I'm looking at guidance in purchasing a controlling stake in a proven small business with huge potential for growth. The business itself is wholly owned by a couple who do not have the energy or skills to increase sales on a scalable measure without additional injection of capital and energy. One of the issues is their financial record keeping is basically non-existent as expenses for their business and their personal lives are intermixed. I'm having a difficult time actually valuing the company and thus making a dutiful projection if a partnership is worth the risk. Looking for anyone who has had a similar experience or experience with business valuation and can offer recommendations/suggestions/advice on the way ahead.
Answers
Christopher,
It does sound risky based on what you are able to share here. If true revenues and expenses can't be determined...what do you really know? It seems like you'd be taking on the risk and they would benefit from the sales.
Is there a way for you to come on as a CEO (a paid employee) until you can determine the actual finances of the business? That could give you time to make sure the books are accurate for a 12 month period, THEN look at what it would take to buy the business. You'd have first-hand knowledge then.
Brian Richardson
tcp@thecompanyproject.com
www.thecompanyproject.com
Christopher,
Sounds like you want to stay far away from this business. You've stated that there are irregularities with the book keeping. This is a huge sign of trouble.
Apart from that, in general, you cannot value a business on potential. You must value a business on the actual cash return. And a suitable time period would be the trailing 24 months. You should also chart the linear path of the cash in (receivables). Never believe in or succumb to the temptation to chart the hockey stick.
Papa Johns is a really great opportunity right now, as an alternative or comparison. The PJ management is essentially giving a sweet-heart deal to all new franchisees (reduced corporate tax, reduced franchise fee, and free ovens).
JG
SIr,
Thank you for your response. The company is LLC'd so would that make a difference in regards to personal liabilities stemming from the current owner's personal lives? While doing further research, it also looks like possible inaccurate (purposeful?) reporting of revenue generated from sales...how would I protect myself from future audits if that is the case? The owners cannot give up complete ownership as their only income is dependent on the sale's of the product. So, without the product they have no income and a complete out-right purchase would be too risky for me.
You may not want to purchase the actual company, but purchase the product/technology/customer list instead. When you buy a company, you purchase all the liabilities of the company, which,in this case, may include personal liabilities.
The first place to start for valuation is to try to determine future revenue and expenses of the current company as best you can. From that, you can project future revenues/expenses for say 3 - 5 years. You should do at least 3 different future forecast, best case, worst case and most probable case.
Start with that information. Let me know you further questions
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