I have a chance to buy a local investors business, Im not sure how I should value it because theres no real estate or cash flow involved. He is asking 150K, I think thats high but I dont have a frame of reference.
Listed in the sale is,
business identity
primary business phone number
website
dirrectory listings for “ugly house buyers”
marketing (says generates lots of deals)
network of realitors that he generates residual income from
contacts with mortgage companies that hold their own loans
sell company with first deal under contract (this is not a big deal for us)
a non compeate agreement for 2 years
I know the guy does lots of deals, he claims 05 profit of 1.6m, 06 profit 1.25m, 07 profit 600K, which he says is 30+ deals per/year. He says the reason for selling is because he has over 50 rentals and that treats him well, hes also a retired fireman.
What I see that I dont like is that there is declining profits, and if we spend that amount of money 150K just to market we could pick up our number of deals. Well after typing most of this out it would at least be good for discussion.
I think 50 cents would be about right. Otherwise, I would just start your own company
I totally agree…His business is worthless with no assets,no cashflow…
Also typically a non-compete clause is 5 years +…Ask to see his tax returns to verify what he claims to have made…Also ask him to sign a 10 year non-compete (just to call his bluff) Because it’s my guess that he wants to find a sucker to buy his business because he now knows he can simply do this without paying any franchise fees and expensive up keep…So he looks for a dreamer to sell his business too…STAY AWAY from this deal…No one sells a great or even a good business…Trust me…I have extensive experience in the selling and aquiring of businesses…I’m %100 sure you can do the same thing without purchasing this business…
Long time childhood friend of mine has been in the dream selling business in a section of Florida that is notorious for housing these call centers…There is nothing better than selling dreams of great wealth to people…He is a multimillionaire…
The only reason I even entertained this was because my thought process, I was thinking if he is out of the market, and we pick up just part of the deals he was getting it could pay off for us. To be clear we do own a local rei business, this was just a thought to add to what we have. I also thought that we would instantly expand our network, which as been very helpful to our present business. I wouldnt pay this guy what he was asking noway no how, and the suggestion for a longer non compete is great, because he probably is going to do just that; sell it and start over doing the same thing.
Just for the sake of argument does this guy have anything of value? Im sitting here thinking what a homevestors franchise cost and thats kinda what this guy is trying to sell. I’ve got some buddies that paid for that(which I would never do) and they do quite well with it.
If you think there may be something of value here. Why not offer to buy it with HIM financing the purchase. It would seem to me that this could be a win/win for both parties. You finance the purchase with let’s say 50% of the profit of the first few deals until he gets full asking price. YOU put NOTHING down and have a “walk away” clause in the agreement, if he has NOTHING you can bail out. Your only expense is the advertising you paid for, which you’d be doing anyway if you tried to imitate his methods. He may be interested in a deal structured this way. Especially since your already in the business. YOU should have a huge leg up on someone just starting out, SELL that to him! If he’s as smart as he seems he should pick up on this right away. If YOU don’t perform he has the option to resell to someone else. If this REALY DOES generate deals for YOU, it’s in YOUR best interest to GET HIM PAID and OUT as quickly as possible, make sure you tell him that.
I’d lay it out there and see what he has to say. Remember…If your paying $150,000 out of future profits for a marketing machine that has been up and running SUCCESSFULLY for 3 years generating THOSE NUMBERS. $150K could be the bargain of a lifetime. Structured right, you can’t lose.
As you know it is very difficult to hide profits in real estate transactions due to all the paper trails and the fact that these transactions don’t take place in real cash. If he really is generating those kinds of numbers just have him show you a portfolio of the properties. It shouldn’t take you long to confirm everthing he has done with the local city or town halls real estate records.
If he refuses…then you know he’s full of it and you walk.
as mentioned, first and foremost, I would want to inspect the books of this company real closely to verify those quoted profit numbers.
like fdjake suggest, the idea of an “earn-out” clause is a much better way to strcuture the deal and more typical for these kinds of businesses. That clause could be X% of profit on first Z deals or it could be time based (e.g. 18 months).
also, his numbers for '07 are way off from '06 and '05 with good reason. A Blind monkey could made money in REI in those years, but these are much tougher times (more difficult times ahead as well).
pay for $150k for a business clearly in decline and may not be a suitable business model for market that lies ahead??? no thanks
Not unlike real estate, unless a business has hard and valuable assets (an auto dealership, or jewelry store, for example), or a brand name, its value will be based solely on cash flow. A good rule of thumb is to expect to pay 1.5 to 2 times the annual cash flow for an up and running service business. This is a very rough number but good for talking purposes.
