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Fair market value of dive shop

Discussion in 'Business of Diving Institute' started by vjongene, Jun 30, 2017.

  1. vjongene

    vjongene Barracuda

    # of Dives: 1,000 - 2,499
    Location: Willemstad, CuraƧao
    372
    15
    18
    I am thinking about buying a dive shop in the Caribbean, and trying to figure out what its fair market value would be. It is a well-established operation with a good reputation. Most of its business is from courses and guided dive trips, plus some equipment rentals and sales. I have access to its recent financial reports. I also know the asking price.

    Does anyone have pointers on how to estimate the value of a dive shop, given its basic financials (profit and loss, balance sheet, etc)? Any advice would be much appreciated.
     
  2. Bubblesong

    Bubblesong Marine Scientist

    # of Dives: 50 - 99
    Location: Massachusetts
    2,269
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    Several years of government Tax records and payment history would show true profits and outstanding tax liabilities. Police/fire station records would show how safe the business and area are.
    Checking import duties records office would show both cost records and import tax trends.
    These records would be obtained independently of what dive business owner gives you, to verify the healthiness of the business.
     
  3. Malpaso

    Malpaso Solo Diver

    # of Dives: 200 - 499
    Location: MA/CT
    674
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    The easiest way to decide is to take the annual average profit over the past x number of years, and decide how long you want to take to make back your purchase price. There are many other detailed ways of calculating the value of a business, e.g., x times revenue, # of turns of inventory, x times equity. Variables include payroll v. contract workers, sales v. services, seasonality.
    Not knowing your background, spending the money to have an accountant versed in this industry to do the due diligence might be well worth the cost.
     
    Bubblesong likes this.
  4. Bob DBF

    Bob DBF Solo Diver

    # of Dives: I just don't log dives
    Location: NorCal
    6,377
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    Find a realtor or real estate attorney that specializes in commercial property. You need to have a professional that knows and has experience in what to look for in these deals.


    Bob
     
    tep likes this.
  5. sunshower

    sunshower DIR Practitioner

    # of Dives: 200 - 499
    Location:
    145
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    A multiple of the profit makes sense to me. I would echo the above suggestions to bring in some outside help; avoid getting into a financial mess because didn't have the right info to make the decision. I'd also talk to shop owners in your local area; they must be full of good info, some of which would be transferable; things to think about etc; maybe share their thoughts on how they'd value the business if they were buying it; get their opinion on the appropriate multiple. Sounds like fun, good luck!
     
  6. Clark Fletcher

    Clark Fletcher Barracuda

    # of Dives: 25 - 49
    Location: Hickory, NC
    215
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    Fair market value is really what you're WILLING to pay for it. And, that depends largely on your intent.

    First, you have to decide whether you're buying it as an investment and are going to pay someone else to run the operation for you, planning to move to the Caribbean and run the dive shop yourself with it as a primary source of income, or planning to retire to the Caribbean and run the dive shop as a hobby.

    Once you know that, then you can look at the shops average profit margin as a starting point. When you look at the profit margin, you must consider if the basis for that profit margin will remain the same after the purchase. Some of the questions you have to ask when you're considering that are:

    1) Is the current owner also running the shop and paying himself a salary/wage that is part of the current operating costs? If you're going to pay someone else to run it for you will that cost remain the same or increase after you purchase? If you're going to run it and it is a primary source of income, can you live on what the person currently running the shop is being paid?
    2) Is the current owner making payments on the property or any of the assets of the shop and are those reflected in the current operating costs? If so, and you're assuming that debt in the sale, in addition to including that in the after-sale operating costs, you'll also need to include any debt you incur for the seller's profit from the sale (assuming he is making a profit and you aren't paying cash for the full purchase price).
    3) If you are retiring to the Caribbean and running the shop yourself for something to do, then do you need income from the operation to live on or is your retirement income sufficient in and of itself?
    I could go on but, I think this will give you a good starting point of things to think about. And, that should help you determine what you CAN pay for it and what you would be WILLING to pay for it.

    Hope this helps.
     
  7. Rred

    Rred Manta Ray

    # of Dives: 200 - 499
    Location: In a safe place
    1,058
    441
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    vj-
    If you don't have a local small business association or a CPA you work with, ask a local reference librarian which books to read. There are standard practices that businessmen use to evaluate the worth of any business. One rule of thumb is that IF it is an established business, and there are no issues (like leases, zoning changes, etc) that may impact it, the business may be valued a 5x the average after-tax net profit based on several years, adjusted for growth curves. Others would say that you can get 10% return on your money from many sources, so the price must be less than 10x your annual profit from owning it.
    If you are asking these questions...unaware that inventory, etc. also impact the numbers...you may be looking at it from love rather than economics. Dive shops can be terribly competitive and unprofitable. Find a CPA or other professional who can establish a value and advise you on other complications that may be involved. Including reputation and cost of hired help.
     
  8. DepthCharge

    DepthCharge Solo Diver

    # of Dives: 500 - 999
    Location: upstate NY & Lake Worth Fl.
    362
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    I agree with Clark Fletcher. Esp. his second paragraph. As far as running most of it yourself.....have you ever worked at a dive shop? If/when I retire I wouldn't want to be working that hard. Just doing the management would be OK, but not all the other stuff. (or even 1/2 of the other stuff:shakehead:)
    Later,
    John
     
  9. Edward3c

    Edward3c Instructor, Scuba

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    I was offered the dive operation on one of the Inner Hebridian islands. Having gone through the accounts it was clear the business was a secondary income or hobby. I had to be diplomatic in walking away from it as they were related to my wife.
     
  10. mi000ke

    mi000ke Manta Ray

    # of Dives: 100 - 199
    Location: Massachusetts & Grand Cayman Island
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    I've owned/run/sold a few small businesses (not diving related) and have many years of management consulting experience, and unless you have experience running a small business and/or have worked in a dive shop (and preferably both) you are looking at a very risky proposition. I could write pages about what to look for and how to value the company (and you should pay attention to Clark Fletcher's comments, plus there is a ton of stuff you can read out there in the world), but if you were my client I would spend our first meeting trying as hard as I could to talk you out of this. If you still insisted on going forward after that, then the fun would begin.

    Financially, to grossly oversimplify, you need to figure out how much in total you are putting in (cost of business plus additional near-term investment for new equipment, immediate repairs, debts that are near due, etc.) and how much will be left over each year (AFTER paying yourself a reasonable salary, assuming you value your time). (This will require doing a lot of serious forensic accounting.) Divide the leftovers by the total you put in, to compute an annual return on your investment. I earned 14% return last year in the financial markets without doing a lick of work and taking only a moderate risk. You will be working really hard and taking a big risk. Hopefully your number is way more than 14%.

    And the best case scenario for buying a small business is to find an aging owner without children who want to go into the business and who just wants to get out, and the business has a great reputation/brand image. And in general, unless you can see something about the business that is undervalued and that is not obvious to other potential buyers, or you have some kind of an "in" with the seller, there will be no bargains.

    On the bright side, while I know the owners of many small businesses that have failed, dive shops in the Caribbean all seem to stay in business a long time. But I wonder how much the owners make per hour. Hope it's more than you'd make flipping burgers.

    Oh, and not to be harsh, but the fact that you are asking these questions on SB suggests that you might not be ready to take the plunge. If you are serious, hire a professional advisor who has experience valuing small businesses.
     

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