Buying a business, what do you think of the price?

[nickjohnson]

I've been working with someone that owns this photography business

for daycare portraits mainly. He wants $50,000 for the business, and

I think thats way too high. I think its barely worth $15,000. He

paid $65,000 for the business about 2 years ago, but he also bought 3

medium format cameras, 3 huge tripdods, 80 backdrops, and tons more

useless stuff. He also bought 25 good accounts with it.

 

In the last 2 years he went digital, (2 cameras, 1 tripod, 1

excellent printer) and has about $5000-7000 worth of current

equipment, and thats pushing it. He has maybe 2-4 accounts left.

This season he's shot nothing. He wants us to shoot some jobs for

end of spring/summer but I don't want to work for him, I want to buy

the business and he knows it. I'm getting the feeling he's just

using me to perfect his business for free.

 

I'm telling him I don't want the old film stuff, nor the 80 ancient

backdrops. He wants to get out what he paid for the business. The

next odd thing thats going on is I belive if I just buy the business

he won't work as hard as I need him to to generate accounts, and my

$15000 will be spent on buying $5000 of equipment and a guy that wont

work. I still expect to pay him nicely (1/4 the net profit from the

job) just to keep the accounts coming, but he wants more. He wants

to somehow get $50,000. The way to buy the business without

investing is I'm taking half the money for managing the photographers

and doing the post production work, and he's taking half cause he

owns it and cause he does the sales/account work. Half of what I

get, gets paid to him as me buying stake in the business. As I buy

into the business, I get some of his owner stake (half of his money)

to the point where I own the whole thing and he just gets 1/4 of the

net. Confusing enough? Anyway, this is a way that my work can buy

the business.

 

Now however he wants a bonus (he says $500-1000 per account) for his

part in getting accounts, in case I fire him after I wholey own the

business, which wouldn't take that long at 50K. He says its worth it

because he can generate the accounts. He says that he'll get 50

accounts within 1 year to justify the price. If he gets less, then

the company is worth less, I pay less. If more, then I pay more.

What I don't like is the idea that I'm going to pay more and more as

he grows the business to the point that I'll never own it.

 

This sounds pretty crazy to me, but it was my idea. I just didn't

think he really expected $50,000 for this failed company of his.

Last year he maybe made $20,000, but that was last year and there is

little loyalty in this business. I can't say he has much going for

him. Any thoughts?

[grinder]

I think you and Biff Loman need to part ways.

[stephen hazelton]

From your description, I can't really see any reason you'd want to buy the business- sounds like you could just strike out on your own and do the same thing.

[nickjohnson]

There were two things that made this enticing. First, I see it as a proven business plan without a guy with the energy to do it. I wanted to be that guy, and have the previous owner stay the face of the company. He is, from all I can tell, a very good salesman. Hell, he sold me on this damn business.

Second, the idea that I could get the business at a greatly reduced price because it wasn't on its feet appealed to me too. Now that he wants full price for something that isn't in functional shape, I don't see why I would pay it. I just thought that things really were worth that much maybe and I'm just ignant.

Probably not.

[grinder]

Here is a link to the MSDS it has a health Rating of 1 Flame 1 and stabilty of 0.

 

MSDS's are your friend you should review them for every chemical you use. And keep copies for any chemicals you store in bulk or have a high health risk.

 

<a href="http://72.14.203.104/search?q=cache:AWZFt_MDf9cJ:www.forensi-tech.com/msds/photoflo.pdf+kodak+photoflo+msds&hl=en&gl=us&ct=clnk&cd=1">Msds here</a>

 

It is not anymore dangerous than the numerous other chemiclas you use daily. Again dont bath in it or drink it use common sense and PPE as required.

[grinder]

I am sorry wrong post it was meant somewhere else.

[kelly_flanigan1]

What if you buy his business and his "stuff", and he goes out and then goes and captures the accounts again?<BR><BR>What the chap paid for the business, disco backgrounds, mohair wigs, glass plates doesnt really matter to you. <BR><BR>What matters is what profit the business will turn, and what you have to pay to have him gone or non compete for XX years. His business name, location and clients can be worth something. <BR><BR>What where the profits for the last 5 years?<BR><BR>You can weight the last year as 5/15 ths. the year before as 4/15ths; the year before as 3/15s etc. Thus if 2005 made 5k; 2004 made 15k; 2003 made 50k; 2002 made 40k; 2001 made 25k the forward weighting wouldnt look so good. <BR><BR>the books might be cooked and there is really do money, and the marriage might be just a sinkhole, cash injection to keep the doors open another 2 years. <BR><BR>Doe the business owe anybody, or have some hidden quicksand?<BR><BR>Read some Warren Buffet, most businesses are not worth owning; and great ones are only a good value at certain times. Baby B share groupie.

