Private market valuation help?!

[lefthandpath]

Hello everyone,

 

Long time lurker just registered to ask this question.

 

Kinda an odd question so please bear with me but I Thought you smart people can help me figure out something.

 

Im dating a girl whos father has died recently and left no will. She is the sole heir and has the step mom who her father married. In our state the heir and stepmom will split all assets 50/50.

 

The assets included are a brick and mortar specialty food store selling oils and spices. My gf is wondering how she should value this business . Her step mom has low balled(we think) her and is pressuring her to sign over her part of the business. MY gf's dilemma is she doesn't know if its a fair value offer for her portion or just a low ball ,like i think it is.

 

Here our the financial info Ive consolidated into an excel spread sheet: https://drive.google.com/open?id=1X6YpbDH5q3GMVVTG0zanItQ_WV9ukiyE

 

She is being offered only 30k for 50% of her equity in the business. This to me seems kinda low basically a PE of 1.

 

Can anyone shine any light on this situation? Does anyone have any intimate knowledge of private market valuations? Or perhaps a course of action that makes sense. We have retained a attorney but our budget isnt very high and valuation isnt his forte.  IM doing my best to try to help her in any way I can.

 

Thank you in advance!

[rb]

A few questions.

 

1. Why is COGS declining so much from 2014 to 2016?

 

2. Why did compensation of officers go down from 120k to 69k?

 

3. Does anyone work in the business that gets paid below market rate?  For example an owner that looks after the business that draws below market rate salary and this doesn't reflect in the P&L?

[Gregmal]

Just my 2c

 

First, in order to get a fair offer, reject the 30K. That's terrible. Then, have your attorney ask them to make another offer, but with one condition, which will almost always ensure you are getting a fair offer... The condition is, whatever their offer is, if you don't like it, you can turn around and buy them out at that price.

 

Second, in relation to the business... Did the owner work there as well, or was this passive? If the business was passive prior, depending upon where your gf is in life, there may be an even bigger opportunity to acquire the business and then focus on running it full time, which could significantly cut salary and wage expenses, plus probably fine tune other expenses...The gross profit gives you quite a bit to work with.

[Pelagic]

Hello everyone,

 

Long time lurker just registered to ask this question.

 

Kinda an odd question so please bear with me but I Thought you smart people can help me figure out something.

 

Im dating a girl whos father has died recently and left no will. She is the sole heir and has the step mom who her father married. In our state the heir and stepmom will split all assets 50/50.

 

The assets included are a brick and mortar specialty food store selling oils and spices. My gf is wondering how she should value this business . Her step mom has low balled(we think) her and is pressuring her to sign over her part of the business. MY gf's dilemma is she doesn't know if its a fair value offer for her portion or just a low ball ,like i think it is.

 

Here our the financial info Ive consolidated into an excel spread sheet: https://drive.google.com/open?id=1X6YpbDH5q3GMVVTG0zanItQ_WV9ukiyE

 

She is being offered only 30k for 50% of her equity in the business. This to me seems kinda low basically a PE of 1.

 

Can anyone shine any light on this situation? Does anyone have any intimate knowledge of private market valuations? Or perhaps a course of action that makes sense. We have retained a attorney but our budget isnt very high and valuation isnt his forte.  IM doing my best to try to help her in any way I can.

 

Thank you in advance!

 

I actually just dealt with the sale of a similar specialty food/nutrition supplements store which had very similar numbers to those you posted. I'm guessing since you include rents, the property itself is not owned?

 

Also 30k seems particularly low since not only is it less than 1x earnings but the compensation of officers in the expense column would presumably go toward the owner?

 

The issue I see, and experienced firsthand, is separating out the business owner's income (salary) with the business' earnings. If the owner is employed by the business (as is common) and taking $100k+ a year in salary plus whatever excess cash the business itself provides it looks significantly more attractive to an owner/operator purchaser than simply valuing the business at a multiple of its earnings.

 

I'd look at some of the business buying and selling marketplaces sites like bizbuysell.com to see valuations sellers are attaching to similar businesses in your area.

