A business buyer consulting client asked me today what he should pay for a niche construction company and if he should pursue a particular listing he was interested in.
The questions I asked him were the obvious: How much work in progress do they currently have? (in contracts and dollar amounts), What is the adjusted net income over the last three years? How long have the employees been at the company? Are they employees or "independent contractors"? Does this specialty construction business have ongoing work from ongoing clients?
The broker selling the business was asking approximately 3X the adjusted net income & a pretty good multiple for a construction business. Turns out there are not any "ongoing" contracts or work & that jobs usually come in from referral and current marketing efforts. The buyer did not feel comfortable pursuing the company since future business was not "assured" in the future.
Part of buying a business is buying the "goodwill" of a company. If you are going to risk being self-employed there will be risks associated with buying a business. Instead of paying full price for the business I advised this buyer to go back and offer a lower price with more flexible terms and conditions on the note due to the circumstances. I also advised that a long training/transition period should also be negotiated into the final deal.
Since the buyer has an engineering background (usually a risk adverse occupation) he wasn't willing to "take a chance on getting future business". His choice, but I advised him to look in the future for a business that obviously had a built in ongoing client base & but he will pay a premium for that factor in pricing and in the deal structure.
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