Setting the value of a business
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?
= new reply since forum marked as read
finance because he thinks he will net more that way.
Does it have an international exposure that there is profit from? Could there be?
The way one used to value business (multiples of the profit) assumed there was a future in which things would grow. That is no longer the case in the U.S., and may not be for many years, at least until we quit increasing our personal and national debt and fooling ourselves that this is progress.
In our future, what if GDP sits around .05, or even declines to, say, -.5 periodically, over the next decade? In case things continue to deteriorate or even get much worse here, is the business really sustainable?
What if it only does half as well as you think? I would bet he thinks it is worth 3x what you want to offer, but that's normal
The reason I asked about int'l exposure is just in case the low-hanging fruit doesn't look as good as it did from a distance. But having worked in the business it sounds like you know how to take advantage of that as needed.
You mentioned his not setting a price yet. It is hard for people to let go of a business, as it can come to define their very personality. I hope he figures out the advantage of selling it to you.
And I wish you a lot of luck. And paying customers Let me know how it goes.
After more than 6 months of negotiations, we'd finally come up with a package that was essentially done. He asked for us to send him a formal letter of intent and a semi-detailed business plan. We did that, he agreed with both sides acknowledging that a few details needed to be addressed...a few days later, we get a message that after talking to his advisors, "he was very concerned with a few points". Turns out they were all the major points but price.
The deal was pretty complicated because we didn't have any significant capital other than that needed to transition the business. Because he was essentially carrying the financing, we agreed to a much higher price for the business than it was really worth. We were willing to pay a premium for great terms. Literally at the 11th hour (1 week before we were to "take over" he claims he has another buyer group interested that has some strengths and weaknesses compared to us and would we consider possibly working with them?
At that point, my wife and I were done. I'm about 90% sure that the "other" group wasn't really a serious offer. Our response was pretty simple..."we understand that our best offer may not have been good enough, but we're glad you have another buyer for your business."
He didn't even bother responding.
