Author Topic: Buying a Small Business  (Read 3183 times)

JoJo

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Buying a Small Business
« on: May 15, 2014, 05:56:26 PM »
I know there is a ton of information online about purchasing a small business, but I wanted to see if anyone here has any opinion or advice.  An opportunity just came up recently that is very intriguing – it’s funny that it happened just a week after I posted the  “Making hay while the sun shines” post…
http://forum.mrmoneymustache.com/welcome-to-the-forum/making-hay-while-the-sun-shines/msg275223/#msg275223

The opportunity:
A small travel company that runs some short regional tours in the USA of 1-5 days plus 1 or 2 longer trips in a year, within the US or Canada.  About the maximum that could be made per day of touring is $1000.  The current owners are semi-retired and only ran 30 days of tours per year recently.  In the hey days they ran 100 days of tours per year.  Obviously, the non-tour days are needed for planning, bookkeeping, publicizing, etc. 

The purchase:
There are no tangible assets.  To purchase the company would be to purchase only the name of the company, the training by the previous owners with close to 30 years of expertise, and a client list of 600 people.  This company has previously been running off of their client list and word of mouth.  The only advertising is quarterly mailings and a very basic website.   They are retiring because they are in their upper 70s and health is slowing them down.
No purchase price has been discussed yet.

My situation:
I work in a corporate job and have a pretty cushy deal to the point I’m able to save about $140,000 after taxes and expenses.  Plus I get health insurance and 6 weeks of vacation.
However, I’m starting to hate some things about my job and the chance that things are going to get really bad in the next 1-3 years is high due to a huge project that is going very poorly.

Until this opportunity came up, I was seriously thinking about working for 2 more years, saving another $300,000 or so, and then semi-retiring – going abroad, peace corps, teaching English, guiding trips, etc.  I have been away from family for my entire working career and this company is located near my family – parents, siblings, nieces, and nephews, so that would be a benefit to move back.  I absolutely love traveling, including the planning of it so this is in my wheelhouse.  It’s probably not the exact segment of business I’d like to be in – I prefer a bit of adventure and this is geared towards senior citizens.  That being said, they go to a lot of shows and go to some really offbeat places that would be pretty interesting to me.  Also, I would probably still go on a 1-2 month trip each year to quench my adventure travel thirst.

Questions:
Any general opinions?
Given the description, what sort of price would you put on the business?  There’s still a lot of due diligence I need to do, but assuming the above info is true, what would be your guess?


swick

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Re: Buying a Small Business
« Reply #1 on: May 15, 2014, 08:32:53 PM »
Sounds like a really interesting opportunity.

However, I wouldn't name a price. I would be asking them what they hope to get for the business and training (make sure you have details of what they are willing to provide, transition time, etc) and then ask to see their books. Since there are no tangible assets you are basically buying the training and their name - I'd be following up with their clients to see what their name is actually worth.

Also, if it is seniors, there is a good possibility that many of their clients are with them because of the personalities of the owners, there is nothing guaranteeing they will remain your customers.

If you want to branch out into a more adventurous market, it might be worth it to see if they would be willing to train you and not sell you the business.

Daleth

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Re: Buying a Small Business
« Reply #2 on: May 15, 2014, 08:33:34 PM »
So if they've been doing 30 days/yr of tours and the most that can be made is $1000/day, that's $30k/yr, right? Or am I missing something? I wouldn't put a super high price on a business that only brings in $30k/yr. Couldn't you start such a biz yourself?

Thegoblinchief

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Re: Buying a Small Business
« Reply #3 on: May 15, 2014, 08:43:59 PM »
So if they've been doing 30 days/yr of tours and the most that can be made is $1000/day, that's $30k/yr, right? Or am I missing something? I wouldn't put a super high price on a business that only brings in $30k/yr. Couldn't you start such a biz yourself?

+1

I think you'd be better served by finding a different outlet for making money in travel.

Cpa Cat

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Re: Buying a Small Business
« Reply #4 on: May 15, 2014, 09:54:13 PM »
Remember that with a little effort and savings, you could build a similar business yourself. Indeed, chances are, you will build this business yourself even if you buy it, since it doesn't run as many tours or the kinds of tours you'd be interested in.

That means there's limited value in the client list. It's worth something, but not tens of thousands of dollars.

