Smart Money: Small-revenue businesses carry little value

Bruce Williams is a national radio talk show host and syndicated columnist.

Dear Bruce: I would like to purchase a service business. I know you have said small businesses are not worth as much arithmetically as larger businesses, dollar-for-dollar. This is a service business repairing communications equipment for TV stations.

The owner, at 73, has been thinking about selling, but now he really wants to get out after his recent heart attack. The revenues have increased nicely over the last three years.

There is no real estate involved. The company is netting between $30,000 and $40,000 a year and the owner takes a $75,000 salary.

I am 54 and know the business. I earn about $55,000 a year. The owner wants $250,000. My CPA and bankers think it's worth it. What do you think? P.B., via e-mail

Dear P.B.: You're making $55,000 today without any investment. The owner's taking out $75,000 and I assume he's not putting in a tough week. Adding the $75,000 he is taking to the business net of $35,000, is $110,000, his end. If you buy it you are going to have to replace yourself with another body for $50,000, which gives you about $60,000 about the same as now with no investment. The only saving grace might be if this business continues to grow.

The other variable is how much paper is he willing to carry? If he's willing to carry almost the entire purchase price, $200,000 might be a decent number. Walk very softly. There's no point in buying a job.

Dear Bruce: Last December, we purchased a business for $83,000 and later found out that the software was not compatible with the printer. Nothing turned out like it should. We could not sell any products. Once, when I called for technical support, I heard him in the background telling his help to get rid of me. That was the final straw. We asked for our money back and the seller refused, stating he could fix the problem. The last part of January, he told us he had the new drivers and profiles for the software. This was after he twice tried to fix it. He states that all other machines are up and running fine. Now we are ready for the fixes, but he states he will need an extra $900 for the extra expenses he has incurred to fix the problem, including a lawyer as he thought we were trying to sue him. He told us that if we did sue him he would take us to federal court and that he can and will outspend us. I believe he knew it would not work when he sold it to us, and I think I can prove it. Any advice? Reader, via e-mail

Dear Reader: Your letter doesn't give me a clue as to what kind of business you purchased and what kind of material. At the very least, the guy you are dealing with (as you described the situation) is clearly unscrupulous and, at worst, a crook. He is trying to extort even more money from you, while you, apparently, have received nothing worthwhile.

The threats about a lawsuit are largely meaningless.

If you feel that you have been defrauded, then consult an attorney. I see no purpose in giving this individual any more money.

Dear Bruce: I am 57 and have been in sales management for the past 20-plus years. My profession has been good to me, but the new generation of management is just about to drive me crazy. I have been thinking about buying into a franchise and was curious as to your general feelings on the franchise industry. B.F., via e-mail

Dear B.F.: Franchising has a lot to recommend it and a lot to be considered before one gets into it. On the plus side, you are getting involved with people who know their industry, assuming you choose an established franchise. They've made the mistakes and they can help you avoid those mistakes.

In many instances, the difference in this experience can tip the scales in your favor toward success rather than failure.

On the other hand, if you are a free spirit, a franchise very likely is not for you. No matter how good an innovation may seem to you, you will not be permitted to make that change in most cases unless the franchiser approves. You may have the greatest idea for a unique syrup in a pancake franchise, but you will not be permitted to serve it.

Uniformity is what franchises are all about.

Look well and choose well. If you are a corporate type and can deal with the conformity and recognize that you will have a partner for life, a franchise may be just the ticket for you.

If, on the other hand, you chafe under any type of restrictions, take a careful look before getting involved.

Dear Bruce: We are 50 percent owners of a small family restaurant. In the near future we may be given the opportunity to buy the other 50 percent.

Is there any kind of business model to use to try and figure what a reasonable buyout amount would be or what an existing business is actually worth?

The business brought in around $230,000 in gross revenue last year. We lease the building so there is no real estate involved. There is about $20,000 in equipment as assets and there is a debt of around $65,000. Any advice you may have would be greatly appreciated. J.C., via e-mail

Dear J.C.: It would seem to me that the business has little or no value. It grossed under $250,000, you have a very small amount of physical assets and a debt of around $65,000.

You didn't mention what the partners are taking out of this business, but it can't be very important money given the relative modest gross.

A very modest payment to your partners would be more than generous, assuming that you take on the debt (and the lenders will allow the other family members to get off the hook).

It pains me to tell people that their enterprises have little value, but nothing would be served by stroking you.

Dear Bruce: I have been a teacher and have run a small business for years. A few years ago I heard from a friend about a small company that builds virtual reality games for theme parks. The company started with one site and has several others open or in the process of opening. This is a company where the owners take investments, and we get quarterly profits, which have been decent.

We're supposed to be going public in late May. I have already invested around $62,500. They are running in the black. They are working on having the first home-version virtual reality game available, hopefully, by Christmas.

I've mostly done safe mutual fund investing. Even with the capital gains hit, I'll be withdrawing my money from my mutual funds in less than a year. If the product opens well on the market, should I grab a little profit and run? I'm just a bit nervous and I don't want to lose everything.

I know the stock market can be volatile, but they seem like an up-and-coming company. Any ideas would be helpful. D.B., Odessa, Texas

Dear D.B.: You say you've only done safe mutual fund investing, but this seems pretty adventuresome and there is nothing wrong with that.

You didn't indicate how relative the $62,500 is to your entire portfolio. All that having been said, there's nothing wrong with the idea of "keep a little, sell a little." If you feel the company is going someplace, why not retain a position? You probably will get it at a decent price on an IPO, although many IPOs go down for a time after the initial spurt. Watch it very closely. If there is a spurt, sell half of your position, take your profit and hang on to the rest. A very wise man once said that nobody ever went broke taking a profit.