 

I will say this as a word of caution, don't expect a lot (although 30K still seems quite low) unless there are clear factors that would indicate higher earnings for a new owner. 2-4x combined earnings (salary + business income) might be in the ballpark and is in the range of some of the offers we received on a very similar store. Although in our case the real estate ended up being sold with the business so the package as a whole sold for a lot more than the offers we received for just the operating business which is what it seems like is being sold here.

 

Happy to offer some more help, ironically one of the individuals who made an offer on the business I was selling taught me a lot about the valuation process as they saw it as a purchaser. But like I mentioned, familiarize yourself with some of the business selling marketplaces and narrow down the criteria to as similar in type and region as you can.

[Tim Eriksen]

It is completely wrong for the step mother to put any pressure on her.  As others have said you need to find out additional information.  Where are 2017 numbers??

 

Was the father involved in the operations?  Was he drawing a salary or other benefits (medical, life insurance, season tickets)?  Other deductions is a large % of revenue.  Is it utilities and other normal expenses?  Does the step mom work in the business?  Is she drawing any benefits?

 

The offer price is below book value which is extremely low in comparison to earnings.  Return on equity is above 50%.  The offer is below the cash in the business.  Retained earnings has decreased over the last few years even though income is positive.  Someone took a large draw.

 

You have to answer these questions before you know for sure.  On the surface it is a ridiculously low offer.  Your gf may want to offer her mom 5k more for her step mom's share and see how she reacts.  Structure it so the business repurchases the half interest using its cash.  Or... Why sell at all?  Could they set up an LLC and structure it so she receives the same payments as the step mom??

[lefthandpath]

A few questions.

 

1. Why is COGS declining so much from 2014 to 2016?

 

2. Why did compensation of officers go down from 120k to 69k?

 

3. Does anyone work in the business that gets paid below market rate?  For example an owner that looks after the business that draws below market rate salary and this doesn't reflect in the P&L?

 

1. We dont have much insight into all financial details. My gf is young and being kept out of the loop on ALOT of aspects. 

 

2. Compensation might have gone down due to her father dying and the step mom being the only other officer?

 

3. step mom manages the stores and each store has 2-3 revolving employees. I dont think the step mom is paying her self for anyone else below market rate. 

 

Just my 2c

 

First, in order to get a fair offer, reject the 30K. That's terrible. Then, have your attorney ask them to make another offer, but with one condition, which will almost always ensure you are getting a fair offer... The condition is, whatever their offer is, if you don't like it, you can turn around and buy them out at that price.

 

Second, in relation to the business... Did the owner work there as well, or was this passive? If the business was passive prior, depending upon where your gf is in life, there may be an even bigger opportunity to acquire the business and then focus on running it full time, which could significantly cut salary and wage expenses, plus probably fine tune other expenses...The gross profit gives you quite a bit to work with.

 

This whole situation is already 2 years deep. We have rejected the offer and offered mediation which her attorneys rejected. Tomorrow we are meeting with a business advisor to finalize our valuation to send over to them.

 

The owner(her step mom) works there in a management position.

[gary17]

private businesses are about 2 - 3 x pre-tax earnings  (earnings after paying management *& staff reasonable salary).

 

agree with the shot-gun clause

[Mondegreen]

First, in order to get a fair offer, reject the 30K. That's terrible. Then, have your attorney ask them to make another offer, but with one condition, which will almost always ensure you are getting a fair offer... The condition is, whatever their offer is, if you don't like it, you can turn around and buy them out at that price.

 

Seems an extremely intelligent way to proceed.

[HalfMeasure]

First, in order to get a fair offer, reject the 30K. That's terrible. Then, have your attorney ask them to make another offer, but with one condition, which will almost always ensure you are getting a fair offer... The condition is, whatever their offer is, if you don't like it, you can turn around and buy them out at that price.

 

Seems an extremely intelligent way to proceed.

 

This is fantastic advice - can't think of anything more parsimonious than this.

[lefthandpath]

For some reason the step moms lawyers have yet to provide any valuations. Since we rejected the first offer they are now saying we must provide a valuation.

 

the shotgun clause idea is amazing but how will it work if we provide the valuation? Tomorrow we are suppose to meet with my gf's lawyer and a business valuation expert he is friends with.

 

Her lawyer is almost certain that this will have to go to trial or before some judicial authority due to the bad faith and lack of interest in them having any sort of mediation that was offered before.

