Hi all,
I need some advice from someone regarding the purchase of a business. My inlaws are thinking of buying a dry cleaning business. The business is owned by a 70 yo man who wants to retire and the impression he gives is that he cant be bothered with it all any more. He doesn't actively chase new business and has only advertised his business for sale in the shop window with a small handwritten sign.The asking price is $70 K and the bank has refused the in laws a loan for the purchase as the takings after all outgoings and wages is only $25K per year. This 25K would be the in laws "wage". They were only going to borrow $20k for the purchase as they have the rest.
They think they could build up the custom (it is in a tourist/retirement/seaside area).
I think $70K is far too much to pay for a $25K profit per year.
Does anyone know how to value a business? I've thought they should offer him much less, maybe start at $25K and see what happens.
Any thoughts greatly appreciated
As far as I am aware, businesses are usually valued as a multiple (2-3 times) that of their annual profits (or earnings in some cases). In this case $70k seems to be fairly reasonable.
Make sure you do plenty of financial, and market-based due diligence, i.e is the $25k claimed by the 70yo man, or can you verify this with financial statements? Also thinking you can 'build up the custom' is one thing, actually doing it is another, make sure your parents survey the market and ensure that the customer base is able to be expanded…
My employer is acquiring another business at the moment, and I am doing some of the due diligence, type "buying a business checklist" or "business due diligence" into google, there are heaps of free articles/lists out there.
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2 to 3 times is probably fair for same businesses but this does not appear to be making a wage, so the business is worth next to nothing, value the presses etc.. as a firesale price then ofer that (10 K) you can ask for tax returns, is it run as a business or just a trading name. Rember there is a lease on the shop, how long has that got, any rent increases about to happen etc.. Do a business plan, how are the inlaws going to make this work where the current owner hasn't. Don't believe the sales pitch.
I personally think dry cleaners are on the verge of extension. The fact the bank will not lend money is probably another good sign.
Drycleaners that have adapted have offered extra services eg repairs, ironing, or sold other items eg gifts, luggage. If your parents in law are going to do this then they need to work out how a new business will succeed.
Not many people get much drycleaning done particularly in retirement/seaside areas where informality is the rule.
Your parents in law bank is doing them a favour by knocking back the loan.
I have gone in the past 30 years from getting a suit drycleaned once a week to getting something drycleaned once a year.
thanks for the input.
I am very concerned about them making the wrong decision about this business as they dont have anything to fall back on (except us).
Basically their situation is that they have just emigrated here from the UK and my F.I.L. has been disabled for the last 30 years (work accident, can walk, just). He is 64 and is getting a disabled pension but will loose that shortly as they have left the EU. He doesn't get the OAP for another 12 months. The M.I.L. is 60 and is looking for work to keep them going till they get the OAP. They lost about 200K in one of the investment firms that went bust over there and have only about 50K in the bank, no home to sell, no super. They had to give the Australian gov 80K to come here. So once that 50K goes, thats it.They don't want to be a burden on anyone (although we are their financial guarentors for immigration purposes) and they thought that buying a business is the only way they can be independant.
The bank is who told them the profit was 25K. Initially they thought it was around 60K.
The owner also told them he gets alot of business off the resorts and hotels in town. There is one other similar business in the town but it is mainly a laundrette with limited dry cleaning abilities.
I'm not convinced it is a good proposition. They are coming to our place tonight and I'll get a look at the financial docs and books then. I just dont want them to make a huge mistake as they have had so much bad luck in their lives, especially recently.
Keep the advice coming, it all helps.
cheers
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