Guest post from Jeff Thompson, Owner of AKCrossFit in Atlanta, GA.
It’s only worth what someone is willing to pay. But if you’d like a method and some thoughts:
One way is to take the current value of the assets, then add the cash flow from future profits and discount them to today using a NPV calculation. The NPV or Net Present Value is the value in the present — of money you’ll get in the future, because getting money in the future is less valuable than the money you have in hand today.
For example, let’s say your equipment, furniture, and everything else (used) is worth $20,000. Further, let’s say your box after paying everyone and everything (**including yourself and other owners a market rate for managing and/ or coaching**) gives a profit of $3,000 per month.
That gives a NPV of $136,500. That’s 5 years expected to return $36,000 per year, with 10% interest discounted back to today(which is a common rate for NPV calculations.) Maybe 5 years is too long – maybe 3 is correct, maybe 2 – depends on how long the business has been there, and how long you think it will last, etc.
This would give a price of $156,500 after adding the 20,000 in assets. But that’s a value without considering the risk that those profits might not ever appear. It also doesn’t consider any of the other factors below. So you start from there and start subtracting.
The question then is, what are the risks, and would someone really pay that for your business, given all the particulars? Here are some of the factors:
1.) Is that $3000 a month / 36K a year in profits consistent? Going up? Going down? All over? How long has that been the average, and what’s the variance? What’s the expectation for the future? If it’s not consistent, or there is not a long track record, or it’s flat or declining, you might need to use a different number.
2.) What’s the barrier to entry? Why would someone buy your box at a high price, rather than just open their own box, because they could do that easily for 20K-30K (if they leased their equipment with a $1 buyout.) They wouldn’t expect it to be profitable for a while, and they would have to staff it, find a location and do a ton of work, but it’s an option. The new gym would be unproven, but might be profitable after a while – who knows.
3.) What are the terms? Are you willing to finance a purchase? If so, for how long? Are you willing to part owner for a while and get paid some of the price out of profits? Are you willing to be a silent partner? Are you willing to help coach or manage for a while? Maybe that’s part of the deal. What are you really trying to accomplish?
4.) Do people that might buy your gym have that kind of money? How do business loans work where you live? How hard would it be to find a buyer? Are you in a hurry to sell? What’s your personal situation?
5.) Other risks to the predicted profits might be: Will there be price erosion or an oversaturation of crossfit boxes (or knockoffs) in the area? What will the new owners likely think about their chances to keep it profitable? To what degree is your current success personality driven? Will clients jump ship if you’re not there? Will employees leave if the owners change?
6.) Is the lease assignable? Will the landlord rent to this new person at the same rate, or are you allowed to sublet or assign the lease, or do you own the building?
Lots to think about. I’ve done this stuff a bunch with a lot of different kinds of small businesses.
Put in 0 for initial costs, and 0 in for years unused
Contact Jeff at Jeffinator@gmail.com