The other asset that they would be providing is talent - they may have some tips and tricks that are useful to you. In that case, you could do a percentage cut - they get a percentage of the tours/trips that are organized in the first 6 months, during which time they tutor you, then you cut them loose.

People often fall into the trap of paying too much for reputation - and that's basically all you're getting here.

Also consider - they don't have too many other options. There isn't a huge market for what they have to sell. And they want to retire anyway. If you don't buy, they will probably just stop running it. Their best alternative to you is nothing.

MarciaB

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Re: Buying a Small Business
« Reply #5 on: May 15, 2014, 10:04:00 PM »
You've got lots of decisions to make...get some FREE and confidential help! Small Business Development Centers are all over the country (http://www.sba.gov/tools/local-assistance/sbdc) and are funded with your tax dollars.

Also check out SCORE (http://www.sba.gov/tools/local-assistance/score). Again, free and confidential help to help you think through all of this (the questions of whether this makes sense for you financially, if it's a reasonable choice on a personal level, etc.).

CarDude

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Re: Buying a Small Business
« Reply #6 on: May 15, 2014, 10:08:05 PM »
I thought your name was familiar. You're the guy who's making enough to be FI already while working in a deadly job you don't enjoy.

Yeah, I still think you should retire. And no, I don't think you should invest in this business. You want to travel? Go do it. You want to visit family? Go do it.

However, don't keep working because you're afraid of what might come next, and don't buy dead-end businesses simply to have a day job. Life is short enough.

totoro

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Re: Buying a Small Business
« Reply #7 on: May 15, 2014, 10:19:12 PM »
What do you mean it would make $1000 per day of touring?  Is that net after tax?   

You are buying a job here.  That is fine, but it is quite different than buying into something where you have the prospect of not working yourself yet still receiving income. 

Valuation of a business like this is tricky, I don't know the industry standard because it is so specialized.  One way is to take net, including paying a fair salary for the work you would be doing, and then you assign a multiplier (ie.  usually about 3 but between 2-6).

This means that if you would net $30,000 right now, but have to pay someone about this price to do the work of the tours the value of the company is close to zero. If what you are left with is $10,000 than maybe it is worth $30,000.  Multipliers are modified by additional positive and negative factors like general industry trends, whether more than 10% profit is from one customer, future growth...

SDREMNGR

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Re: Buying a Small Business
« Reply #8 on: May 15, 2014, 10:32:39 PM »
Take the 2 more years and $300k, that should give you enough padding so you don't have to worry about buying a business.  You can just start whatever type of work you want.

JoJo

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Re: Buying a Small Business
« Reply #9 on: May 16, 2014, 09:41:09 AM »
Thanks all for the replies.

To share a little more info.  My plan was to transition into this over the next 10 months.  Since they need to publicize tours well in advance, I could organize the tours from where I'm at and not make the actual move until later.  I would probably stay in my current job until next March and use my remaining 4 weeks of vacation this year to run a few tours.  That would allow me to plan ahead, get a fuller tour schedule for 2015, and save another $120,000 towards retirement.

Maybe I didn't seem as enthusiastic about this opportunity as I should - as a woman, I enjoy most of the trips they do - theater, shows, riverboat cruises, bus tours, etc.  And I love organizing and researching this stuff.   The retiring couple spends winters down south so I would likely take some months in the winter to go somewhere interesting to me - SE Asia, Latin America, etc.  Also, my parents in their upper 70s are fairly independent right now but my siblings have been helping them some.  I feel like I should help too.

As for adventure travel, that's a tough business to crack.  I know a guy that has all the right connections who started his own company and he's having a really tough time and has only lost money for several years in a row.

As for price, I was going to see if they were interested in taking a percentage of profits and once I had paid a predetermined amount, I would own it outright.  Then if I get in a don't care for it, I'm not out a big up front fee.  Also, running a couple exploratory trips in 2014 without quitting my current job would give me a back up plan.

soccerref

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Re: Buying a Small Business
« Reply #10 on: May 16, 2014, 10:56:37 AM »
It's hard to see much value for this business beyond providing a job for the owner.  I would definitely not pay anything upfront for this.  If the current owners continue to run the business, the income stream would likely diminish over time from attrition of their client base.  Your plan to try before you buy is appropriate.  You might consider paying the current owners a percentage of the income from the existing clients for one or two years, allowing you to keep what you can generate from new clients.