(Or How Much Should I Offer, Or How Much Should I Agree To)
There are many ways to evaluate what the value of a car wash is worth when you are attempting to buy one offered to you; or one you see and want to buy what you saw. My emphasis in this chapter will be just two ways.
First way, is the traditional way in evaluating the value of any business related to its offering price. Secure the figure of the net, net income of the business, and then multiply that number by three. As an example, the business shows a net income of $80,000. Then the business is worth three times that net income, or $240,000.
This type of evaluation is very conservative. It assumes that in three years time you will get all the money back you paid for the business simply based upon the existing business’s net income, and without any changes whatsoever. You may have in your mind to make changes here and there, that should increase the bottom line to more than the $80,000. However. to be conservative, you do not use those ideas or potential net income in your calculations. (Some very wise and successful people are able to do even better by only buying a business with a multiple of one times the net income, but they are very rare).
Somehow or other, you are so convinced that you can really make a lot more money if you do this or that for the business, that you start reasoning that if you do this or that, your net income would be $120,000. So you arrive at a multiple of net income to the offering price for the business of 3 times that projected amount which is now $360,000. So from the real, and not projected income the multiple now lies between 4 to 5 times the net net income. The new projected net income has now allowed you to offer more based on your projected evaluation. Just remember, the more you project of future income, the higher the offering price is allowable. The more you offer is based upon projections, and not real true current income. The more risk you will be taking. Many deals have been consummated by people who paid more than the general market wanted to pay, and their calculations proved correct by their success in making changes that truly affected the profitability of the business. So the others who were not willing to pay the premium, lost securing the deal because their offers were too low; that is what bidding is all about, and knowing how much to pay for anything.
So the multiple can vary depending on other factors other than the net income, and this calls for the second way to evaluate what price you are willing to pay. This way is based on what I shall call “The Hidden Assets”. The assets and good will of the business, or other heretofore items that were not allowed into your calculations.
Let’s look at each one of these contributing evaluation factors, and see if we can calculate what they are worth in adding to our net income to determine the gross estimated funds that could alter our offering price, or to accepting the offer made by the seller.
1. Good Will
Usually not considered since it could vanish over night depending on an array of factors. But there may be long standing contracts with clients, or a special historical characteristic of age (the business may have a great reputation for fifty years), or no competition. You may discover other factors where ordinarily Good Will is not considered that are worth something in the purchase price that other buyers do not see, that you do.
Good Will Value $____________________
2. The Lease
You may get a lease that is far below the current or projected rent in the area. It may be a lease for 30 to 50 years. This has value that can be added to your offer.
The Lease’s Value $_______________________
3. New Equipment
Then there is some new equipment that was just recently been installed that vastly improved the potential of the business. Equipment that you might have had to purchase if you bought the car wash. This then could have a value in your evaluation.
The Value Of New Equipment $_________________
4. A Radical Change
A radical change that will soon occur that would affect the business’s income and exposure spectacularly.
The town has just announced that a new road is going to be built, or across from the business a Mc Donald and a Home Depot will be built. How much will that be worth in two years from now, or in ten years from now. So you now add up your estimates for the value of the good will, the lease, the value of the new equipment, a radical change which includes the potential of your new neighbor’s businesses presence in front of your location, or any other dramatic change. Add that on to the net, net income, and your multiple for purchasing the business increases. This is the second way to determine how much you can pay for the business.
These two methods, The Conservative One, or The Liberal One, can be used depending upon your inclinations, and will vary upon your direct personal evaluations, or any other ideas where you determine that should be added to the net income. This would permit you to pay more for the business than the standard conservative 3 times multiple mentioned above.
1. Good Will $_______
2. The Lease Value $_______
3. The Value Of New Equipment $_______
4. Future Radical Change $_______
5. New business Concept* $_______
6. “Your Idea” $_______
7. “Your Idea” $_______
Total Hidden Asset Factors to add to Net Income to determine the possible purchasing price
Hidden Assets Total $___________
Net Income + Hidden Assets = Total Dollar Evaluation x 3 = Projected Negotiating Price $_______
*Adding on a Express Lube, Convenience Store, or any other business that could generate added income and net income to the car wash.
The only last caveat is don’t buy a doggie location ever. The location must be superb or walk away quickly. Our business is still based on the three most important factors in deciding whether to buy or not to buy. LOCATION, LOCATION, and finally LOCATION.
Philip Pearl CPA, of TBC Brokers assisted me in the writing of this chapter, and whom I consider one of the best business brokers in the country. Looking for a business, contact him and you will be well rewarded.