfit gym down the street from you? Small business books are often cooked when the owner is trying to sell. That doesn't seem to be the case here however.
Anyhow, Crossfit is a fad like certain diets are a fad. The Atkins diet ring a bell?
Certain types of diets and exercise go in trends.
What your going to hear next is that Crossfit provides small benefits while allowing yourself to get injured easily. The people touting Crossfit act like it's the best thing since the wheel was invented.

 

[spasm3]

I'm not a business owner, but there are other things you need to look at. Location and future growth, customer demographics of the area , and as others said you would be a minority share co-owner. Looks like they are looking for someone to share the debt, the seller is looking to bail.

 

[wn1998]

I get that some believe Crossfit is a "fad". I however have been a coach for the last two years. I think the only thing "dangerous" about Crossfit is a bad coach. The workouts all suck and you feel like [censored] but what keeps people coming back to Crossfit is the awesome bonds you make with those that workout with you.

I am sold on Crossfit, I just need to get this asking price down and let our co-owner know I'm willing to take the risk, but I'm no where near his asking price.

For the others that ask what if another gym opens in our town? We already have 2 others but ours has the towns name so we are the first to come up in a google search. I am confident with a few changes this can be a successful gym, I just need to know how I can buy it reasonably.

 

[Wolf359]

Depending on the business, typically anywhere from 1-2x earnings, sometimes as high as 3x earnings for the right situation. From what you wrote, there's no earnings. This business loses money every month. I think the numbers are probably worse because he probably isn't valuing his time that he puts into the business and that would be gone once he leaves so if you had to hire someone to do the same thing, the numbers would be even worse. You also pay for fixtures and inventory. Sounds like there's 4k worth of equity there. So you could pay him 4k and have the privilege of losing money every month.

 

[Donald]

Every business needs to have a business plan or it will likely fail. You need to put together a rough business plan and then see what a reasonable value would be for the current business.

For the staff costs, does that cover the FICA the employer pays? Workers comp? Disability? Unemployment.

For the insurance, they is casualty and liability.

 

[demarpaint]

Originally Posted By: Lawn_Care
At those numbers? Run!

Run far, Run fast. Don't look back.

The ship is sinking and he's looking for a lifeboat.


I agree 100%, there are a lot of other better ways to lose money. I'd run, and not look back.

In answer to your question, 1-2 times earnings is a good place to start for putting a price on it.

 

[Pop_Rivit]

A 3 year old business generating such a tiny revenue isn't a business, it's a hobby. A very expensive, money wasting hobby.

Your list of numbers is also leaving out quite a few items such as taxes and office supplies. If you really want to start your own business start it from scratch that way you're not buying someone else's debt and problems; you can manage and grow it properly from the start.

Not only that, but you'd only be a "co-owner", and a minority co-owner to boot. You'll be an underpaid employee who shelled out money to be an underpaid employee. You'll get a better paycheck by working part time flipping burgers.

 

[kschachn]

Originally Posted By: wn1998
I get that some believe Crossfit is a "fad". I however have been a coach for the last two years. I think the only thing "dangerous" about Crossfit is a bad coach. The workouts all suck and you feel like [censored] but what keeps people coming back to Crossfit is the awesome bonds you make with those that workout with you.

I am sold on Crossfit, I just need to get this asking price down and let our co-owner know I'm willing to take the risk, but I'm no where near his asking price.

For the others that ask what if another gym opens in our town? We already have 2 others but ours has the towns name so we are the first to come up in a google search. I am confident with a few changes this can be a successful gym, I just need to know how I can buy it reasonably.


Those statements show me you are "sold" on this despite the hideous financials. You're making a decision based on emotion rather than facts, which is unfortunately how it is done many times.

 

[UNC164]

An operational but money losing business is typically only worth its basic book value. That is the value of the assets minus the debt. Ignoring the subjective value, the book value is 14,0000 - 10,000 so apprx value is $4,000. Add the value of subjective items like existing customer base, existing lease and location etc - maybe add $10,000 max. So I think you would be on target with valuing the current business at $14k, 1/2 this business is $7k max. I would not pay a penny more and given the risk I might max my offer at $5k. What the seller feels it is worth or what he will lose to sell at a loss is not relevant to your offer - if it goes under it will be worth nothing.

 

[volk06]

To get a rough value of a company, add up all the total assesst and subtract the liabilities. According to above that's $4,000. The company is currently worth only that. It could be worth more IF and only if was turning a profit which it's not. It looks like it's losing a substantial amount every month. He's sentimental and wants paid for all his work at $27,000. That's not how the business world works. 4,000 is what I'd pay, maybe 5,500 if I really wanted to try it after I factored in the income at your %. But $7,000 is very generous and too much in my opinion. After all you'd only be at 49% and have no control. Only do this is you have the money. DO NOT take out a loan for this without the company making money. If you have to take out a loan you shouldn't be buying the company due to the risk. Can't worry about what it could do in the future.

FYI, we just went through this a year ago buying into a company and becoming owners. Can't let emotions control what you pay.

 

[AZjeff]

Originally Posted By: wn1998


I am sold on Crossfit, I just need to get this asking price down and let our co-owner know I'm willing to take the risk, but I'm no where near his asking price.



Guys, he's in. He wants to know what 1/2 of this hobby is worth. The only answer is $0-$10,000. Best of luck OP.

 

[Plumber]

Offer what you feel. The guy will take it....as there is no one else that will.

 

[addyguy]

Not that I know a lot about this, but...

Any 'specific' fitness/workout plan is a fad that will eventually fade. Sure, it will have it's adherents who stick to it even if it is out of style, but a lot of people will drop it or not keep up with it.

If you are into fitness, and want to run a gym, I think a more general gym that supports all kinds of fitness activity is a better bet. Then you get people who want to do Crossfit, or other niche workouts, and traditional folks who do cardio and weights.

Just my thoughts.

 

[Hessam]

One thing no one has mentioned here is the churn rate of the business. How long have the current 28 members been there? are they likely to stay for the short/intermediate term. But if the churn rate is high, you could lose half of them and have only 14 members in a few months. From what I understand the churn rate with Cross Fit is extremely high. people get a groupon and sign up for a few weeks/months in time for the spring/summer beach season, then bail at the end of the summer. Those type of seasonal business are extremely hard to value. My girfriend has done that same thing for past 3 summers.
You have gotten some really good advice on the BITOG board however. I wouldn't pay a penny more than 1 X sales, which is around $3000. If you really believe in the business and feel like you can cut some of the excess costs out of the business maybe offer an extra $500 in the spirit of getting the deal done. I would max out my offer around $4K, like several other BITOG members suggested to you.
another question to ask yourself, is how much you could sell your part of the business for if you needed to get out a few months from now. that should always be a top consideration when taking on any type of investment.

 

[dlundblad]

Originally Posted By: Lawn_Care
At those numbers? Run!

Run far, Run fast. Don't look back.

The ship is sinking and he's looking for a lifeboat.


I didnt read this post at all, BUUUUT:

Profits excluding the stuff you didn't mention. insurance etc. is about $1000 a month. It's a joint venture so you have to cut that in half. Your take home per month is less than $500. You'd be better off getting a minimum wage paying job.

 

[Dave Hess]

Yeah, I would stay away for that gym business.