Valuation of my biz & Sale

[pathofphanuel]

Been in business for 38 years same location. I own a 7000 sq ft building on a 30000 sq ft lot .
16 employees
Cash flow 1.5 million- business owner takes out 200 k salary. Everything is paid for . Profit on the books to keep from being taxed is around 25-50 k a year . I’ve got two employees that could take over, but I’m struggling with a price. My accountant and his firm suggested something it it seems off . Im 65 and need to find my a way to put my business in my employees hands . They would pay rent and I would like something for my Brand . What do you think and is it a bad idea to carry the note or any part of it . Now interest rates are pretty high at the SBA right now . Any suggestions? It’s a service business in the hunting industry in Ak.

 

[tdrum99]

@pathofphanuel Could look at an ESOP plan, depending on how long you want to stay around.

A business making $1.5m but only showing $25k in taxes seems, shall we say, challenging to value.

 

[kermos]

@tdrum99 OP might be finding out why cooking the books can have a downside

 

[cavwda]

@kermos This exactly. Should have planned this sale for the last 3-5 years and paid more to Uncle Sam for this eventuality.

This deal will be impossible to finance at a valuation the owner will be happy with.

 

[kenman923]

@tdrum99 ESOPs are great ways to accomplish this, however they can be incredibly expensive to setup and administer annually. From my little experience with them, a business of this size would likely not be able to afford the ESOP costs.

 

[onjig]

@tdrum99 I'm having this issue with two business I'm in the process of buying now. First one is about OPs revenue, and about OPs profit. Second one is $500k revenue, negative EBITDA. Both don't seem to understand how businesses are valued and that absolutely no buyer cares that the profit has been "artificially lowered" to avoid taxes. In fact, that's a major liability — even in an asset sale the IRS can attempt clawbacks if they decide what you've done rises to the level of tax evasion.

So I have to spend my time and money contesting adbacks, educating the owners on why they were massive idiots, and arguing with them about the value of their company which on paper isn't worth the professional services costs I'll accrue in buying them.

Best case scenario for OP is he makes a convincing case for owner's salary and a few other adbacks which brings the value up to maybe $800k on the high side, or convinces his employees to pay way over fair market valuation. Worst case scenario, that business is worth $250-300k and you'll be lucky to get that.

 

[tdrum99]

@onjig I looked at a business that was cash based. Owner said he started to keep real books for 3 year to prepare for the sale. But said he still kept about 30% cash off the books, but knew nobody would use that in their value.

So, it was a decent seller with realistic expectations. Life is too short to spend too much time trying educate sellers, since money will think you are just trying to trick them into selling for less.