Is This Seller Nuts?

So what do you get when someone owns a business for 40 years and is either so enamored with the business or simply wants to retire “in style”?  You get expectations that are so ludricris one has to feel sorry for the seller or the buyer that gets involved in this escapade.

As usual the names have been changed to protect the innocent.  A construction based company that bids on work through general contractors.  The facts: 1) revenue in 2010 was approx $7MM down from $10MM in the previous year 2) gross profit margins are 20% 3) in 2010 earnings were $300,000 4) AR is $2.5MM and AP is $1.5MM and AP is being stretched out due to a downturn in cashflow.  The facts part ii —- 1) the seller/owner is the face of the company 2) 40 employees 3) union shop 4) seller owns the building 4) seller admits to a highly competitive industry (and in fact while I was there a contractor asked for a reduction in price from $106,000 to $100,000 and then settled on $104,000.)

The seller is looking for – can I have a drumroll please – $4MM in cash!  Basically, the bottom line is that the business was worth 2x/3x earnings (say $600,000) and probbaly requires $500,000 of working capital.  If you don’t know the business – forget it – while the seller would provide 1 year – what if something happens to him?  Then what?  So instead of $4MM in cash – its more like $600,000 with $300,000 down and a note for the balance.  And I have to wonder if thats generous.

While the seller was adamant that he would find that one person – “thats all it takes” – I am more doubtful – or better yet sure that it won’t be the case.  This is a business that is driven a singular individual – no sales team, is under severe competive pressure, has hurt its relationship with vendors and one in which its hard to predict the future.

Now readers may say that I hate the business – I don’t – I would just hate being the buyer – maybe at any price.

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5 Responses to Is This Seller Nuts?

  1. Ken says:

    Donsrons,

    Always enjoy your posts. I would love to learn more about your approach and the strategy involved. How do you get into conversations with prospective sellers? What is the objective of your initial conversation? How long does it typically take to learn all of their financial details, like in the above post?

    Regards,
    Ken

    • donsrons says:

      Ken,
      Thanks for your comments. I probably cannot give you the lowdown in a response. My approach and strategy is a really a matter of experience. And every business is different. I am looking for sustainability, potential and what is the truth behind the business – good — bad – why is the seller leaving.

  2. Supermoves says:

    Though 3x earnings is one way of valuating a business, there are many factors that can raise the value of business beyond this simple measure. Real estate holdings and large cash reserves are two examples.

    In this case, 3x earnings would be about 900,000, but if the building were paid off and worth 2 million and the company had 1.5 million in cash reserves (though that doesn’t appear to be the case here), 4 million wouldn’t be such a ridiculous valuation.

    The real deal-killer here is that the current owner is the “face of the company”. He likely has good relationships with state and local officials leading to projects they wouldn’t otherwise get. He has “been seen” around town, and is well known among clients. I know he said he will give you a year, but it took him 40 years to get where he is, so you shouldn’t expect to take over in just one.

    What would be interesting to know is the value of the real estate and the construction equipment. Perhaps the real value here, especially in this economy, could be the break up value!

    • donsrons says:

      Actually, there are many ways to value a business – undoubtedly a universal truth. However, and I tend to be over simplistic in my writing, one cannot get confused when evaluating a business. What is the cash flow and will it go up or down! As far as cash reserves – most deals are done such that a minimun amout of cash is left – post deal. In fact most deals are done with a working capital level to be guaranteed by the seller – which I should clarify in new post. As for the real estate – the seller was not selling – though he did say he would at the right price – thats a news flash. So it was $4MM for the business – RE not included – cash was zero – plse note that the buyer needed to come up with working capital. Thank you for thoughts!

      • Supermoves says:

        I hate to post this here, but would you please contact me re: monetizing this site? Supermoves at aol dot com
        Thanks!

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