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BUYING A SMALL BUSINESS

Business for Sale -- Washington Pottery Manufacturer
 

An in-depth look at a business being offered for sale, including the price and pros and cons of the purchase.
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The Business Set in a rural community with abundant wildlife and views of Mount Rainier, this 40-year-old family-owned pottery studio produces plaques, sculptures, vases, and planters. Some pieces are sold at an on-site retail store, but 98% of revenues are generated by independent reps who sell to some 2,500 retail shops. All 21 employees plan to stay on. No family members want the business now that the owners are retiring.

Financial Summary 1992 1993 1994Gross revenues $805,111 $960,505 $984,748Recast earnings before $127,926 $173,357 $133,133 depreciation, interest, taxes, and owner compensation

Price $700,000

Outlook Sales in the $22-billion gift industry continue to grow, but they've slowed. Experts attribute that to a rebellion against mass-produced goods, so this pottery's distinctive products give it a competitive advantage. The sagging earnings in 1994 reflect the business's investment in a companywide health-care plan. A savvy buyer with sales know-how could cut out some of the reps' 15% commissions by working trade shows at which independent reps pitch wares to retailers.

Price Rationale Valuation experts would likely use an excess-earnings method to set a fair price for this business. Here's how it works: First, they'd calculate projected earnings by taking the three most recent years of net profits and then, for each year, subtracting the cost of owner's compensation and benefits. That averages out to $36,000 a year. The experts assume a buyer would tap the pottery's $253,000 in tangible assets (accounts receivable, inventory, and equipment) as collateral for a loan to buy the business, and conclude that a new owner would need about $25,000 a year to service that debt. Subtract that from the average earnings and you get $11,000. The buyer must then decide what premium to place on those earnings. Considering factors like industry health and company performance, experts agree that a buyer could expect an investment in the pottery to yield a 30% rate of return. To throw off $11,000 at a 30% rate, the buyer would have to have invested around $37,000. That's the fair value for the business itself. Toss in $253,000 in tangible assets and 20 acres of real estate worth $280,000, and you'd get a more reasonable asking price of around $570,000.

Pros The chance for an artisan's dream: making unique pottery in a pristine setting.

Cons It's a labor-intensive business, and tastes change. One man's unique is another man's kitsch. -- 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 Washington Business Investments, 206-473-2522. n

Last updated: Jan 1, 1996




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