another damn biz question: blue sky, myth or reality?

cactuscorn said:

sorry to keep buggin you guys but theres such a wealth of talent and information here its silly of me not to use this forum as a resorce.

whats yer take on the value of "blue sky" in todays retail based business market? i hear opinions both ways depending on the nature of ones goods and services. im confused in its validity.

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What would the business be worth without the person who's running it now? How many of his customers will leave because he's not there anymore? How many will return because he's not there?

Those are tough questions to answer. Get familiar with how the seller does business and identify a way to improve/separate yourself from them in a positive way and immediately communicate this to your customers.

I think in retail it's not very valuable vs. what I do by providing professional services.

My take is you have to go by the tax returns for a business do determine its value. If the seller was "cooking" the books to take advantage of paying lesser taxes, of showing less income than what's there, seller has to live with that as a basis for determining the value of his business.

There is no way in the world that any business is worth more than the money it produces in one year. You should never pay more that one years gross for a business. In my industry, a practice roughly is worth 60 to 80% of the one years gross or 3x the net. A consultant will usually take three valuation methods and average them out, and it usually comes in around 65% of the gross.

Good Luck CC.

P.S. I just got home from a ride with the maiden voyage of my Turner jersey and an RP23 on the spot. Later.

Well, if I were selling....

..... my shop, then the value is huge, the years of potential income, the growth, the time and effort over 5+ years of building up a solid and profitable business, the fine reputation in my market, my vision to make it happen all that is worth 5 to 6 times the annual gross sales, surely.

Now, if I was buying some rat hole little shop, needs painted, has a crappy lease, needs a POS system, inventory is screwed, look at all the dead products on the floor, cash flow is for crap, come on man, turn that inventory 4 times a year, you call these employees?! First thing I have to do is have a fire sale, get a loan to make improvements, by fixtures, train some decent staff, advertise, get the word out that the surly bunch of hoodlums at that shop are gone and it is a bright shiny future, heck, I'd be doing the guy a favor to take it off his hands, let alone PAY for any of that!

Only trouble is, both scenarios describe my shop! Eeek!

There certainly is some value to the Blue Sky, but how to peg it? Is the biz you are looking to buy in "danger" of being bought out from under you? Are people beating on the door to buy it? If it closed up without being bought, could you re-open, and in a different location, or the same location, a similar biz and be successful? Then you just may not need the other guys Blue Sky and reputation. Path of least resistance to just buy the biz and take her over? Maybe just go into direct competiton with the biz for sale, and kill them off. Then buy the inventory and fixtures at a fraction.....

That is a tough one. Does your local Chamber of Commerce or local College/Jr College have a Business mentor or planning program, you could get some opinions from....?

Heh. Feel free to email or PM me, CC, if you wanna bounce stuff off me.

S-Works said:

CC, you'll have to find out what good will is worth in the industry.

But in me trying buy practices, I've not had one consultant, appraiser, accountant, attoryney, tell me that a practice is worth more than it can produce. And the production won't be the same without the original owner running it. It could be better, but that is not the norm.

The point of buying a business that's making money is it's easier to work than starting out cold, because you have money coming in. The big question is how much comes in after ownership change.

Tough questions that need to be answered.

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S-Works truly hit the nail on the proverbial head with both statements here. I am an outside sales rep in the liquor industry and for the last eleven years have run one territory with approximately 130 clients. In those eleven years about forty of these locations have sold and only a small percent of the new ownerships have increased the sales. About five accounts have understood what was wanted and what was needed in the community and grew their business. Thirty-five or so did so poorly understanding their market that six were repossessed in less than two years. There are many reasons for each having decreased sales but mostly the new business model, or lack thereof, was not what the original clients had and not what the majority of the consumer of that area required.

Though I have never bought or sold a retail store, I have been in the middle of quite a few retail store sales and seen the before and after effect plenty of times. Not sure how valuation of bike shops is different then liquor stores as they are no more then the sum of their parts inventory, infrastructure (racks, cash registers, light fixtures ect..), location and gross sales.

One thing that I can definitely say hurt a lot of the new ownerships was coming into the business under capitalized. Nothing is more damaging then not being able to make the changes needed when changes in the market occur. Another problem for many of the new ownerships was not understanding how much income was required to maintain current inventory levels and took too much of the profits out for personal expenses (their rent, car payments and other cost of living expenses).

Good luck to you CC, when done properly the rewards can truly be amazing. One of the five good luck stories was a gentleman in his early thirties who took a store from mediocrity and grew it into one of the largest stores in the area. He came in with good working capitol, understood what was lacking in the area and filled that void. In five years he has quadrupled the sales and is still growing his market share.

KB

i hear ya man and thanx for the examples. lots of plans and dreams here. lots of work put into it so far. im busy learnin the market and needs of its custys so yer words arent lost on me. i guess the financials will tell the story and help us decide if this is a viable option. till then were only guessing huh? the guy sellin this biz is tired and wants out. pure and simple. its been on the market for over a year without a bid. i think price has been the issue which is why im bein so careful to get the whole picture then make damn sure i understand it before i go much further. ive already found flaws in his estimates of worth, 1 of em guite huge but we worked that out. my point bein ya cant pay more than somethins worth if ya plan to be successful and i hope to carry that knowlage with me through the rest of this venture.

my next question is one out of inexperience, not a chalenge. whats wrong with changin the biz model if the old one, though successful looking so far, is still in the dark ages? wouldnt a influx of new ideas, updated stock, increased productivity and so on be a profit plus? i see leavin well enough alone but id be worried about not movin forward.

and i gotta ask... what makes everyone think this is a bike shop? ive never said it was and will remain tight lipped about whats really goin down till im at least close to signin papers if not havin it in the bag.

cactuscorn said:

my next question is one out of inexperience, not a chalenge. whats wrong with changin the biz model if the old one, though successful looking so far, is still in the dark ages? wouldnt a influx of new ideas, updated stock, increased productivity and so on be a profit plus? i see leavin well enough alone but id be worried about not movin forward.

