I want to buy an existing dog grooming salon. How much should I offer?
I want to buy an existing dog grooming salon. She is currently asking 55k. She is an all-cash business. She is only open 3x a week and makes about 7k. She wants to retire. Rent is $1,600 a month.
We come across this all the time where the business owner is in fact an individual (sole trader) and most of their business has been done in Cash (read unproven). There are a few things to be wary of:
1. Proven Income
It is in the name, so if you can't prove it, then it does not exist. So your revenue or profit multiples are only applicable to what they can prove in their audited account. Everything else is just talk and you know what they say about talk!
Businesses are usually valued at the multiple of their revenue or profits plus their tangible assets. Sounds like she rents her outlet, and I assume the rest of the assets are "used tools". Used tools are almost worthless and rental is liability and not an asset.
Given the situation you are really only buying "Goodwill" of the business (or the person's customers). The problem with a lot of these businesses, is that the business is the person. The customer loyalty is with the person, so once the person leaves there is little to guarantee that customers will come back to you.
Think about it in personal terms. Why do you go to your regular hairdresser or the vet? You trust them and have a personal relationship with them. Once they go, most people will be motivated to give someone else a try. Imagine the conversation where you mention to your friends "My hairdresser (or vet or replace any suitable person) has retired, so not sure what to do?" and your friend's reply is almost instantly "I have been using XYZ for years and they are great. Why don't you give them a try?". OK, some might say the opposite to this "Whatever you do, do not try ABC!!", but still the assumption is that you will give someone else a try.
My answer to you is that you are not buying much that you can bank on. It is all hearsay, and unproven with no guarantees for anything.
If you desperately want this business, then I would tie the person to some cash upfront (very small amount) and then give them an "Earn Out" which is essentially a cut of the revenue for the next 3 or 4 years. This means they are motivated to pass on customers to you, and continue to recommend your services until you build your own relationship with the clients.
Good luck and I hope this helps.
Its hard to answer that question because there are a lot of other things you haven't mentioned you need to consider, employ an accountant to look over the books who will give you a numbers report, i.e. income, profit, outgoings and miscellaneous, stuff thats not officially recorded, you mention its an all cash business, does this mean she doesn't keep accurate books. If thats the case, it can be difficult to work out where the cash is going. the first step is to know exactly what the numbers are, outgoings, these are the important ones because this is what you are going to have to meet each month. Customers, where are they coming from and are the customers likely to stay loyal to you if the previous owner has gone, although you say she is retiring, many loyal customers move on when a new person takes over. Once you have the numbers, the accountant will be able to help you value the business and there are other services you can use to value its worth based on the profit and any assets she may have such as equipment that she is leaving behind. Hope this makes sense but make sure you explore all of this as you are less likely to have a surprise once you have one the deal you didn't expect.
Ali's and Claire points are quite valid. I would recommend you ask the following questions:
1) Has the revenue from the business been reported and taxed by the IRS? If yes, get five years of tax statements. If no......a big red flag!
2) Did you have an accountant to prepare financial statements and files taxes? If yes, get five years of statements, if no ..........another big red flag!
3) Did you have a separate bank account for the business? If yes, five years of statements, if no.......You know!
4) How were the expenditures for the business handled? Cash or Credit? If credit. get accounts and statements from suppliers. If cash.......you know!
A "no" to any of these questions should present enough risk warning that should be strongly considered (especially the first question). Multiple "no's" are an absolute deal killer in my opinion. Get at least five years of any statements, the more the better!
If you get the statements, you need to do some analysis from the information presented (I.E. average annual incomes, average annual expenses, what capital expenditures occurred or needs to occur, etc.)
This information obtained should present a good picture for you for you to commit to investment or not. If you feel at all uncomfortable about the deal, walk away.