I am currently in negotiation with the owner of the small outdoor bootcamp I work for to purchase part of the business. I am looking to buy out the client list of the morning classes for which I teach. The owner has giving me a breakdown of what she thinks the classes are worth and is valuing the classes much higher than I would have thought. Revenue aside, she includes my current salary as the “owner comp add back” in the total discretionary earnings number since I am already teaching the classes and as the future owner the money will be going to me. I am having trouble grasping this as I still need to pay myself a salary and it seems like paying her for my income doesn’t make sense. Has anyone gone through anything similar or can provide some advice?
It’s all in the negotiation.
She is trying to value the business to you based on its worth TO YOU. So, she’s assuming that you are teaching all of the classes and will keep all of the revenue.
But, what the classes might be worth to YOU is different than what the classes are worth TO HER. If she’s making $100 in gross receipts per class but is paying you $40 per class, the class is only worth $60 an hour to her.
Somewhere in the middle of that is a fair sales price. Does she want to get out of the business? Then you might be able to get it for closer to what it’s worth to her for the rest of your outdoor season (does it end in the fall?). Or are you the one approaching her because you want to grow it or change it? In that case, since she’s already got a successful business, you might have to pay closer to what the business is worth to you, over a longer time horizon.
Another thing to factor into the value is how stable this revenue is. Are these a few dozen long term clients, or is it a list of a lot of people who only come sporadically on a pay-as-you-come basis? This is a fair topic for negotiation.
It’s common for a first offer from a seller to be a ridiculously high offer.
Since you know who comes to your bootcamp and how much they pay in order to be there, you could probably figure out your own calculation of how much the class is worth.
How many other people are interested in buying the business? And how likely is it that she will sell it to them instead of to you? And if she does, will the new buyer bring you along with the deal or do you lose your teaching position? If you don’t buy the business, does that mean you still have your teaching position and everything stays the same? What costs is she currently paying that you will have to take over – insurance, equipment, venue (some places like schools charge for you to use their outdoor space), permits.
All of these thoughts are worth considering, and could negotiate a price up, or down.
Negotiation is a game. I tend to negotiate hard, but also fairly. The best deals are done when both parties walk away happy and thinking they would do business again with that person in the future.
I keep thinking I’m done writing to you, but then a little lightbulb flashes on in my head (I’m a former tax accountant and also have an MBA).
One of the best books I read on negotiation is, “Getting to Yes without Giving in.” It’s not a super-long read, and it talks about how to list out all of the things you value about a transaction, not just the revenue, how much it’s “worth” to you, how much it’s “worth” to the other party, what items you don’t care about, what items they don’t care about, and what items you both really care about.
If this purchase transaction is of a significant amount to you, it might be worth buying this paperback and taking a quick read.
I sold my first company a few years ago, but I did it as a whole. Personally I wouldn’t buy part of a business because there are many risks and complications in such deals. But to help you with your question I would say the asking price should be between 50%-100% of what the business made the previous year (actually the average of the last 3-5 years would be more accurate).
I’m surprised the current owner is willing to sell part of her business, but it’s not unusual. You might want to talk to a corporate lawyer who specializes in this area before you make any decisions because keeping yourself legally covered is a must in this situation. You can also consult with brokers who specialize in buying and selling businesses so you can have a more clear picture. At the end it comes down to what the current owner wants to make out of this deal and how much you are willing to pay for it. I hope this helps.