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.