Originally Posted By: 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?
Based on your numbers, the EBIDTA is negative...
The way I would value it would be to look at the free cash flows (which in this case is negative, and treat it as a perpetual dividend (the formula can be found on the internet). Since it seems to be a risky proposition, use 16% discount rate.
Then add to it the net fair market value of the assets and reduce it by any debts.
In this situation, the value of the business should be around $2k.
You may add value for things like goodwill, etc. but even at that your $7k seems to be overvalued.
And remember, as a buyer you have to arrive at the lower end of the spectrum for value so that you have room to negotiate.
