Thread: Paintball Biz
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Old 12-18-2013, 06:37 PM   #15 (permalink)
Lohman446
MCBs armed pacifist
 
Join Date: Jun 2009
Location: West Michigan

The problem becomes trying to consider what is a successful business. If they are doing what they want to and are comfortable with the money they are losing, making, or not making than it is successful FOR THEM. That does not mean it is successful as a business.

Let me use my friend as an example. He runs a business that he greatly enjoys. It gives him a little extra money but allows him to socialize with people he otherwise would not. As badly introverted as I am he is the opposite - an extreme people person. He has booked events out past most of his competitors who run actually businesses in the field he plays in. He runs a legitimate business (records, insurance, taxes, etc.) but neglects to consider costs. One of his competitors, likely annoyed, offered to buy him out so he came to me and we sat down to discuss numbers.

The question became how to value his business beyond the assets (for sake of informational security I am going to input some numbers that are not actual). We first determined the value of his assets to be about $5,000. His profits last year were $8,000. Considering it was part time and had relatively low and fixed overhead I suggested his multiplier might start high (usually a business is worth, in addition to assets, between 1 and 4 times its yearly profit with most falling between 2 and 3). I suggested we start with a multiplier of 5 and he value the business at $45,000 (5 x $8,000 + $5,000 in assets).

Then we dug a little deeper and I finally looked at him and had a conversation about "profit". Turns out he had never paid himself. He works about 15 hours a week. At $10 an hour that comes out to $150 a week or $7,800 a year. There was an even bigger issue: the work he did, his skills, special licensing, and track record makes his value at a lot more than $10 an hour. In the end his business is worth nothing as a business because if you took these factors into account it would be losing money. Indeed its only value is in its assets. Now we can argue about certain aspects of assets such as customer base and other things but I think the issue is illustrated

Its unreasonable to call a business "successful" from a business stand point unless it would be making money if the owners were paid the prevailing rate for the work they do in it. Most small business owners (and many management employees even) take a wage that is less than they could get on the open market. When valuing a business these underpaid employees must be taken into account.

Luckily for us players many paintball field owners are running the business for reasons other than financial.
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