If you’re purchasing or have been offered to purchase an existing scooping company, coming up with a purchase price can be challenging. As a buyer, you want to buy for a little as possible. As a seller, you want to sell for as much as you can. When negotiating a price, you will have to come up with a good balance between the two.
What dictates a selling price?
There can be several methods in coming up with a selling price for a business. For instance: a multiple of annual gross sales; A selling price based on Earnings Before Interest, Tax, Depreciation and Amortization or EBITDA; A set cost per client; A multiple of net income, etc. My usual line is “Buy it for whatever you’re willing to pay”, or “sell for whatever you’re willing to give up”. Ultimately, a business is only worth what someone else will pay for it.
Let’s briefly look at the pros and cons of each. Then I’ll finish with what I would personally do and have done in the past in regards to buying or selling a scooping business. This is by no means a detailed analysis of each method, just real life examples that may or may not apply to you.
Annual Gross
What does the business have in annual gross sales? That part is pretty simple. If the business does $100k in gross sales, you simply decide what percentage of that would dictate a selling (or buying) price.
Pros – It’s pretty quick and easy to figure out your price based on gross annual sales. As long as there are accurate records, you can see the price very quickly.
Cons – The problem with annual gross sales is deciding what percentage to base it on. Over the years I have seen different types of businesses go for varying percentages of sales. Anywhere from .75% to 6%. Based on the $100k gross, the selling price can be anywhere from $75,000 to $600,000.
EBITDA
Or Earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is used as an alternative to simple earnings or net income in some circumstances. (According to investopedia.com) Simply put, EBITDA is a measure of profitability.
Pros – EBITDA can give you a more accurate measure of how well a particular company is doing. Usually this is based or compared with similar industries.
Cons – EBITDA does not fall into generally accepted accounting practices and, therefore, most if not all scooping companies do not keep track of it. We’re lucky just to get our tax returns done on time.
Set Cost Per Client
Pretty straight forward. “I have 100 clients in my business and you can purchase my client list for $200 per client.” Well, that would come to $20,000 in this particular case. This method usually does not take into account the average length of customer retention; The average time a client has been with the company; Goodwill; Brand recognition, etc.
Pros – It’s not a particularly bad way to come up with a selling price, as long as you address all of the aforementioned criteria. And more, that I will bring up later.
Cons – This method may seem like low balling a potential seller. Let’s say 100 clients generates $6000 per month of income. That equates to $72,000 a year gross compared to the $20,000 selling price. It can seem like a wide discrepancy.
Multiple of Net Income
This selling price is based on the income of a company after all expenses. Let’s just get to the pros and cons of this one.
Pros – This may seem like a more accurate indicator of what kind of income the company generates. (It’s really not, see the Cons.)
Cons – While net income can be more accurate as to the profitability of a company, there are many factors that would skew the numbers. For instance: What may be an expense for one person, may not be for another. As a self employed scooper, as most of us are, your goal is to show a little profit as possible. Or it should be! After all, you are paying taxes on your profits. If you are incorporated, this makes even more sense. And because of this, net income will differ. That and a host of other parameters like living expenses, business loans, vehicle loans, and payroll if you have employees.
Finally, a Real Life Example
Selling
So far I have never sold a scooping company. However, I have sold many routes in several different areas. And this may be the major differences when it comes to determining a selling price.
If your selling a client list, you do not have to worry about goodwill, brands, or assets. The only asset you’re concerned with is the client list. I have sold several client lists and did so to non existing companies. In other words, I did not sell to a scooper that has been in business for any length of time. Everyone was new to the industry. This makes huge difference on selling price. Bottom line, I sold the lists for and average of 1x’s annual gross. Why? Because that’s the price we agreed on!
I said an average of 1x’s gross. Some were a little less, some were a little more. Why the difference? Because that’s the price we agreed on! (Sounds familiar) I showed the buyer what the potential income was based on the gross sales AND with the additional clients they should be able to gain. A client list of 50 to 75 clients is a great start when you’re starting from scratch, and that’s what I showed them.
Buying
Example 1
I have “bought” a few scooping companies over the years, some bigger and better than others. The first one was easy. The owner called me up and asked me if I wanted his customers. I said “sure” and “what do I need to do?” As it turned out, he was moving out of town and only had a small handful of clients and didn’t ask for anything. He just wanted to make sure his clients were going to be taken care of. Of course, I took them and it added about $500 extra gross income per month for my business.
Example 2
The next one was even better. He had started the business part time and had a respectable start to his business with about 25 clients. Due to some medical issues with his wife, he had to get rid of his company and called me up wanting to know if I wanted his clients. Well, “of course” I said, and “what do I need to do?” Same answer. He just wanted to make sure his clients were taken care of and I obliged. This time it added about $1500 a month additional income. However, I decided to surprise him with a check for $1500 for his troubles. After all, I felt kind of sad for his situation.
Example 3
Now for the biggest and most recent one, about 43 residential and 5 commercial accounts. This equated to about $4500 a month gross income. This time was different. The owner had all his numbers on a spreadsheet, all his information and he knew what he wanted to sell his company for. Since this is still fairly recent, I can’t disclose the actual numbers, but I’ll give an idea of how we negotiated the deal. The first number he wanted was waaaaaay to much. It may have been OK for a new company, but not for an existing company. Here’s why:
For the amount of money he was asking for, it would have been about 10 times my current customer acquisition costs. Even factoring in the time frame to acquire the customers, it was way too much. What I had to do was decide for myself what the business was worth to me personally. I came back with what I thought would be a number way too low figuring, “Hey, if he doesn’t like it, he can find someone else to buy it”. Surprisingly, he took the offer after I explained my current cost of customer acquisition. To him it made sense.
Conclusion
There is no clear cut method for determining the value of an existing pooper scooper company. Many factors come into play. In the last example, if the owner was not in a hurry to sell his business, he just might have been able to get his first asking price from a new start up company. After all, starting a company with instant $4500 a month gross income isn’t a bad start. That would save a lot of time and hassle of starting a company from scratch.
It all boils down to what makes business sense for each of the parties involved, the seller and the buyer. If it cost me $35 to obtain a customer, then why would I pay $500? (Not the real numbers, but it gives you an idea) But if you’re just starting out and it costs you, let’s say, $100 to obtain a client, because you’re new, and you have lots of marketing expenses etc., then paying 3 or 4 hundred dollars per client may be worth it, especially if the seller will let you finance the cost with the profits!