A business without any assets is not going to have a $ value... If she were to quit this spring by summer someone else will have all the no contract jobs she is now doing... Carscw, suggestion is More than fair... :smile:KennyV
There is a formula based on projected net income of the business to sell clients. Selling client lists is something that is done all the time. Depending on the number of clients they can sell into the thousands. Whether he buys the list or not I'm sure if she wishes to do so she can sell them to someone and there would be someone who would be glad to pick them up. Here is an article on value of client list.
How to determine value of client list when purchasing service based business?
If you decide to purchase the accounts or the entire practice of another service oriented company, you must be careful in choosing the seller and the price you will pay. When I say services oriented company, I mean companies such as sports agency, tax practice, law practice, web design company, etc.
Typically, the cost of purchasing an existing client base from another service provider could range from 25% to 125% of the latest 12 months of gross fees. Higher percentages could be justified only for highly profitable firm with a high fee structure and high client retention level and reputation. The lower % level should be for lower-end clients and newer accounts.
Please remember that the value indicated by the use of the multiplier should specifically be used for the valuation of the clients lists. You should not apply it to to any other tangible or intangible assets. If the tangible and intangible assets are also offered for sale by the previous owner, they must be added to the value of the client list you estimated by using multipliers. The value of tangible assets added to the client list valuation, is estimated by calculating their current fair market value and deducting any liabilities from it.
One of the major factors to be considered in the valuation of a service based company are:
- Ease of the transferability of the client base
- The historical retention rate of the client base
- Client Characteristics
- Management and personal characteristics of the seller
- Willingness of the seller to assist in transition
If an entire business is being purchased, the previous owner or a key employee generally stays with the new firm for a period of time. Failure of the seller to assist in the transition, could decrease future revenues.
To increase chances of keeping as many clients as you can from the business you are buying, look for the following attributes:
- The seller has served the clients for more than three years
- The seller guarantees a letter of introduction for the buyer
- Both seller and buyer have similar skill set level
- Management styles are similar
- Seller is part of the business transition process
- The seller has plans to retire, leave the area or profession. If the seller wants to stay in the area but leave the profession, seller should sign a non-complete agreement.
The negatives of purchasing a client list or entire business is that you will not retain the clients on the list and that some may not be a good match for you.
Because of such risk in client retention, the best deal for purchasing a client list is to pay the seller a percentage of the revenues from clients who continue with the practice for a specified period of time.
You can try to make a deal to pay % of all revenues from existing clients for up to 3 years. If you set-up your deal like this, the true value of the transaction is not known until the end of the five-year period.
I never pay the price agreed to for client lists in cash. I always try to make payments over a term of 3 to 5 years.
The way I purchase small businesses has always been based on a % of actual collections over a period of time. I would never buy a business with money up front, because I never know how many clients I am going to keep. The % paid depends on the type of accounts. In service oriented business you either have business or individual accounts. Business accounts carry more value then individual accounts. Payout percentages have ranged from 15% to 25% over three year period.
