Buy Out/ Business Valuation (aka fun fun fun)

I'm considering buying the company that I've been working for for the past 5 years or so, and in doing so I've realized I have NO IDEA how to evaluate what a company is worth. The company is fairly small - 4 employees including me, a bucket truck, chipper, dump truck w/ 20 ft crane, chipper - with a pretty awesome reputation in the area and enough work to reliably keep the crew going + a bit if I wanted to expand - they've been around since the 70's and they're just plain good to people/their customers. The difficulties are: most of the equipment is fairly old and will definitely have to be replaced in the very near future and the company is still using the techniques of the 70's - which is to say that customers (and the other employees) will expect that I spike up their trees, flush cut, top, etc etc. (which I obviously don't want to do!)

So... any advice out there on pricing an entire company? I've heard that one years gross is a common yardstick for this sort of thing, but I don't know if that's true, and I don't know how to factor in equipment replacement and such even if it is true...

Thanks!!!!

Carver,

There are many ways of going about this, but to be fair to everyone involved it's usually best to have a professional appraiser set the starting point. Since the owner knows you, and you seem to have a good working relationship with him, the final selling price may likely end up being adjusted in your favor. In the end, nobody feels cheated. This is always a good way to start out with your own business. You know what the business is worth when you buy it......and the seller has the opportunity to adjust the price in your favor, as he pleases.

Joel

How much client base will you lose to the 'other guys' doing dark age tree 'care', when you tell the customers that you will have to charge more than they're used to, in order to do the work properly.

Will the crew stay under your supervision (already working happily under you?)?

Will customers stay once their original contact/ the old owner is gone?

Sean,

You make some good points, but I have to jump in here. I purchased a business of my own many years ago. It was a dental supply business. The same questions you raise went through my own mind at the time. I learned a few things along the way.

1. Worry only about those things that you have direct control over. There's plenty enough to worry about without involving yourself with issues you can't control.

2. Do your very best to keep the customers you have, by ALWAYS giving them MORE than they expected from you. For example: Trim a few extra branches around the yard at no cost, or grind out out an old stump as a "Thank you for your business".

3. Your employees should know up front that they are not allowed to operate their own tree care businesses, while working for you. And the consequences for getting caught doing this should be clearly spelled out from the beginning. Setting the ground rules for your employees is VERY IMPORTANT. If one of your employees asks that he be permitted to do a small job on the side, it might be a good idea to give in once in a while. Keeping your employees happy is part of keeping a business running.

4. New customers will pop up faster than you first imagined, provided you take extra special care of every customer you currently have. Show up on time...every time. Show up prepared. Always complete the job. Clean up after yourself....etc. Word of mouth advertising is the very best form. It's free....it's frequent...and it's personal.

Hope this helps.

Joel

Very well stated, Joel...good advice there.

I have no idea how to go about this.
There was a Co. that was started in the fifties in the area that was bought for 95k in the mid 90's and is now making well over 700k a year. Similar story as well. It's success was keeping most of the original client list and expanding into tub grinding for various municipalities.

Will customers stay once their original contact/ the old owner is gone?[/QUOTE]

this is one of the bigger questions I have - he's definitely built a following (customer base?) based on personality almost as much as on skill, professionalism etc.

Joel - Thanks for the advice! I think that stands up whether I start my own business or buy this one...

Ultimately I can't account for everything - so far my attempts to do so have given me headaches and not much else. I guess the part that's really got me is how much can I expect to pay for a customer list and reputation? Perhaps a professional appraisal is the only real way to do it...

Unless you're financing it I wouldn't get an appraisal. I'd hire a CPA to look over the books for the last few years. Doubt I'd pay over half a years gross (assuming the books are clean) knowing you have to overcome the topping issues and such. Figure out face value of equipment, if you can afford to buy it (and want it) you should get a discount for buying all of it. I would buy equipment separate from business do you can depreciate it yourself.

Flushcut,

One of the most important lessons I've learned about customer relations:

It costs 10 times more to gain a new customer than it does to keep an old one. Think about it for a bit.

You make visits, advertise, provide free estimates, make phone calls, send out flyers, print business cards, hold open houses, buy signs for your equipment..... and it all costs money.

You have an old customer who knows you and appreciates your work.....and all it costs you is a free pruning job on a little apple tree once in a while. That little free job costs money too, but it's an advertising expense, just the same. List the cost of that free tree trimming job in your accounting books as an advertising expense.

Joel

Not sure that works on paper. If you don't have a receipt I don't think you can categorize it as an expense beyond the labor.

I have also heard 1 years gross plus value of equipment, to me that is ridiculously high. Personally I would rather start small rather than buy someone out. This way, the clients are YOUR clients, and the business is YOUR business. To each their own.

I bought a pickup and a trailer almost a year ago and I had my best year in trees so far. More fun and more money. Stacking brush is getting old but I sub for a guy who's been doing it for almost 15 years so I guess I can hang in for a bit.

We have the method for valuation set in our operating agreement. Not sure how this would relate to your situation but our company would get its value based on 3 separate appraisers. One hired by me, one by my partner and the third one would have to be agreed upon by the other two appraisers. Those 3 would each figure out a price and then collectively come to a final price. That final price is what we have to go by if we sell our shares.
I guess you could use a similar method, but I bet it would be pretty expensive to hire 3 appraisers.

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