 

[Gregmal]

For some reason the step moms lawyers have yet to provide any valuations. Since we rejected the first offer they are now saying we must provide a valuation.

 

the shotgun clause idea is amazing but how will it work if we provide the valuation? Tomorrow we are suppose to meet with my gf's lawyer and a business valuation expert he is friends with.

 

Her lawyer is almost certain that this will have to go to trial or before some judicial authority due to the bad faith and lack of interest in them having any sort of mediation that was offered before.

 

All I'd say is that you don't HAVE TO do anything. Don't let them boss you around. That's bullshit. If they are being difficult then you are wasting your time negotiating in good faith. I'll leave you an example.

 

I've been invested in a company that has kind of had a history of shareholder neglect. Over the past several years, this company has been disingenuously egging on it's largest shareholder, largely because the shareholder feels they aren't doing their jobs. There have been multiple proxy fights, and a whole bunch of other nonsense. The entire time, management has been boasting about wanting to buy back the activist shareholder's position in the company. After several years of poor results, the shareholder finally said "ok, make me an offer". What did they do? They made a below market offer and then put out a presentation accusing the shareholder of being desperate and looking for greenmail...Typical scumbag move.

 

So my advice to you; don't give them anything. Just ask them to make an offer, with the ability for you to turn it on them. Otherwise, just let them dig their own grave, and document everything through your lawyers.

[rb]

For some reason the step moms lawyers have yet to provide any valuations. Since we rejected the first offer they are now saying we must provide a valuation.

 

the shotgun clause idea is amazing but how will it work if we provide the valuation? Tomorrow we are suppose to meet with my gf's lawyer and a business valuation expert he is friends with.

 

Her lawyer is almost certain that this will have to go to trial or before some judicial authority due to the bad faith and lack of interest in them having any sort of mediation that was offered before.

Well the shotgun clause would be great. But honestly unless their lawyers are utter idiots that would be insane to grant you a shotgun clause. Generally in law you don't give anything if you don't get anything in return. Shotgun clauses are usually part of shareholder agreements. You should see if there is a shareholder agreement and if there is a shotgun clause in it.

 

Honestly, this forum could be a lot of help, but maybe you should have reached out more than 24 hours before a court battle.

 

In regards to valuation on the surface it looks like people are getting paid fairly, maybe even more than so. So then like others said, the company should really be worth at least 2-4x PE. But the company itself is not that valuable. So you have to weigh that against legal costs to extract that value. This is why most parties settle. The legal costs could be higher than the whole value.

[watsa_is_a_randian_hero]

I work in valuation, for the top provider of valuations globally to private equity firms and hedge funds.  We have a disputes practice as well.  PM me and I can give you our disputes contacts, as well as other firms in this space it might be worth talking to.

[Jurgis]

In regards to valuation on the surface it looks like people are getting paid fairly, maybe even more than so. So then like others said, the company should really be worth at least 2-4x PE. But the company itself is not that valuable. So you have to weigh that against legal costs to extract that value. This is why most parties settle. The legal costs could be higher than the whole value.

 

Unfortunately, this.

[Spekulatius]

I would think that doing nothing would be the best option. If the business remains as profitable as it is, Mrs. Gf would just get nice income from her passive stake- nothing wrong that. She just has to make sure there is nothing fraudulent going on.

 

An offer is just an offer, it doesn’t mean she has to take it. You dot need a lawyer to do nothing either.

[bizaro86]

If the step-mom runs the business, I think it's very likely that the "do-nothing" choice ends up with ~100% of profits paid as salary/benefits to the step mom.

[LongHaul]

I personally would not deal with the lawyers.  That is likely to be lose/lose with the gf/mother in law from a money, time and even business perspective.  Agree to a deal that is fair to both parties and then get the lawyers to draw up a contract.

 

I think convincing the step mom with logic and a fair price would work, otherwise the lawyers could have a field day and she would not get full control and economics.

 

 

I also don't like what the step mom did with the lowball offer.  To be blunt sounds like she is trying to "steal" the business from you GF.  Think about the Step moms character carefully and if you want to be partners with this person in such a small business.  Unlimited number of ways she can steal.

 

 

 

[wachtwoord]

And this have been avoided with a decently written will.