Several of these “We Buy Houses” companies are franchises. I have owned franchises in the past (not real estate). You have several options here:
Contact the franchisor and open your own local office if a territory is available. The drawback here is that, unless you are in a huge city where other franchisees have done the groundbreaking, you will pay for name recognition out of your pocket. This is tough and very expensive (but the franchisor and subsequent franchisees to the area will love you). The benefit is that they provide the systems and training.
Contact an existing franchisee and buy his business. This is always the way to go in my opinion. The benefit here is that you can generally buy them cheap, especially if they’re having trouble. Some franchisees just want to walk away and will accept pennies on the dollar. The well run, profitable, businesses will still be low priced (1.5 to 2 times cash flow can be cheap). You’ll still get the brand name, systems, and training but someone else did the start-up work. One trick is to buy an out of town distressed franchise on the cheap, and then move it to your town if the territory is available Most franchise agreements will let the owner relocate.
Forget the brand name and buy an existing non-franchised business, as you are considering. Here I agree with the others. The problem here is you are not really getting anything. Is there an office with staff? Does the business have name recognition? Will you just be walking in and taking over. What happens if the staff leaves? You’re not manufacturing anything here. What are you really buying? What kind of training can you expect from the seller? It seems to me you buy a pig in a poke going this route. I bet it would cost substantially less than $150k to start your own company, especially since you are already in the business
Call a local business broker if you want more specifics on how to value a “We Buy Houses” business in your area. I bet I’m not off by much. Don’t buy thru a business broker though. It’s too easy to contact the franchisees.
This guy seems to have a business on auto-pilot making him $600,000 a year. There must be another reason he wants to unload it for $150K. He could hire someone to run it for $75,000 year.
Check to see if he tries this every 3 years. Sell then start-up again after 3 years.
If this is a legit deal, $150K is reasonable.
Good luck
Im glad Im a member of this forum, great help. I’m just courious if anyone here has
actually bought a business like this where there is no solid assets, and no cashflow (your last deal is your last deal), just yearly earnings?
We have moved on from even thinking about buying this business, but I like the conversation genarated around it, and who knows one day we might have to determan what to sell our company for.
I have visited some sites that basically set you up as a business and they range in price from $200 per/mo licencing fees to $10,000 start up fees, and then theres good old home vestors at over $50K. Are any of these really worth it, if all you are paying for is set-up? Now dont get me wrong, I know two people personally that do very well with home vestors, and they have recouped their money.
For argument sake what makes one better than the other when each company is ultimatly marketing to get the same deals?
Just thought I would through this up here, and see what everyone thinks.
I think that blue sky is a legitimate part of the value and purchase price of a business. But in this case, you are not getting any customer base.
Success in real estate has a whole lot to do with the personality of the investor, his negotiating skills, and his eye for a deal. In this case, the investor and his skills are not part of the purchase.
You aren’t getting a loyal customer base, and you aren’t getting the guy who makes the deals. So just exactly what are you getting for your money?
The BEST deals on property are the ones NO ONE knows about.
I consider the MLS system no different than a car dealers lot. Once it’s on the lot/MLS, it’s fully priced. The key to our business is GETTING those homes BEFORE a realtor can. Once a realtor is involved they do what they are paid to do…get the owner the most money they can for that home. If that homeowner calls ME, I am under NO such obligation. If $50K buys a $125K home?? They sign a sales agreement NOW, and we close THAT week!!
This type of businesses (the one in your question) simply MARKETS the fact that YOU WANT TO BUY HOMES!!
That’s it…As Tatertot said, it’s comes with no customer list, no owners experience, it’s all Bluesky.
If you have never marketed to a customer base before this could be a good way to learn how a professionally run system works. That’s all Homevestors are…a marketing system that works.
You can do the same thing on your own??? Of coarse…But…The REASON people do well with businesses like Homevestors is the francise REQUIRES them spend money on a proven marketing system. It’s in the franchise agreement, and because someone has already spent $50k FOR that franchise IT GETS DONE. Most independants won’t spend in a YEAR what a Homevestors franchisee will spend on adverising in a month.
It’s all about LEAD GENERATION!!! We all know how this business works…if you get 100 calls a month from people looking to sell their “UGLY HOUSE” you are definitely going to BUY a certain percentage of those homes.
It directly relates to the marketing campaign you put out there. If you generate 10 calls a month, then obviously you aren’t going to buy 25 homes with THAT amount of marketing.