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Thu Dec 6, 2012, 01:46 PM

Setting the value of a business

My wife and I are deep in discussions with the owner of a publishing business who wants to retire. He's gotten to the point where he's leased out the warehouse (he owns the building) beginning in March, which essentially puts him out of business. As a book publisher, the value of his business is largely in the copyright agreements and contracts with authors he has...if he goes out of business, those contracts are all immediately void. In a nutshell, he is in a very bad place to negotiate.

We aren't in a much better place. We have virtually no capital and although we might be able to get bank financing, I have doubts because the business has been in a semi-liquidation decline for about 4 years. New products have kept apace, but marketing and infrastructure investment has virtually been nil. Banks don't like seeing 4+ years of steady decline in gross, even if net has held up remarkably well in that time.

Anyway, the owner is willing to carry 100% of the business financing and even structure payments as a percentage of gross after the first year (we will need to reimburse him at cost for the existing inventory as we sell it). Yes, we are aware that this is extremely generous.

So here's the problem--he has resisted putting a firm number out for the cost of business. Equipment and supplies--I've got complete inventories, costs and estimated values. However, the value of the contracts, goodwill, etc. has us both stumped. I've found general guidelines for business values (not specific for publishing) that suggest 3-5X net. That puts this business around $250,000-$400,000 based on the last 2 years. But the inventory is separated and there is the matter of the declining sales for the past 4-5 years. I'm thinking of offering $175,000 to as much as $250,000 to be paid at 4 to 5% of gross yearly until paid off. (if we gross $500,000 in year one, we'd pay him 20-$25,000 and if nothing changed for 10 years, he'd get his $250,000). The structure idea is his, but I don't know if he's expecting much less or way more for the cost of the business.

Any advice?

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Arrow 11 replies Author Time Post
Reply Setting the value of a business (Original post)
Spike89 Dec 2012 OP
jtuck004 Dec 2012 #1
Spike89 Dec 2012 #2
jtuck004 Dec 2012 #3
ErikJ Dec 2012 #4
Spike89 Dec 2012 #5
mahina Dec 2012 #6
Spike89 Jan 2013 #9
Auggie Dec 2012 #7
Spike89 Jan 2013 #8
mahina Jan 2013 #10
AstroGather Aug 10 #11

Response to Spike89 (Original post)

Thu Dec 6, 2012, 10:35 PM

1. I would bet he knows how difficult the bank financing is going to be, and that he will


finance because he thinks he will net more that way.

Does it have an international exposure that there is profit from? Could there be?

The way one used to value business (multiples of the profit) assumed there was a future in which things would grow. That is no longer the case in the U.S., and may not be for many years, at least until we quit increasing our personal and national debt and fooling ourselves that this is progress.

In our future, what if GDP sits around .05, or even declines to, say, -.5 periodically, over the next decade? In case things continue to deteriorate or even get much worse here, is the business really sustainable?

What if it only does half as well as you think? I would bet he thinks it is worth 3x what you want to offer, but that's normal


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Response to jtuck004 (Reply #1)

Fri Dec 7, 2012, 12:31 PM

2. Thanks!

There are, as in any business, a ton of variables. Fortunately for us, we're in this particular business already. In fact, my wife worked for the owner about 10 years ago. There is a ton of potential, even in a stagnant economy. In short, the guy has made the classic mistake of waiting a couple years too long after he decided to retire. He hasn't been interested in growth at all in the past 3-5 years, he's simply been slowly semi-liquidating the business and half-heartedly looking for a buyer.

There is international exposure, but frankly, marketing has been so neglected for so long that there is so much "low hanging fruit" in the domestic market that I'll probably just maintain the contacts outside the US until I've got sales here closer to optimized.

You're absolutely right about the financing...he knows the most attractive thing about the deal is that it is almost no cash down. We really are the only potential buyers and he's on a tight deadline.

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Response to Spike89 (Reply #2)

Fri Dec 7, 2012, 01:51 PM

3. It sounds like you would be a good buyer/operator

The reason I asked about int'l exposure is just in case the low-hanging fruit doesn't look as good as it did from a distance. But having worked in the business it sounds like you know how to take advantage of that as needed.

You mentioned his not setting a price yet. It is hard for people to let go of a business, as it can come to define their very personality. I hope he figures out the advantage of selling it to you.

And I wish you a lot of luck. And paying customers Let me know how it goes.

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Response to Spike89 (Original post)

Wed Dec 12, 2012, 08:58 PM

4. Call a professional

Somebody that sells businesses for people. A business realtor? I asked one about a year ago and he was very helpful.

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Response to ErikJ (Reply #4)

Thu Dec 13, 2012, 11:53 AM

5. Thanks, we're meeting with an advisor/broker tomorrow nt

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Response to Spike89 (Original post)

Sun Dec 23, 2012, 04:54 PM

6. What's his BATNA?

Best alternative to a negotiated agreement?

From my negotiating class, can you tell?

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Response to mahina (Reply #6)

Wed Jan 2, 2013, 12:30 PM

9. He (the seller) needs a negotiating class I think!

After more than 6 months of negotiations, we'd finally come up with a package that was essentially done. He asked for us to send him a formal letter of intent and a semi-detailed business plan. We did that, he agreed with both sides acknowledging that a few details needed to be addressed...a few days later, we get a message that after talking to his advisors, "he was very concerned with a few points". Turns out they were all the major points but price.

The deal was pretty complicated because we didn't have any significant capital other than that needed to transition the business. Because he was essentially carrying the financing, we agreed to a much higher price for the business than it was really worth. We were willing to pay a premium for great terms. Literally at the 11th hour (1 week before we were to "take over") he claims he has another buyer group interested that has some strengths and weaknesses compared to us and would we consider possibly working with them?

At that point, my wife and I were done. I'm about 90% sure that the "other" group wasn't really a serious offer. Our response was pretty simple..."we understand that our best offer may not have been good enough, but we're glad you have another buyer for your business."

He didn't even bother responding.

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Response to Spike89 (Original post)

Wed Dec 26, 2012, 08:09 PM

7. Off topic response, but ...

I think one would have to think twice about entering print publishing when the world is adopting to digital. Mrs. Auggie, who has authored four books (all printed), has been hearing noise from her publisher how difficult it's becoming to sell printed matter.

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Response to Auggie (Reply #7)

Wed Jan 2, 2013, 12:07 PM

8. Was buying a publishing co., not a printing company

I know some publishers are wedded to print, but the reality is that for most publishers, the medium isn't really important. The digital book market is a mess right now, but it will get straightened out.

Back to the original topic...we basically pulled out of the deal at the last minute.

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Response to Spike89 (Reply #8)

Wed Jan 2, 2013, 11:47 PM

10. Since the seller asked if you would team up with another buyer,

which would sure be a deal-killer for most people, it sounds like you made a really good decision.

Better luck in the new year!

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Response to Spike89 (Original post)

Sun Aug 10, 2014, 03:57 PM

11. Here's how I'd value it

Yes, 3x to 5x NET is a common business valuation, plus inventory and equipment. A 5x would be a strong business with little risk such as a long established and easy to run franchise. A landscaping business would be more like 1x. Distribution businesses can be as low as 0.5x.

In my opinion, Good Will is always over priced, don't pay for it. Everyone things their brand is worth much more because they have invested the time to grow it, the value must be placed on how others view the brand, etc.

It sounds like you have an excellent offer with the 100% financing.

I would offer 2x net with 100% of the salable inventory value only once sold. Any other equipment 10-30% of the new value depending on how new it is (consider it's useful life, not how much it costs to purchase).

Also keep in mind a purchase price is not about future income, it's about what it's making today.

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