How much for tanning salon?

paullwill8

Hi all.
I am thinking about selling my Tanning Salon business.
It has only been open 6mths and i have been making a profit of £650 per mth (this is without any wages) already. Iam expecting spring/summer to be very busy so hopefully this will increase to £1000.
The property itself is rented on a 3 yr lease. It cost me 25k to set up.
I have around £500 worth os stock.
Anyone clued up as to how much I should be looking to sell for????
Thanks.

nookie

There are various ways of calculating a "starting point" of the businesses worth.

You could use the asset based measures:

Book value - The value of the assets in the business (you need to include diminuation in value of the assets)

Replacement value - The cost of setting up an equivalent business from scratch. This would be the maximum price the purchaser should pay.However, putting a value on goodwill for example will prove to be difficult.

Therefore a better measure is using the discounted cash flow model.

The value is effectively calculated by multiplying earnings by the expected growth rate then dividing it by the cost of capital less growth rate.

Based on £650 per month growth rate 3% per annum (long term) and cost of capital round 15% (as a reflection of risk)

(650*12)*1.03 / 0.15-0.03 = £67,000

at £1000 p/m

(1000*12)*1.03 / 0.15-0.03 = £103,000

However the question to ask is why sell? If you invested £25k and making £650 p/m that gives an investment return of 31% (about 20% discounted). To find that return elsewhere would be very difficult.

You might think this looks like a maths excercise but the methods are used by all corporate investors and venture capitalists will rely on these methods heavily. Let me know if you want any of the terms explained better, but I hope it makes sense :j

paullwill8

Thanks for that nookie. I am just hoing to get my money back really, reason being I can earn more Painting and Decorating, which is what I do, also it is proving to be too much hassle owning a shop.
Do you think selling at offers over 25k would be a good start?

Jacko_3

Nookie thank you for that useful post. I was skiving from studying for CIMA Financial Strategy when I came across your reply. There is no escape. I have never understood why the divisor is less the growth rate.


I feel the key factor in the valuation is that the profit is before wages are deducted. Surely any one working there for a month would earn at least £650.

The value of the business would depend on the value of the lease.


Regards

Jacko

Pennywise

Yep, discounted cash flow and all the other "profit +" or "profit multiple" bases of valuing a business need the profit to be reduced for the realistic cost of labour. Discounted cash flow etc are all very well for large scale businesses but aren't really applicable for owner-managed micro businesses.

So if it is part time and a realistic "wage" for the hours worked each month would be say £500, then the profit isn't £650 per month, it is only £150 per month, which really brings down the value on any valuation basis using profit as a starting point.

If you are finding that you could earn more money reverting to your previous occupation (which isn't particularly highly paid) then that same ideology would apply to prospective purchasers also, so it is arguable that the business is actually worthless, other than the second hand/forced sale valuation of whatever equipment you could sell.

These days, anyone can realistically expect to earn £10,000 p.a. for a full time job, and anyone with £25k to spend would expect to earn say 10% on that capital if they invested it in a business. So the business would have to be making at least £12,500 p.a. profit before it is a viable proposition for anyone to pay £25k or more for it.

That said, there may well be someone out there whose lifestyle aspirations and finances would fit in with your proposition and would be willing to buy the business instead of having the hassle of starting their own - perhaps someone who isn't bothered about not earning a realistic wage for their own work time, and perhaps someone more interested in building it up in the hope of a capital gain later on. Also, it is possible that there is someone out there who has the money and is naive enough to think the business is worth more than it is. Small owner managed businesses are notoriously difficult to value and it really is just a matter for a buyer and seller to happen upon a mutually acceptable figure where they're both happy.