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BUYING A SMALL BUSINESS

Business For Sale: California Architecture Firm

A complete overview of a business offered for sale that includes a price rationale and the pros and cons.
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The Business Its reputation is built on custom home planning and design, but this 19-year-old architectural firm also provides design consultation and electronic and mechanical design. The current owner has no employees. The firm's reputation supplies a steady stream of potential clients; roughly 80% of revenues come from referrals.

Financial Summary 1992 1993 1994Gross revenues $200,876 $146,983 $136,945Recast earnings before $113,131 $78,120 $67,814 depreciation, interest, taxes, and owner compensation

Price $180,000 (includes equipment and furnishings)

Outlook Sole proprietors like this one account for about 4,500 of the country's 22,000 architecture firms and 4% of the industry's total billings. California's economic rebound has so far included a strong demand for custom architecture work. With a 10% share of the area's custom market, this firm is well positioned to build on the recovery. Experts agree that the founder was wise to give the company a noneponymous moniker, allowing a new buyer to cash in on the business's reputation rather than the founder's name. The declining revenues reflect the seller's deliberate downsizing to focus on the highest-margin jobs. A new buyer could take on some of the work now being turned away (approximately $135,000 in 1994 alone), add employees, and build on the services offered to remain competitive.

Price Rationale At roughly two times 1993 earnings plus the book value of equipment and a small premium that will buy the owner's commitment to stay on for a three-month transition period, the price includes everything necessary to continue operations except office space. Experts don't quibble with the two-times-earnings multiple, but they believe the 1994 earnings are a more appropriate base, so a fairer price would be in the $120,000-to-$150,000 range.

Pros An opportunity to buy a service business with an established reputation instead of starting from scratch.

Cons Industrywide competition is severe. But more important, what exactly are you buying here? Has the seller designed a business that has staying power beyond his tenure, or will the business's reputation and billings follow him out the door? If the latter's the case, you're buying nothing but used equipment. -- Robina A. Gangemi

Inc. has no stake in the sale of the business featured. The magazine cannot confirm the accuracy of financial or other information offered by the seller. Inquiries should be directed to Affiliated Business Consultants, 719-540-2200. n




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