[kelly_flanigan1]

Most new businesses fail due to cash flow problems. Even when you buy a business there can be alot of cash flow issues. Paying insurance can be the darn devil; health insurance a complete nightmare. When things go on the fritz you might have to go without any salary for 1/2 year or a year, and still customers will want credit. You still may have customers who think you are fleecing them when you are living on fumes at home. Try to discect what you are actually buying, do it on paper. What is the value of the capital items the business really needs to go. Does the business pay taxes on its capital equipment to the city or county? What is the business insurance cost each year?

[graham john miles]

I was recently searching the internet on how to value a business. Not only must you factor in physical assets, but also intangible assets that contribute towards potential earnings. A rough guide seems to be multiply the yearly income by a factor that varies for 1 to 5 depending on the type of business and management. For example a larger business with good sound management, a number of employees and a comfortable market share might quantify as a factor of 5. A sole proprietorship in a small business in a competitive field might go from 1 to 2.5. In this case I would suspect the lower end of the scale so if the business is averaging $20,000 it might be worth $20,00 to $30,000 plus capital assets.Your valuation of $15,000 sounds low, covering perhaps only physical assets. If it made $20,000 last year, it's worth at least that plus physical assets. With better management and a more aggressive sales approach you could reasonably expect an increase in yearly income above and beyond that $20,000 in the past. The business sounds a little too specialized and if you did purchase it, you should seriously consider diversifying, perhaps into wedding work. I would guess you'd only need perhaps 10-15 of those a year to net $50,000. Check the web yourself. I'm new to this to so you should take my comments simply as a starting point.

[art_haykin]

In effect, you are buying NOTHING except a little camera equipment. You paint the bleakest possible picture, then say what a marvelous opportunity it is and how badly you want it.I was in business successfully for nearly 40 years, and it's my honest opinion that you haven't a CLUE as to what the Hell you're talking about or trying to get into. 6 years ago, my daughter and her husband managed to put a few bucks together and put a down payment on a going CD (music) store in Oregon.The store was established, doing around $150,000 gross business, and showing a reasonable profit. They paid $90,000lock, stock, and barrel. All the merchandise was fresh and the fixtures were up to date. It had and still has a devoted customer base. Last year, it grossed $250,000 and they've managed to retire about half their debt while making a good living. Buying a neglected, mis-managed, foundering business is worse than starting one on your own from scratch.I'd consult a HIGHLY qualified CPA before even considering that turkey.

[nickjohnson]

Kelly:

I agree with you on many issues. I tell him that what he paid for the business is inconsequential to me.

 

What I'm paying for by his numbers is his ability to generate accounts. From my standpoint, there is no loyalty in this business on the part of clients, so though he may get a customer for one shooting season they might go to someone else just for the hell of it the next season.

 

Also, I think I could go out and generate accounts too, I just don't want to do that job. I'm happy to pay him extra to make it happen, to get those accounts. But for maybe $7k in materials I could do this myself and the overhead is quite low. I think I'm talking myself out of buying this :P

 

Oh, and no cash assets, and no debt that I know of.

 

Milo:

The reason that I don't use a formula like the one you mentioned, and I've looked at them too, is that this is quite an unstable situation that I think without me would not work. So I think its me that makes this company worth something, and its past performance is no guarantee of anything in the future due to the lack of loyalty in this market. I like the idea of this formula though, and I think I'll use it to tell him why his business isnt worth anything.

 

Art:

Haven't a clue is pretty close, though I know how hard it is to get a business profitable (I've been runing my own photo business for about 3 years now and am just now established and making acceptable money) and am happy to work, and I also know this guy has problems.

 

All:

I don't know what else to say but that I appreciate your advice. Slowly I'm looking at this and thinking it's a bad idea to get involved (it started when he said $50,000 with a straight face after I offered him $15,000) but thanks for letting me vent.

