How much is a customer base worth??

[R2006]

Hi guy's

Got a quick question. I've had my company for 23 years now, I learned it from my father in-law who is now ready to retire and would like to sell his operation to me. He's been around for 45 years. We are tyring to put numbers together but we seem stuck on how to figure the value of his existing customer base. I would like to see him get fair compansation as he has been good to me over the years, and will need this money for retirement, but I dont have a clue as to how to figure this one out. We are going to see a small buis. lawer but was wondering if any of you had any idea's, or mabe questions i should ask when i get there.

thanks.

[peter d]

A customer base is worth $0.00.

[ITO]

A customer base is worth $0.00.

I agree................

[peter d]

So you might be wondering why a customer base is worth absolutely nothing in calculating the value of a business. For one, a customer base is here today, and gone tomorrow. Furthermore, unless they are under contract or some other written agreement, they are under no obligation to buy your services.

[wireguru]

yep..worth zero. forgetting the fact that its family for a minute, why pay for something you can just go take?

[mdshunk]

Any accountant who is also a business valuator will tell you that a customer list is worth exactly zero. I agree with the others.

[1793]

Hi guy's

Got a quick question. I...my father in-law who is now ready to retire and would like to sell his operation to me. He's been around for 45 years. ...lawer but was wondering if any of you had any idea's, or mabe questions i should ask when i get there.

thanks.

Is his business one man or is it a company? I ask because if his business is small, maybe only him, then his customer base may very well be because of him, without him there may not be any business.

[splinetto]

With no business schooling, accept for Accounting 101, in college, I would assume you would need to base the selling price of the business on the companies profits over the years...And in those profits the worth of the customer base will be included...I would venture a guess there might be some multiplier to figure it out and possibly subtrating liabilities to get the companies worth

[mdshunk]

Most businesses that are for sale are worth exactly as much as their assets. Unless there's systems in place making money for you every day while you do other things, the business itself isn't worth squat.

[splinetto]

Most businesses that are for sale are worth exactly as much as their assets. Unless there's systems in place making money for you every day while you do other things, the business itself isn't worth squat.

So if you were to make an offer on an exsting business whether its been around for 2 months or 40 years your offer woud be based soley on the co assets.....Wouldnt the name hold any value positive or negative.....

[mdshunk]

So if you were to make an offer on an exsting business whether its been around for 2 months or 40 years your offer woud be based soley on the co assets.....Wouldnt the name hold any value positive or negative.....
You betcha. Past profits are no guarantee of future profits by any stretch of the imagination. Doubly true if it was a one-man show or a small shop with an owner who worked with tools. The business described, with the information we have so far, is worth exactly as much as its assets are worth.

[nakulak]

a business is worth one thing, and one thing only: the amount that someone is willing to pay for it. A good test for the value of a business is to get the balance sheet for the business, along with the listed assets and past tax return, and go to the bank to find out if you can get a loan for the price you intend to pay. the banker will be very helpful in letting you know exactly how much the business is worth.

[mdshunk]

The only time a business is worth more than its assets is when you're also buying an in place "system". Doesn't matter if they have 50 employees to each bring in 1000 dollars worth of invoices every day. They could all go to work for someone else the day after you buy the place.

[brian john]

90% of my work is for 10% of my customers, I think a good customer base is priceless.

My wife recently bought a business, from day one she has been making money from the ex-owners customers.

[Sparky555]

There's not much information to go on here. The value is the assets with consideration for repeatable income & profits.

Other information needed:

How many employees? (Is this Joe's Electric & Joe is retiring?)

Does everyone earn a fair salary for their job? (No free wife accountant, or skip a paycheck when business is slow).

Have fair benefits been paid? (Health, retirement, etc. It's not a good sign when you say this sale is his retirement. Will you be looking to sell it for your retirement, or do you have normal annual contributions to your retirement).

Any maintenance contracts?

Annual net profits?

The customer base isn't worth anything IMO without repeating sales & profits. Is this a few thousand customers in an updated accurate database, or what?

[220/221]

If you want good electrical advice, talk to an electrician

If you want advice on selling your business, talk to a business broker.

In my recollection it used to be worth around 3X to 5X the annual earnings (net profit plus perks/benefits)

Now MAYBE it's 2X.

Things are not what they used to be a few years ago. You will be getting a deal.

[ivsenroute]

It is worth its physical assets only.

As far as customer base, ONLY if there are renewable contracts in place such as service agreements.

A pest control company has renewable contracts for service work and that type of business is worth approximately 75-125% of its annual revenue from renewable contracts.

[ohm]

If you want good electrical advice, talk to an electrician

If you want advice on selling your business, talk to a business broker.

In my recollection it used to be worth around 3X to 5X the annual earnings (net profit plus perks/benefits)

Now MAYBE it's 2X.

Things are not what they used to be a few years ago. You will be getting a deal.

Great answer! If the company has a good name and it's staying in the family and very little is changing, other than the owner..it has some value.

You might ask that your father-in-law be on some sort of retainer to help in the transition. It would also make him and your wife feel good.

