Seller is deluding himself!
I am dealing with a franchisee in the Northwest. There are some health problems in the family and he has decided to sell. The problem is that even when both he and his wife were healthy he had deluded himself into thinking it was Ok to invest in his business for the long term while forgetting short-term performance. The business is doing approximately $475,000 in sales.
The business was originally purchased with the hope of turning it over to a son-in-law. When that didn't turn out and the in-law moved to another state, the owner was forced to take a serious look at the business and try and make it grow.
Bottom line now is that he has four employees in addition to he and his wife. Three of the four employees are so highly paid that he is lucky if he can pay his wife $16,000 plus cover her healthcare costs of about $12,000 a year. What about his salary or compensation? I don't think he has ever paid himself a cent, choosing instead to "invest" in people and equipment - at least that is what he would have us believe.
His rent represents 14%, of his total sales; his payroll (excluding he and his wife) is approximately 40% of sales, and almost 45% of those sales are brokered. His sales per employee is hovering in the $80,000 range and he has no idea how bad this is, let alone the rest of the ratios.
Oh, I forgot to mention. He has a note payable to a local bank of $450,000! The current net worth of the business is approximately -$425,000! Net worth of the corporation is -$430,000!
He has been trying to sell the business (once again for health reasons), but when the franchisor has hinted that it isn't worth the $350,000+ that he thinks it is he just argues with them. They brought me in to do a valuation and my generous estimated value was $205,000, and that assumes that the seller will absorb all assets and liabilities (except for equipment), including that $450,000 note!
I just sent off a detailed valuation report to the franchisee, and I am awaiting his call where I am sure he will gloss over all these serious problems, and try to convince me about the great "potential" that this business has to offer for the right buyer!
If you think you can sell a business or value a business based primarily on "its great potential" I think you are deluding yourself, just like this owner is doing.
The business was originally purchased with the hope of turning it over to a son-in-law. When that didn't turn out and the in-law moved to another state, the owner was forced to take a serious look at the business and try and make it grow.
Bottom line now is that he has four employees in addition to he and his wife. Three of the four employees are so highly paid that he is lucky if he can pay his wife $16,000 plus cover her healthcare costs of about $12,000 a year. What about his salary or compensation? I don't think he has ever paid himself a cent, choosing instead to "invest" in people and equipment - at least that is what he would have us believe.
His rent represents 14%, of his total sales; his payroll (excluding he and his wife) is approximately 40% of sales, and almost 45% of those sales are brokered. His sales per employee is hovering in the $80,000 range and he has no idea how bad this is, let alone the rest of the ratios.
Oh, I forgot to mention. He has a note payable to a local bank of $450,000! The current net worth of the business is approximately -$425,000! Net worth of the corporation is -$430,000!
He has been trying to sell the business (once again for health reasons), but when the franchisor has hinted that it isn't worth the $350,000+ that he thinks it is he just argues with them. They brought me in to do a valuation and my generous estimated value was $205,000, and that assumes that the seller will absorb all assets and liabilities (except for equipment), including that $450,000 note!
I just sent off a detailed valuation report to the franchisee, and I am awaiting his call where I am sure he will gloss over all these serious problems, and try to convince me about the great "potential" that this business has to offer for the right buyer!
If you think you can sell a business or value a business based primarily on "its great potential" I think you are deluding yourself, just like this owner is doing.
Labels: huge note payable, selling on potential, valuing a business
posted by The Quick Consultant at
1:41 PM
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