Pricing of Fixtures

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tjay

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Does anyone have any recommendations on how to estimate the worth of frame shop fixtures and other leasehold improvements? I'm trying to buy a business and, while I'm comfortable estimating the value of the equipment, I have no idea how to estimate the value of the worktables, etc. All of the fixtures are homemade, approximately 20 years old and made of plywood with carpeted tops on the work tables. They seem solid, but UGLY. Any advice would be appreciated.
 
I'd say: "These seem solid, but they are ugly. We will have to do some work to elevate them to our shop standard. We will pay approximately half the lumber value." You can always move up if you want them, or they can make firewood of them and you can make the ones you would really want...
 
All of the fixtures should be itemized with a price which the current owner has set.

Review the list and make your own estimates then use these differences as a negotiating point.
 
Guys-We are making this way too difficult.

Business are generally sold for total dollars broken down into categories that have tax implications like assests, goodwill, things that have capital gains or can be expensed.

If I were selling this business and someone started cherry-picking individual items, I would think I was dealing with a bunch of lightweights.

If you feel anything is not useable, offer a lower price. If asked why the counter offer, a fair response might be that you can't use the fixtures, but the seller may keep them if he wishes. It really is good faith bargaining.

I always caution that people should get professionals involved in deals like this. They have done it before and understand how the game is played well.

Liza'a example is correct from an accounting point, but not in this case. We all ahve equipment tat has been depreciated/expensed long ago. Can you imagine that you are selling your shop and you have an 8 yr old saw that runs great. You depreciated it out last year. Are you going to give that away? Wouldn't you be a little miffed if some sharpie said that since it has been depreciated, it has no value?

This is a textbook example where a broker would be worth his commission
 
Originally posted by Bob Carter:
Guys-We are making this way too difficult.

Business are generally sold for total dollars broken down into categories that have tax implications like assests, goodwill, things that have capital gains or can be expensed.

If I were selling this business and someone started cherry-picking individual items, I would think I was dealing with a bunch of lightweights.

If you feel anything is not useable, offer a lower price. If asked why the counter offer, a fair response might be that you can't use the fixtures, but the seller may keep them if he wishes. It really is good faith bargaining.

I always caution that people should get professionals involved in deals like this. They have done it before and understand how the game is played well.

Liza'a example is correct from an accounting point, but not in this case. We all have equipment that has been depreciated/expensed long ago. Can you imagine that you are selling your shop and you have an 8 yr old saw that runs great. You depreciated it out last year. Are you going to give that away? Wouldn't you be a little miffed if some sharpie said that since it has been depreciated, it has no value?

This is a textbook example where a broker would be worth his commission
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Bob is correct on how a shop/business should be sold,but as a buyer you still need to know that the over all price that you are paying for (assets, goodwill) are actually worth what the seller is asking for them, and the only way to do that is to break down and price out every item individually. You would price everything out to used equipment cost not new. As for fixtures you for sure would give a price for materail and time it took to make the fixture but you would deprecitae the value based on the condition the fixtures are in.
 
Technically Sammy has a point. But the real value of a business is it's ability to repay the investment (note).

Anybody that has ever sold (three for me) or bought (1 for me) a business knows this.If you had a broker or other professional to help you, I am quite certain that they would tell you to worry about the "blue sky" elements more than this very small piece of the pie.

Imagine that you were selling your house. After careful analysis, you have determined that the going rate for other similar houses in your neighborhood sell for $200,000.

So, quite correctly, you say let's list it for the same.

A potential buyer comes in, loves the house, but the wife says "Those kitchen cabinets gotta go". They determine that a new kitchen to their liking will cost $15,000. They counter and offer $185,000

As a buyer, do you accept?

Two problems pop up.

The first is that you really aren't negotiating in "good faith" and probably will spoil any good will

The second is that buying and selling something like a business or a home can get very personal (hence: emotional)and needs a professional to act as a go-between.

I really believe that if this were really a deal breaker, a broker would find a more acceptable way to counter for a lower price.

Trust me when I suggest that this could easily cause more harm than good to focus on such small component.

The second concern I might have is if the seller starts to go down on stuff like this, I would be very afraid that either the business is overpriced (and that value should be determined on earnings and sales)or he is too motivated to sell (and that scares me more)

As Sammy suggest, you should know that the overall price is what the business is worth. Is the $1000 or so you might be discussing really the problem?
 
Thank you all for your insight. While my natural inclination, right or wrong, is to examine the value of each item individually as Sammy suggests, I understand and greatly respect Bob's points concerning bargaining in good faith. In my particular situation, the business will still be making money even after paying myself an adequate salary and covering the business loan, but the listing price for the leasehold improvements seems high (approximately 1/3 of the total asking price).
 
I was talking with a business broker the other day about this very thing. His short answer was:
3 years of net profit is what the "good will" is worth.
No more than 1/2 the replacement value of equipment over 3 years, 1/4 if over 5 years.
any fixtures "home made" are only the value of the wood to make them new.....
This is his formula and it kind of penciled out nicely for the friends business. She went with it, and sold it in a month... using the broker; which was after 6 months of trying to sell by owner.....

good luck
baer
 
Baer, you've offered concise, sensible information that could probably be applied to any business.

Anyone who's thinking of selling -- or buying -- a framing business could at least use these parameters as a benchmark for comparison to whatever other opinions come along.
 
The only thing missing from the formula is inventory.
 
Waitaminute, after reading tjay's last post, I'm confused. I can't imagine fixtures (framing tables, etc) being leasehold improvements in the first place. I've thought that leasehold improvements were additions to the building (a new floor, an extra heavy door)that will belong to the building's owner if the renter moves out, and that would mean stuff like furniture isn't.

Also, I can't imagine why tjay would object to a high price listed for fixtures if he's willing to pay the price for the business unless the IRS considers that when a business changes hands, already depreciated equipment/fixtures are valueless. The higher the fixtures are valued, the more depreciation the buyer will be able to use. Too high, of course, and the IRS will balk, but I'd like the highest valuation possible. You can't depreciate good will, can you, or location or even a favorable lease?
 
Most of the worktables in the space fall into the category of leasehold improvements because they are anchored to the walls and are considered something that the building owner could object to me removing should I relocate the business. This has been an element in the leases of several people that I've spoken with. Per the seller's broker, a final inventory of the equipment, materials & leasehold improvements will be taken prior to closing and the final sale price adjusted accordingly.

And thanks for that info, Baer! I'll plug my numbers into that formula and see how things look.
 
Also, I can't imagine why they would object to a high price listed for fixtures if he's willing to pay the price for the business ..............already depreciated equipment/fixtures are valueless.
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NOT SO The sale of a business and its contents determines its value.
There are some tax implications as to "how a company is valued by catagory".

Yes, "Goodwill" is not normally depreciatable.

As for the fixture/equipment value being "Too High". The IRS has you in their grasp on the other side. The seller would have to pay "capital gains" tax on any excess value over "book value" in the current tax year. The book value would by the original accuquision (purchase) value less depreciation.
 
Exactly, Jerome, a high value placed on the fixtures would be to the buyer's advantage and not necessairly to the seller's disadvantage. If I were buying a business for a certain amount, I'd want to place more value on stuff I could depreciate than, say, good will. Book value is simply what the seller can clain to lower his gains, if any. Book value has nothing to do with what the seller's willing to sell the fixtures for. The seller is going to pay the same capital gains no matter what he figures the fixtures are worth verses good will.
 
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