This is an interesting topic to me, as on several occassions I’ve
considered selling my profitable jewelry business. Unfortunately for
me, however, though I have a great location in a great mall, my short
lease (3 years, the longest lease mall management will give to a
kiosk) makes selling the business for a worthwhile amount difficult.
As a very general rule, I thought that most small businesses sold
for 1.5 to 3 times NET profits (while also taking into account lease
terms, present trends & future sales projections, existing inventory,
accounts payable, likely demographic changes, location, etc.).
Taking a look at the business’s P & L statements, accounting & POS
software is good advice, but just remember that ALL of these can be
artificially manipulated to reflect whatever figures the seller wants
them to reflect. In most instances the tax return will be the most
accurate picture of the business.
Someone mentioned tax returns and how they are mostly fluff; what is
meant by this? Are you suggesting that people often over-inflate
their profits on their tax returns?! What I think a buyer might hear
is a that seller tells them “Look, between you and me, I know that I
only listed gross sales as $400,000 on last year’s tax return, but we
do a lot of cash sales, and last year’s actual sales were actually a
lot closer to $500,000”. IMHO that’s too damn bad for the seller. You
as the buyer should value the business based upon what the tax return
states, not what the seller says. But in terms of the tax return
being mostly fluff, I doubt that many people are going to inflate
their sales & profitability figures (and thus their tax liability) in
one year in the hope of being able to sell their business for more
the next year. But maybe I’m wrong.
Several people wrote (and I’ve often heard elsewhere so I imagine it
is true) that most jewelry businesses will sell for an amount based
upon the discounted value of their existing inventory. So what
happens in the following example?
Say you’re comparing two stores, both stores had gross sales of
$600,000 and after tax net profits of $150,000 (for the sake of
comparison let’s assume everything else about the two stores is
equal) except the following: Store A’s end of year inventory cost is
valued at $300,000 Store B’s end of year inventory cost is valued at
$100,000.
Regardless of what the realistic selling prices of either store is
determined to be, is store A is worth three times what store B is
worth?
How does one take into consideration and balance net profits versus
existing inventory? Which is more important and how does one affect
the other?
Doug