Selling or Buying a Small Business/How to evaluating a small business
QUESTION: Dear Expert,
I am trying to become a 50% owner of a small existing clinical testing laboratory. The current owner (who would become my business partner at 50%) and I are in a firm agreement not to spend much money just for the sake of accurately assessing value of the business. We'd rather want to spend any available money to expand the business which is at a challenging edge currently. For the past couple of months, I have already worked full-time at this place without getting compensated, and we are in an agreement some fraction of my 50% would be paid to him as an upfront cash, and the rest will be by my sweat equity (i.e. not drawing a salary from the company until fulfilling my portion of 50% value). Is there any rough formula to calculate the current business value, just as a ball park $$ amount? The company revenue is generated by cash payments for the tests ordered, which can be different month to month. I can provide more info. if needed.
Thank you very much in advance,
ANSWER: Hello, Steven, and thank you for contacting AllExperts.
I have sold clinical labs, so have some understanding of their peculiarities. First, I do not know what you consider "much money", but a fairly thorough evaluation is $1,500 or less depending on what exactly is included. A certified appraisal is much more, around $5,000. For your purpose, you may not need a certified appraisal but you may want to consider an evaluation. I can tell you that in this market currently, you could ballpark about 2.5-3 times the Adjusted Net Profit. "Adjusted Net Profit" consists of the bottom line Net Profit, plus anything in the expenses that is either non-recurring or somehow flows to the owner. E.g. owners salary, amortization, personal auto, depreciation, interest, personal medical insurance, interest, State and Federal taxes, etc. If you can compute that, I would say a fair market value might be around 3 times that figure. However, I do not know what size the lab is, and that does affect the multiple, as do a few other factors. I would say if it is doing over $1 Million in total revenue, the multiple could be a touch higher.
I can give general advice on AllExperts. If you would like an accurate evaluation, which takes a good bit of time and work, it would have to be on a paying basis. I would be happy to work with you on this if you decide a more detailed evaluation is needed. Otherwise, I think you can ballpark a value from what I have provided.
Best to you!
Senior Business Broker/Intermediary
---------- FOLLOW-UP ----------
QUESTION: Hello Mr. Bruno,
Thanks again for writing me back with valuable information. I have a follow-up question to your answer provided; this business being a laboratory, there are a lot of equipments (mostly old, but still decently functional). These equipments are not included in our evaluation?? Also, this lab has a CLIA license enabling processing of clinical samples. The value of this type of license (which takes a lot of money and hard labor to maintain) is not included in business evaluation?
The second question is: we probably feel comfortable going with the approximate $$ value based on your suggestion. For the next step of officially making me a 50% co-owner, what are the procedures that we need to follow? Our business is located in the state of California. We would like to involve lawyers as minimally as possible due to their expensive fees.
Looking forward to your directions!
Hello, Steve. In the sale of any business, the equipment used to produce the revenue and profit the business is being sold on, is included. You cannot value the business based on its cash flow, then take away the equipment used to produce that cash flow. Banks used to lend money for business purchases based on assets, but after many loans defaulting, and banks having to take over the assets, they decided to use the cash flow method because it makes more sense. So, a business's value is relative to it's profit.
In terms of the licensing and/or certifications, there would be some premium added to the value for that. However, I can only talk in general terms, not knowing any financial information. Unlike real estate, a business cannot be valued simply on comparables. Each business must be looked at and analyzed thoroughly for what it is.
It's very difficult to conduct business without having "normal" expenses. Almost any business at one time or another has to have legal help. I understand about attorney fees, but would never advise you to "not" use an attorney when it is appropriate. You do not necessarily need an attorney to accomplish your task, but being in California, you should have an escrow. I can recommend one in San Diego County but do not know if you are here or somewhere else. There are escrow companies that conduct "bulk sale" escrows. That is what you need. If you do not have an attorney draw an agreement, then find and go to an escrow company that does bulk sales, explain your situation, describe the terms of your agreement, and they will write up escrow instructions detailing what needs to be done, and perform certain tasks which will be explained to you, to accomplish a buy-in. Escrow costs vary a little so I cannot tell you what one would cost.