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How to price business to family/main employee.


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I started a business idea & funded everything to get the business going. It has boomed faster then I expected, i still own & run the shop from the outside but I have 2 family members that have grown the shop from the sales & service from the inside & have been paid a weekly check plus sales bonus checks above any local shop. I have the idea that over the long haul I will recoop my investment & time. I have told them the more we grow the more you will earn pretty simple plan. The company continues to grow every month so I'm not worried about location & all the other things that go into what is my business worth. My question is if I would sell to 1 of them how would I figure a fair price. Mind you I personally have yet to gain a profit from the business myself. I draw a small check but it goes toward bills that it took to get the company started that came out of my own pocket. My quick simple thought was Equipment+Inventory+ (Net profitx3)= Selling price to walk away. I would like to know others I feel I should gain on taking the risk & putting my personal family finaces on hold, but also feel I don't want to cause family issues that I was trying to cheat a family member that would say the business would be nothing without them.

Thanks

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5 hours ago, BNC173 said:

 My quick simple thought was Equipment+Inventory+ (Net profitx3)= Selling price to walk away. 

 

Since I am actively searching for auto shops for sale, I can tell you that is a fair way to value things, provided you have proper accounting to support the profitability claims. I don't mean audited financials; just proper bookkeeping.

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You're concern is fairness.  How better to be fair than to use a 3rd party?    You could pay for an appraisal, which will cover both the business and the real estate.   I have a few samples, both over 95 pages.   They are pricey - mine was $4K.  It looks at the business in multiple ways, such as would the real estate be more valuable with a different business use.   It compares all combinations of business and RE and creates a value.    Probably pricey, but it is an arms-length transaction so it's fair.     Another way to get a value is to go visit your local SBDC (Small Business Development Center) office and ask them for sales comps.  They can provide sales multiples for actual sales that help you with the 3X multiple you suggested.  This won't help with the real estate valuation likely, but it gives you a number.   The SBDC is an arm of the SBA and will help you with these basic queries for free. 

Risk taking:  There's no way to say this without putting my foot in my mouth, because nothing is ever black and white.  This is a statement on perspective.   If it was black and white, I'd say this:   If you are currently giving your family members fair wages for their work, then they are contributing nothing to the startup of the organization.   If they are taking less wages to help start the business, or similar, then they are contributing in some direct manner.   Assuming no:  They are not taking on specific risk, so they would not be entitled to anything (ignoring the many family nuances that might exist).  They may be the best employees in the world and are helping you greatly succeed, but they are employees - not the risk takers.  Therefore, you build a great business and sell a working / proven business to your family members.   Buying a known quantity with a good reputation is immensely valuable to them.  They will appreciate being the ones to continue the business.   Don't feel guilty, feel proud!   

It seems like you are looking for an early exit or maybe family members expectations have been set wrongly.   Why is this troubling you today?    Hopefully, they know your timing on sale (e.g. 3-5 or 10-20 years from now).   By then, with 3X, you'll be walking away with Donald Trump type of money!

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I actually think that is a simple formula and is fair. The 3X earnings might be on the low side if the business is growing fairly rapidly. I'm not sure I would go through the hassle and expense of getting a proper valuation and I know others might disagree. I always look at it as "What I am willing to sell for and what would I be willing to pay?". If the employees were going to buy me out then what would I accept and would I be willing to pay the same to them. I am somewhat in the same boat as I am preparing an exit plan and am working on the agreements. The difference is I own all the buildings, land, and equipment in a separate entity and lease it to the operating company. I will keep that intact for a longer period.  Best thing I did was allowing my manager and lead tech to buy into the operation company at 20% each and financing the deal. They do a great job and manage all the resources well. I really just provide some oversight and coaching and don't get involved in day to day operations. We are currently grooming the next set of owners for the next location. 

I just sold another repair (collision) business and sold the equipment on an appraisal and I kept the real estate and am leasing to the buyer. I actually sold it on 2X earnings as I really wanted out and we were able to close the transaction rather quickly. No doubt I could have held out for more money, I was in negotiations on some other holdings as well as opening up a new repair shop so I was ready to be done with the business. I also negotiated a better lease which is where I will make my money over the long term. Although I will make less money per year, the money is far easier and the funds are electronically transferred each month like clockwork. 

Best advice I received from a friend was to journal all the reasons why I want to sell and every time I had sellers remorse, refer back to the document because the buyer is going to expand and do more business and make even more money. He likened it to my stock trading and selling something early only to see it continue a run up after I sold. Once I started journaling my wife had reminded that I had not been happy with that business and it's been 5 years that I have been wanting to sell while providing me specific instances of things I had forgotten about. I had to write all those things in my journal as well as other things that those prompted me to remember. i felt like the collision business and the time commitments was hampering my ability to grow my general repair shop as I have plans to build additional facilities. 

 

Good luck with your endeavor.

 

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  • 3 months later...

I recently sold my business, but ive been trying to sell it for about 2 years. Circumstances meant that I had to figure out how to sell it now, and still turn a profit...without having to resort to the dreaded auction scenario. The solution for me, sell the shop in two steps.  I offered the main shop equipment and the client base at one price, then offered the remaining equipment as a separate sale. In other words, this way I could attract potential buyers who were looking to buy cheaper, only to find out they really needed to step up and buy everything else.  It worked for me.

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