[R2006]

Thanks everyone for the responses so far, a bit more information, small shop (owner and helper), no repeat contracts, just a good client list. We are planning for him to come to work for my Co. for a few years to help with a smooth transition. And we are planning to see our accountants to answer this question. I was just curious as to anything I might be missing, thanks again and keep the thoughts comming.

[jimmyglen]

I dont know how you could says its worth ZERO

maybe in the most technical aspect

but in the real world of you think you can keep his customers and make money then I would see some real value in that

getting customers (advertising etc) costs money so how is having customers not worth anything?

just my 2 cents anyway

Oh and if any of you guys want to see your company to me just for the price of the assets - let me know (esp. if you have large customer bases)

[peter d]

I dont know how you could says its worth ZERO

maybe in the most technical aspect

but in the real world of you think you can keep his customers and make money then I would see some real value in that

getting customers (advertising etc) costs money so how is having customers not worth anything?)

So let's say you buy a business and pay for the perceived value of the customer base. What happens when the customer base dries up because they decided to use a different EC? Now you just threw away money on a worthless asset.

[petersonra]

So if you were to make an offer on an exsting business whether its been around for 2 months or 40 years your offer woud be based soley on the co assets.....Wouldnt the name hold any value positive or negative.....

mostly no.

it sounds to me like a one man band kind of place. the files may have a non-zero value, but it is not very much.

only an ongoing and profitable business actually has any real value, and even then it is not anywhere near as much as you might think.

most small businessmen have learned how to acquire business. most times he is not going to be able to transfer that ability to you. you will need to learn for yourself.

[Greg Swartz]

A customer base is worth zero.

Lets face it, no one has to choose this electrical company again, the next time they need electrical work.

So, unless you have service contracts in place, that will stay in place, the base is worth zero.

There is a EC in our area trying to sell his company that does about $400k a year. He is selling his company, and customer base for $75k. No tools / equipment / employees come with the package.
H's been trying to sell it for 2 years...

That just does not make good business sense.

When you go into business, you are not just an electrician... you are a businessman. You have to make those decisions that you never did as a Journeyman or Foreman or Superintendant. Everything comes down to whether or not you are going to make money. It's unfortunate, but true.

[Greg Swartz]

Couple of things I forgot:
Since this is family, you've got a lot more at stake: i.e.: your wife and kids... making the rest of the family happy...
If your father-in-law stays on, with you at the helm, helping make those transitions with the business executives he made contact with... then your customer base could actually be worth something.

However, I have an acquaintance in the process of taking over a Fire Alarm company. All of his investors tell him that a customer base = $0
They are willing to count his monitoring contracts, but that's it. Contracts only.

[petersonra]

Look at it this way.

Suppose someone you did not know came to you one day and offered to sell you their business if you would just hire him and let him work for you. Say it was identical to the business in question in every way except that you do not know the guy.

How much are you going to be willing to pay him to come work for you.

Keep in mind a small business that nets the owner $50,000 is a loser if you have to pay someone $60,000 a year to do the work the previous owner was getting $50,000 for.

Most small businesses are not all that profitable. They are just jobs, often netting the owners less than they could make working for someone else.

[Greg Swartz]

Most small businesses are not all that profitable. They are just jobs, often netting the owners less than they could make working for someone else.

Ouch!
How true...

[SmithBuilt]

What happens when the customer base dries up because they decided to use a different EC? Now you just threw away money on a worthless asset.

This could be true with any business.


If you have repeat customers then you have a customer base. It is worth something if you can open the doors the day after buying the company and actually have business/backlog. It may not be worth much but something.


I personally would rather have good customers(if there are many) than the assets of the company.


Companies are bought every day just to acquire the customer base. I realize it's not worth much in a small shop, but disagree that it is worth nothing.

[petersonra]

Companies are bought every day just to acquire the customer base. I realize it's not worth much in a small shop, but disagree that it is worth nothing.

It may be worth less than nothing. The whole business might be built around a model of the owner working cheap to keep those customers. That is a fairly typical model for a one or two man shop.

That kind of customer list is worth nothing at all.

[SEO]

.

That kind of customer list is worth nothing at all.

I agree and if you take them as customers they will expect you to do the same as previous owner.

[peter d]

Most small businesses are not all that profitable. They are just jobs, often netting the owners less than they could make working for someone else.

Aint that the truth. I never understood why someone would run a business only to make equal to or less than what they could by working for a paycheck someplace else.

[SEO]

Aint that the truth. I never understood why someone would run a business only to make equal to or less than what they could by working for a paycheck someplace else.

I've been asking myself that for the last 35 years. But I would do it all over again without question.

[peter d]

I've been asking myself that for the last 35 years. But I would do it all over again without question.

Huh? You mean run a business to make paycheck wages?

[480sparky]

Aint that the truth. I never understood why someone would run a business only to make equal to or less than what they could by working for a paycheck someplace else.

