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Owner wants price based on pre-recession cash flow.

A franchised pack and ship biz owner wants inflated price based on profitable numbers biz did prior to recession. Down a combined 19% in gross sales last three years.The location is ideal for this biz. It is surrounded by many large national big box destionation stores. This is in a high median household income area in the suburbs of a major metro city. I know you should NEVER pay for "potiential", is that what this is or should past 10 yrs. of profit history be taken into consideration and off set the current numbers because of current economy? Any advice would be greatly helpful.

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Answers (4)
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Robert E. Bruhl.com
FL

Stephen, Unless this is a business you plan on spending the rest of your earning years in, i would pass.Also if this is a good demographic area others will look at the location to open similar stores.If you are a qualified buyer, make sure your seller knows that and if he becomes a bit flexible to contact you and you would be interested in pursueing a sale. This type of buyer is quite common today and there medications are not working! Robert E. Bruhl

Sep 12, 2009
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How to Buy a Business
WA

I'm sitting here drinking my morning coffee and laughed out loud. Run Forrest, run! This guy sounds like he's in denial.

If you want to leave the door open with him while you look for other opportunities, suggest an earn-out. That way you pay a price initially based on what the business is worth today and he has the potential to get a bit more--if and only if the business recovers within a certain time frame.

Earnouts can be tricky to design and negotiate because, for example in this case, you need to be able to distinguish between the possible causes of a potential bounce back for the business. Is it due strictlly to the economy recovering or was it due to you engineering new ways of doing business to grow the business out of its current hole? If it's the former, you might agree to pay him more down the road. If it's the latter, you really don't owe him anything beyond the initial selling price.

Right now, I would not count on any recovery. Follow the economic news. The world is changing. My bet is that the economy remains weak for many many years.

Sep 12, 2009
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I am not a fan of the ups type stores to begin with but to me three years is long enough to go back. I wouldn't pay for past history. In business ten years ago is ancient history. besides business was great in 2006 when their sales started going down . Something else may be up. If the seller wants a post recession sale price then he should wait until this is over and see where his numbers go. If he isn't willing to wait then it is his problem. I would walk away. good luck.

Sep 11, 2009
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The cheap shot - people in hell want ice water.

The reality - negotiate. I don't think paying for potential is necessarily a bad idea. But in my opinion the national long term economic outlook is terrible. Aside from a near term, and short, bump I wouldn't count on great growth for many many years.

Sep 11, 2009