Setting the value of a business [View all]

[Spike89]

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?