Because 'working for the man' can only net me so much a week. No more. Period. Sure, I can work OT, but I get paid more only because it's mandated by law.

Working for myself, yes, there's times I make less than I did as an employee. But other times, I get a job that goes far easier than I ever anticipated, took less material, and went super-smooth, and working for myself I have a killer profit-sharing program!

I don't feel the need to go out and 'be an electrician' 40+hours a week just to pay my bills. If I get todays' project done at 2:00, I don't feel one bit guilty about going home early.

Simply put, there's more to it than just making money.

[220/221]

Those that say a customer base is worthless are wrong.

It takes a LOT of time and a LOT of effort to build and maintain a customer base and a LOT of new work is via referrals from your existing customer base.

As far as a dollar amount, there are a LOT of vatibles to factor in. Put pencil to paper and figure out how much time/money it will take to achieve the revenue equal to the existing client base. I am a small time bread and butter type contractor and it took us a decade to reach the 1 mil mark.

[satcom]

"How much is a customer base worth??"

Nothing if the customers never calls you again, the way they look at the value of an electrical contracting business, is the value, of signed contracts for all existing, and future work, plus all the assets, many contractors build assets by investing in commercial property, so when they sell or retire, they have something to show for their years of hard work.

You can sell a business with contracts, Good Will no matter how many customers you had in the past is worthless.

[emahler]

90% of my work is for 10% of my customers, I think a good customer base is priceless.

My wife recently bought a business, from day one she has been making money from the ex-owners customers.

maybe, but if I were buying your business, how would you guarantee that those 10% of your customers would continue to use me? how long could you guarantee it? how could I be sure to get my ROI?

[peter d]

It takes a LOT of time and a LOT of effort to build and maintain a customer base and a LOT of new work is via referrals from your existing customer base.

As far as a dollar amount, there are a LOT of vatibles to factor in. Put pencil to paper and figure out how much time/money it will take to achieve the revenue equal to the existing client base. I am a small time bread and butter type contractor and it took us a decade to reach the 1 mil mark.

That is all well and good, but once again the instant the business changes hands there is no guarantee whatsoever that the customer base will stay intact.

[480sparky]

I spent the better part of my adult life banking at my local bank.

As soon as Wells Fargo bought them, I closed all my accounts and emptied the deposit box.

How much do you think Wells Fargo paid Brenton Bank for me?

[SmithBuilt]

there is no guarantee whatsoever that the customer base will stay intact.

Agreed, but it's better than starting from nothing. Treat them right and there's a good chance of keeping most of them.

[brian john]

maybe, but if I were buying your business, how would you guarantee that those 10% of your customers would continue to use me? how long could you guarantee it? how could I be sure to get my ROI?


There are no guarantees in life. BUT if you do you homework, have a good head and treat them fairly having an existing customer base is better than starting off cold.

[peter d]

There are no guarantees in life. BUT if you do you homework, have a good head and treat them fairly having an existing customer base is better than starting off cold.

Yes, but I'm not paying a nickel for them. Maybe someone else will, but not me.

[emahler]

There are no guarantees in life. BUT if you do you homework, have a good head and treat them fairly having an existing customer base is better than starting off cold.

without some guarantee, it's not an investment....it's a gamble...an uneducated gamble at that...

[peter d]

Another issue to consider: A "good" customer base in one contractor's eyes may be a bad customer base in another, once again proving that a customer base has no value.

[fisherelectric]

A customer base may be of questionable value, but how about a business phone number thats been around for 20-25 years. I get a lot of calls from people who say they got my number from somewhere, word of mouth, a panel sticker, an old card etc. Or would you consider that part of a customer base? I have heard of some of these franchise operations offering big bucks for numbers that have been out there a long time.

[Brady Electric]

Great answer! If the company has a good name and it's staying in the family and very little is changing, other than the owner..it has some value.

You might ask that your father-in-law be on some sort of retainer to help in the transition. It would also make him and your wife feel good.

I agree with the form.
A customer base is worth $0
I bought a sand business years ago to deliver sand to brick layers and paid the owner a small sum for his business, which he went around and encouraged everyone to do business with me. I'm glad it didn't cost me much because in about two months some customers left because of not understanding the old owner which had the business for about twenty years was never around and went to another trucker. Again customers $0 worth.
You can run customers off in a week.
The only way customers are worth anything in this case is if father in law's name is still involved in the business as quoted above.
As usual this form has good advice, you can't beat years in the trade and putting thoughts together for good advice.
Semper Fi Buddy

[iwire]

90% of my work is for 10% of my customers, I think a good customer base is priceless.

It's great for you, will that same base be good for a new guy?

My guess is that the 10% of the customers that provide 90% of you work call you personally when they have questions or problems, not your company.

If you and your partner sold the business to a new guy it seems to me those great customers would feel lost and might well start looking elsewhere if the new point of contact was not the same personality that you are. :smile:

[SEO]

Huh? You mean run a business to make paycheck wages?

My paycheck wages are very good. I am payed a salary which is general formans wages and the if times are good the company makes more money which is mine as well.