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PDtax
PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 1973
Experience:  Tax professional and business consultant for 32 years.
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Im looking for some input/ advise on purchasing the small

Resolved Question:

I'm looking for some input/ advise on purchasing the small appliance repair shop i am managing. The owner want $150K . The property and assets appraise at around $60.. Is $90 too much to pay for a just the name? the business averages $100-150k gross and the owner 1/3 for expenses(save labor) , 1/3 for labor and 1/3 for the owner (draws)
Submitted: 1 year ago.
Category: Finance
Expert:  PDtax replied 1 year ago.

PDtax :

Welcome to the site. I will be helping you today.

PDtax :

The best advice I can offer first simplifies what you are considering. Then, what you get for what you are paying for.

PDtax :

The business employs you and the owner. He gets 1/3, and works there. You get less, and work there too.

PDtax :

When you buy it, I assume you will not keep him on to work for you. If you do, factor in paying him a wage as well as payments on the business.

PDtax :

What you are buying for $150,000 is $60,000 in assets and the opportunity to earn more money by working more yourself or by profiting from hiring the former owner to work for you.

PDtax :

If you are paying cash, I would tell you that $15,000 of the extra money you are looking at (the owner's $33 to $50K) is a return on your investment. The remainder is the extra income you are going to get from this investment (now $18 to $35K).

PDtax :

If you are making payments, your cash flow will be less for the term of the note, perhaps five years at $30,000 per year or so. Then there isn't much profit to keep. You would be working for five years for little to nothing.

PDtax :

The asking price is too high. If the business does between $100-$150 gross, and you want to value it at one times gross sales, which might still be high for this type of business (that's what you use for CPA firm purchases, attorney practice sales, with much more income and much lower costs), an offer of any more than $100,000 would not generate a return to you for years.

PDtax :

I hope that gives you another way to look at the transaction. Thanks for asking at Just Answer. I'm PDtax.

Customer:

Thanks ... good info .... to clarify (and perhaps solicate new advice) the boss lives 150 miles away a pays the utilities and taxes ... perhaps 5 hrs a month til tax time. She currently monitors finance via quick books online. i handle everything else

Customer:

clarifying .... the 1/3 for expenses including $7,000/yr mortgage payment(save labor) , 1/3 for labor (me and varies part time and sub-contract labor) and 1/3 for the owner (draws)

PDtax :

so, your purchase is to include the real estate or pay rent?

PDtax :

you make less than $50,000 per year at this job, maybe half that.

PDtax :

she won't be working for you after purchase.

PDtax :

You have told me nothing to change my mind. If you are buying the shop and equipment and inventory, and paying her $90,000 for a business name that does not pay a premium, it is overpriced.

PDtax :

In simpler terms, you are buying your job. In a down year, you will likely have to pay $30,000 out of cash flow, leaving you with nothing extra for all the risk. In a good year, you will earn an additional $20,000 per year for taking all the risk.

PDtax :

I suspect you could rent space for a competing shop, stock a few diagnostic tools and buy inventory of parts when needed, and save yourself $150,000. Keep in mind you are the key employee. Leave, and see what happens. There won't be enough repair business for two shops, and hers will likely close. Then you get the customers for free.

PDtax :

Thanks again from Just Answer.

PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 1973
Experience: Tax professional and business consultant for 32 years.
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