Get an accountant, financial advisor and solicitor to advise you on this, it is the usual way when purchasing a business
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its only worth what someone is willing to pay. In other words, if the person is trying to get out of the business its worth a lot less. But I agree with Sash, you will want professionals working on this.
You are missing lots of variables, but this kind of a sale often goes for somewhere between one year's gross ($250k) and 1.7x one year's profit before compensation for an owner/manager and before interest expenses, or probably $300k-350k.
HOWEVER, this value would assume the seller provides financing at near market rates (figure twice the prevailing home mortgage rates) for 60-80% of the price, AND that the purchase price would be adjusted to compensate for customers who drop off within a specified period. (Accountants usually use 12 months for that period when buying & selling their practices. Others have different cycles.)
Why the adjustment? You are buying future revenues. Who cares what happened in the past?
The seller should be willing to assure you, through the pricing formula and through seller financing, that there are no expectations of mass defections. This also gives the seller a strong incentive to do everything possible to assure the smooth transition.
If the seller insists on cash-at-closing and a fixed price, then I would expect the total purchase price to be discounted by as much as 25-40%.
Originally posted by webgusto The seller should be willing to assure you, through the pricing formula and through seller financing, that there are no expectations of mass defections. This also gives the seller a strong incentive to do everything possible to assure the smooth transition.
I've never understood this logic. I actually disagree with it based on our own experiences of selling off part of our services last year. The buyer proceeded to run things in the ground, and then attempted a 4K chargeback to recoup some of his losses. He was unsuccessful.
It adds no incentive to the buyer to maintain a high level of services if they are paying a reducing amount for a dwindling client base if they don't run things well. I don't know of any other business venture I could enter in to, where I buy a business for $x and if I feel like slacking off I can get the business for a lesser amount of money, commensurate with how much effort I'd be willing to put in.
Other than a small percentage of "host hoppers" who are in one day, and out the next, exercising some due dilligence should allow a fair price to be set on the purchase of a web host. Whether it's worth that much in 6/12/24 months time is another matter...one that is entirely up to the new owner.
Why should the seller offer financing/terms? If the buyer needs financing, they go see a bank. The same as if they were buying any other type of business.
The problem is that it is almost impossible for a buyer to do true due diligence without disrupting the business, in almost any business being sold for substantial "goodwill" value (value in excess of the market value of th used equipment).
The seller has far better insight on the likely near term future of the business than anyone else on earth. If the seller doesn't believe in the business, what does that say to a buyer, who has no clue what frustrations the customers have been through in the recent past, etc.
I have seen more cases of seller fraud than I care to discuss, and have testified for the plantiff in court in a number of these. Usually these were cases in which today's customers had already told the seller that they were switching away after their current term was up.
Understandably, it was exceedingly rare that a seller tried to perpetuate a fraud when the buyer had not yet given the seller most of the money.
If a seller suspects a buyer is not competent, then he should of course not sell with any seller financing or price adjustment, any more than a bank would knowingly lend money to an incompetent. The buyer seeking any such arrangement should be approaching the seller in the same way he'd approach a bank.
I understand why you don't like the idea of the seller taking some of the risk -- you'd want the buyer to take it all. Believe me, I heard that same sentiment expressed by hundreds of business sellers while I was in that business. But the discount I mentioned was based on statistical analysis of actual business sales, not "ought to be".
Let me rephrase the formula...
If the buyer seems competent and the seller is willing to do the terms I described, a substantial price premium can be obtained for the sale of the business.
For what it's worth (what you paid ), some 80% of the businesses we sold had seller financing. About 2% were bank financed, and in most of those cases, th bank required that the seller participate significantly in the financing. Of those businesses where the existing customer base was the only significant asset of any value, about 2/3 of the sales had contract provisions where the seller had some protection against early dropoff in customers.
PS: In hundreds of business sales, I never encountered someone willing to part with hundreds of thousands of dollars, and then slack off with the idea that he could get some of his money back if he didn't feel like working so hard.
They must do things differently in your neck of the woods Bill. We've picked up a few small businesses in the last 2 years (my preferred alternative to the money pit alternatively referred to as superannuation ). In most cases, keeping the existing owner on as staff. Not once have we asked for terms or "seller financing". If I put myself in the other position, and was selling an ongoing business, I'd consider it a bit of an insult to be asked. "Can we pay you half now, and half later?" On yer bike son.
But stranger things have happened. It's just not the way I see things. Someone selling a business is not a bank, and they're probably not geared up to chase up payments later, should the new owner decide to bail. Sure, a contract is a contract but it might be the only piece of paper that changes hands if fresh dollar bills aren't put on the table from the outset.
You may be right that it is different here vs there. Our tax laws make it much more attractive to sell over an extended period of time. Perhaps yours don't. Ever since some widespread banking problems here about 20-25 years ago (and rules passed since then), most banks won't make substantial loans for typical small businesses unless they have buildings or machinery that could be sold if necessary to recoup the funds.
For whatever reason, seller financing is so common here that it is even part of the preprinted forms we use.
Here's another question... perhaps Bill or another person here can answer this.
From what you have seen in prior acquisitions, what value is placed on assets during a typical Web host acquisition? (i.e. servers, software licenses, etc.) And what value is placed on technology developed by a Web host?
Some of this information may be very revelant to any Web hosts on the forum here who are contemplating selling their businesses - either in the near term or the long term.
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There are several ways to put a value on any business. The one I described, a multiplier of either revenue or earnings, does NOT look at the value of assets -- the idea is that the purchase price figured in that way is for everything that makes the business what it is. That would include licenses, trade name, equipment, advertising designs, perhaps even noncompete agreements with employees.
There are other methods that do look at these assets. They generally look at the likely perceived cost (from the buyer's perspective) of replicating the asset. (A script that took you a month to develop won't get full value if the typical buyer THINKS he could do it in an afternoon -- whether or not that perception is realistic.) If it is hardware, then obsolescence rears its head, and we were seeing 50% to 75% of the perceived replacement cost.