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Updating inventory is usually viewed as good so long as your not removing product lines to install new ones. Really tough to answer this one as I do not know what the business is or what the community you are selling to will be. My suggestion would be, if you end up purchasing for fair market value the business, to move forward slowly with making any radical changes to the business untill you understand the core consumers needs and wants.

cactuscorn said:

and i gotta ask... what makes everyone think this is a bike shop? ive never said it was and will remain tight lipped about whats really goin down till im at least close to signin papers if not havin it in the bag.

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Only been participating on these boards for a couple months and to me it seems fairly obvious. You have a passion for all things mt biking and it would be a good business for a person such as yourself to run. Passion does make a difference when running a business and the consumers definitely do pick up on that. Not sure I put it to print that it was a bike shop but I did have that in the back of my mind when typing the response that it was most likely the business you were looking into. If you are going to spend the kind of hours it takes to run a retail business you better have a passion for it or you will burn out fairly quickly.

KB

devil's advocate point of view:

Nothing ruins something you love worse than doing it for a living...

In my opinion, quality of life is very important. Myself, I love to play music and play a bunch of different instruments. After about 3 years of trying to be a professional musician, I started hating the gigs. Playing music for a living completely took the enjoyment out of it for me. I went back to school and got a tech job that I could do well. Now music is something I enjoy again. I can leave the job at the job and have a blast jamming with some friends.

Likewise, I recently had the idea to start a "mtbr-LBS" in the same vein as [email protected] and [email protected] I thought hard about it and decided not to go through with it. As much as I love mountain biking, I didn't want to go down the same path I went with music. Riding is my escape from Real Life, so I turned down the chance to put the two together.

I'm not saying that my case is the rule, but its something to think about before getting in to a big deal like owning a bike store.

op

(one thing I didn't look forward to: Bike Stores need to be open when everyone is riding, which means you can't ride..that sucks! )

CC, I've pondered this blue sky concept for a few days. There are a lot of rules of thumb for different businesses, but if I were looking to buy another business at this point in my career, I would want to build a reasonable business plan that pays me a decent salary for working, plus some amount of profit acceptable to me for the monetary risk I was taking by purchasing and owning the business. Let's call the annual profit projected by the business plan "X" (how's that for original).

Then for my tastes, I wouldn't want the cost of the business including blue sky to exceed 5X, and 3X would be a lot better. If real estate is included as part of the purchase price, you have to make adjustments, of course, but I'm sure you have that stuff pretty well figured.

I know this is a bit different from most approaches, but if you can't pay yourself a decent salary for working your but off, AND give yourself some profit beyond that amount for taking the business risk in the first place, what's the point?

Hope that helps a bit, and hope this all works out for you. Owning your own gig can be a good way to go.

S-Works said:

What would the business be worth without the person who's running it now? How many of his customers will leave because he's not there anymore? How many will return because he's not there?

Those are tough questions to answer. Get familiar with how the seller does business and identify a way to improve/separate yourself from them in a positive way and immediately communicate this to your customers.

I think in retail it's not very valuable vs. what I do by providing professional services.

My take is you have to go by the tax returns for a business do determine its value. If the seller was "cooking" the books to take advantage of paying lesser taxes, of showing less income than what's there, seller has to live with that as a basis for determining the value of his business.

There is no way in the world that any business is worth more than the money it produces in one year. You should never pay more that one years gross for a business. In my industry, a practice roughly is worth 60 to 80% of the one years gross or 3x the net. A consultant will usually take three valuation methods and average them out, and it usually comes in around 65% of the gross.

Good Luck CC.

P.S. I just got home from a ride with the maiden voyage of my Turner jersey and an RP23 on the spot. Later.

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CC,

Call me dense but I'm not sure that I understand what you meant by "blue sky". Can you clarify?

If we're talking about a pure start-up, I have to say that that can be a brutal road to hoe - hard work, high risk and sometimes no way to get out (although exit strategy is always an issue with small businesses). I'm speaking here from personal experience in a high-tech start-up. Remember the old rule, 80% of start-ups fail, 10% struggle, 10% succeed.

I would always err on the side of a purchase since the prior owner has market tested the business for you already - you've eliminated up to 80% of the risk. In terms of purchasing a going concern, the earnings multiples used for valuation as quoted by SW above match those with which I'm familiar. These seem to be valid for most (perhaps all) "owner-managed" operations. (The multiples seem to go to 5x earnings when the business can run without the owner being part of the daily operations - e.g. has a "general manager" on staff.)

3X annual earnings (scrubbed for extraordinary expenses i.e. "owner's perks", add back additional financing costs, any additional costs for lease renewal, etc.) is good starting point. I'd also model your cash-flows in the worst-case scenario (e.g. lowest historic business period the current owner has seen minus another 15% - call it a recession adjustment) to see how much capital you'd need to survive - if nothing else, this will show the potential downside risk.

Also, look for danger signs (lots of business volume with a small number of customers, lots of cash business, relatives as employees or customers, demographic/competitive changes in the territory around the current location, etc.)

Good Luck CC - Big decisions ahead. :thumbsup:

Paul