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Richard - Bizlaw
Richard - Bizlaw, Attorney
Category: Business Law
Satisfied Customers: 8751
Experience:  30 years of corporate, litigation and international law
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Business value

Resolved Question:

I have owned my small business since 1988. It is a service-oriented business involved in the management of condominium associations. My major client goes back to 1994, and my company has a contract that currently expires 12/31/2014. Each year the contract rolls forward one more year. The business generates NOI of $90,000 per year after all expenses including salaries for my staff and me. I earn only $13,800 due to my receipt of early Social Security benefits. I have an long-timie employee who has expressed interest in buying the business. I need a calculation of its value. Would the proper approach be to divide the NOI by a capitalization rate? If so, what rate is proper in today's economy?
Submitted: 2 years ago.
Category: Business Law
Expert:  Richard - Bizlaw replied 2 years ago.

bizlaw :

How has the net operating income been for the past 5 years? Is it constant, is it going up, etc?

Customer:

Net operating income has been steady. Management fees typically increase 3% per year. Rental commissions have been flat for 3 years after modest decreases for the 2 years prior to that. The increase of management fees has offset increases in expense. A great little business. Very low overhead since the work is done at the offices of the association at no charge to us.

Expert:  Richard - Bizlaw replied 2 years ago.

I switched from chat because I could not see your response. The determination of a capitalization rate can be very subjective but I would think 14% would be reasonable. Basically, the buyer will recover their money over seven years and given the stability of your business that is not unreasonable.. The one area of concern that might increase the rate is how much is your business dependent on one or two customers so that if those customers are lost there is a major drop in revenues. Also in determining your NOI would the employee have to replace you or if he replaces you have to replace himself. If not your NOI should really include your $13,000 in salary. If one of you have to be replaced with someone else then your NOI will need to be reduced because it is artificially high since you are underpaid for your role as CEO at $13,000.

 

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Richard - Bizlaw, Attorney
Category: Business Law
Satisfied Customers: 8751
Experience: 30 years of corporate, litigation and international law
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