[kelly_flanigan1]

Milo ; CJ and the group; there is an excellent paperbook titled "the small business valuation book"; by Lawrence w Tuller copyright 1994. I got mine at Borders Books in the accounting section for 13 bucks a decade + ago. There are many diffeent ways to value a business. Even teh experts will have alot of scatter with their valuations.

[art_haykin]

If you are already established as a pro, and you like the daycare portrait business, and this guy has 2-4 accounts left, and hasn't shot a thing this season, what the HELL do you need HIM for, a just what would you be buying? What am I missing here? In buying an existing business, there can be MANY things that you buy: there's inventory, if it's a product business, fixtures and lease holds, regular accounts,trade marks, copyrights, patents, and formulas if it's a process business, "location,"and blue sky. There are many ways of assessing value, and just ONE is based on its earning history and potential. I'd say that YOU have a LOT of homework to do. I wouldn't touch that turkey with YOUR 10 foot pole. There are daycare centers EVERYWHERE! Go out and research the market.

[bill_thorlin]

Following on from what Art has said what is it you are trying to buy ? No business done this year so the value of nothing is just that - nothing. What are you both living on ? It is very difficult to resurrect a failing business whose reputation is shot - much harder than starting from scratch.

 

You say you do not want to do the "sales and marketing" part but in what appears to be a one man business I do not really see what choice you have. The world of business can at times be nasty and what is to stop him from generating accounts and passing them onto someone else who will up what he gets from it.

 

The track record for partnerships here in the UK is not great - 1 in 3 fail in less than 2 years and 2 in 3 are gone in less than 5 years and that is when the partners start off fully happy. I doubt that it is much different in the US.

 

The only value seems to be some assets. You do not mention premises so this may be involved in the situation - if they are leased this can be a long term burden you may not want around your neck if it goes bad. Again you do not mention if in fact it is a limited company so this may also have an effect - not necessarily always for the better.

 

My suggestions 1) Do your own thing utilising your knowledge of this business area and employ good people ( easier said than done I know ). 2) Find a partner who you can get on with who would bring something apart from cash to the business. 3) If you wish to pursue this "opportunity" get a good accountant ( I believe you call them CPAs ). In fact in any case get a good accountant.

 

My initial reaction is that I would not touch this with a bargepole belonging to someone else - unless you can convince me otherwise with facts you have not brought out already.

[nickjohnson]

Everyone seems to be right on, except I want to tell Bill that this is not necessarally a one man show. Although I like to photograph, I find stale portraits to be stale work. I want to hire out decent photographers, pay them good rates ($25-30/hour part time) to shoot and have someone else do the in house printing work at maybe $15-20/hour. Even with 2 photogs and 2 assistants, there is plenty of money left over for a manager, owner, and salesperson on a good 200-300 kid job. Just not $50,000 worth left over

[bill_thorlin]

CJ - I think you may have misinterpreted my comment - even on the set up you outline it would appear that you are employing staff or sub-contractors/hourly rate non-full time people but you will still be running the business yourself and will need to be involved in and knowledgeable about all facets of the business.

[nickjohnson]

Bill: agreed

[friskybongo]

CJ,

 

1. You say you think you could generate accounts too but you just don't want to do that job. CJ, if it's your business, you HAVE to do that job. Yours is the face of the business.

 

2. He came into the business with 25 good accounts but now has 2-4 left and hasn't shot a thing this year. Sounds to me like he has ZERO accounts left!

 

You've said he's a good salesman. Sounds like the only one he's been able to sell to is you. CJ, you sound experienced and smart enough to do this on your own.

 

THIS IS A BAD DEAL. STAY AWAY.

[enlightened-images]

walk away.

[aaron l]

You say everything is horrible, there is no business and he wants a fortune for old equipment. Where's the benefit here?

 

Buy some new equipment, rent someone's studio and make a go at it. Or become portable. That way you go to the daycare and charge a premium for it.

 

That's crazy to get involved with a failing business due to a person who is headed down the drain. I had the previous owner of my house ask me to buy his 5 year old stereo & ancient big screen for $4k because that's what he paid and thought he should get it back. I laughed in his face. You should, too.

[robbie_caswell]

RUN! Don't walk!

 

If he's not willing to work for himself, why would he do better for you? After your overhead you wouldn't make a dime.

 

Four clients? The business doesn't exist to sell.

 

A few years ago we went through the same thing setting up my wife in a room at a local gym for facials and such. It was cheaper and cleaner to let her boss shrivel and die and get kicked out than buy her old stuff.