How to value the business part of this?

[2rocky]

I've always kind of dreamed of finding a piece of land and a home that has a business as part of it. Maybe a ranch, maybe something else, like a store or manufacturing business. I could run the numbers on rancjhing pretty well but another type of business, I'm not sure.

So when I saw this, I was intrigued, even though it is way above my weight class financially.

What kind of numbers from the business makes this work ? Let's treat it as a case study..

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[TakeABreakAndTouchGrass]

There are experts to value businesses based upon cash flow. Based upon industry it can vary wildly from 1x annual gross income to 10x net cash flow after operating expenses. Since the purchase includes real estate, that complicates things even further. In my world, we'd look at something like this to generate net income sufficient to cover debt obligations at a ratio something like 1.30 - 1.50:1 (EBITDA to annual debt obligations). I would assume you're looking at financing somewhere in in the realm of 60% of purchase price as well.

There are a bunch of other figures, including liquidity to debt, inventory turn time, liquidity to payables, AR to AP, etc. Long story short it's complicated. And a company like this probably places a value on "goodwill" with the local community and the business name as well.

 

[Pucky Freak]

Another consideration in addition to the business operation value and the realty is material business assets, such as gun parts, machines, etc, since someone would be buying not only realty and an operation, but the “stuff in the containers” to continue manufacturing.

 

[SAJ-99]

You would need to see the books. You could do a "sum of the parts". Start with the RE. The picture they show doesn't look like 180 acres but you can determine the value of an acre in Big Timber and apply that price to the RE piece. The business part is more complicated. The company doesn't make many rifles so I assume they are expensive with an emphasis on quality. Input costs and salaries and sales price are easy. How involved is the current family? What are sales channels? How does the public perceive the quality? there are dozens of ?s you need to ask. Then you have to determine your strengths, which may be equally difficult. If you don't know how to make a gun, you need to retain the people with those skills to maintain quality.
Not sure how related it is to C. Sharps Arms.

 

[npaden]

First you need to look at the tangible assets that are not really part of the income producing piece of the business. Essentially the real estate. Land and Buildings. That value should be relatively easy to come up with.

Next piece of the valuation would be inventory, receivables, etc. Inventory can be a tricky one as it should be more based on realizable value than cost.

Last piece of the valuation is the business as a going concern. As mentioned, the most common valuation technique for this is a multiple of cash flows. For companies with high recurring revenues the multiple will generally be higher than for companies with a lower recurring revenues. (i.e. a CPA firm has a lot of recurring revenues where people come back year after year and this is a pretty solid revenue stream, compare that to a real estate company where people might use them to buy or sell 2 or 3 houses in a lifetime).

Some tricky parts of a valuation on a small company like this is the owner salary. You need to make sure where that is in the cash flow model before applying any factors, especially if the owner is heavily involved in the production and you would be required to replace them with a paid employee.

Another thing to make sure is that any equipment involved in production isn't valued in addition to the cash flows. Say you have $500K of equipment that is used in the making of the rifles. If you are paying based on cash flows, you wouldn't make that calculation based on cash flows and then after it was computed add the value of the equipment involved in the production. You have already valued it when you did the cash flow model.

On something like this a lot of times key long term employees can be a big part of the value as well. You would need to verify employee retention.

One method that is used fairly frequently in purchasing CPA firms is a future cash flow model. This takes some trust on the part of the seller, but you pay based on a factor of actual cash flows that come from the acquired firm over the next X years. This works best when the owners are willing to stay somewhat involved over the initial transition period. They make more money on the sale if they can get more of their clients to move to the new firm. If they don't get their clients to move to the new firm they don't get paid for them. You are generally going to have to pay a higher multiple on a transaction like that but it is much safer from the purchasers perspective.

We've purchased 3 CPA firms in the last 10 years or so and we've seen this work very well where the firm we purchased actually had revenue growth during the acquisition period so they got paid very well and we had one where a key employee of the acquired firm left and took several clients with him and the way the deal was structured we didn't end up having to pay for those clients that we never ended up with.

On something like the business above, working through some type of structured payout based on future revenues might be an option that could appeal to both the buyer and seller.

Just some thoughts. The first step would be to get a look at the books and then sit down and talk with the seller and possibly any key employees. You need to get any employees 100% on board with the ownership transfer or it isn't going to work.

My 2 cents. Nathan

 

[LaSportsman]

The advice above is an amazing example of the talent and knowledge at Hunt Talk!

 

[LuketheDog]

The first step would be to get a look at the books and then sit down and talk with the seller and possibly any key employees. You need to get any employees 100% on board with the ownership transfer or it isn't going to work.

This is HUGE, a business like that will fail without very experienced folks in the building. Since it's a niche trade, I bet they'd stay as long as the new owner doesn't threaten immediately rock the boat, but you never know. I believe I heard it way back on a MeatEater podcast, but when Weatherby moved to Wyoming from California a very large proportion of their employees also moved with them, and it made the move and rebuild much easier than it could have been.

 

[LuketheDog]

I'd take that Quigley poster off your hands if you buy it, my mom has a thing for Tom Selleck, would be a great Xmas gift for her

 

[NEWHunter]

Hi! I suppose that it is rather an actual idea, especially in the post-pandemic period. I wish you good luck in your future business and as an entrepreneur, I will give you simple advice. It is really necessary to work with modern soft like CRM systems. It really will optimize your work and give you results. If you will like it, you even can connect with the salesforce customization service that will make the custom version of this soft exactly for the features of your business.

Welcome to HT. Personally, I’m all good on CRM - I bought some at $188 the other day.

 

[BrentD]

The advice above is an amazing example of the talent and knowledge at Hunt Talk!

This is true, but if you think it is only a business, you will probably not do well in this case.

Shiloh Sharps is as much a culture as a business. If you do not understand that and partake in that culture. I do not think you will last. This is, without question, the premier gunmaker in America, but it's also one where the people that support it are loyal to the Bryan family as much as the rifle. If you are not especially interested in all aspects of Sharps rifles today, from the hunting, plinking, and competition with these rifles and the community of people that buy, one after another after another, I think you should probably buy Cooper Rifles instead of Shiloh.

Also keep in mind that the average Shiloh customer is old and getting older - fast! Study the demographics of the customer base before you dive in.

Just an opinion from the cult side...