What is a dojo worth?

There is a point in every business owners life when they think about selling "the business". I have a friend informed me that he would like to get out of the MA business. He said he would probably put his business up for sale in the next year or two. He contacted me first since I talked about opening a place during a conversations. He said he would give me an opportunity to buy it before he put it on the open market. My question to all the Dojo owners etc is how do you dtermine what an existing dojo is worth. I have a business now that run fine but i just can't seem to put my finger on the worth of the business...
This is how it is now:
1. He leases a 2000 sq bld... net net lease
2. 75% 0f his student are under three year contracts
3. He charges $150 per month
4. He sells MA gear
5. He is open six days a week
6. I would assume he has about 150 student and adults
7. He has no inventory or assets except some heavy bags,mirrors, floor mats, chairs, desk and misc office supplies. Estimated value...$5000.00

I know to look at his W-2 to see his yearly income

If someone wanted to buy him out,the only price I can come up with would be the remaining time left on the open contracts plus the $5000.00 ?????? Can anyone help me out..

PAGING RAUL PEREZ!

WHERE IS THAT LITTLE ANKLE NIPPER WHEN YOU NEED HIM!

I think you are on the right track. Look at the value of the assets, its expenses, and finally the cash flow generated. It sounds like you have done that already. The last question, I would ask myself is how long will it take you to recoup the asking price from the cash flow generated. You might want to discount that cash flow to compensate for the lump sum payment you will be making.

No matter what the deal, I think you should cancel all remaining contracts and exclude their monetary value from the sale. These people did not sign contracts to study under you (I'm not making any statements about your ability, so don't take this as an insult), they signed contracts with the current owner/instructor. I don't agree with contracts, anyway, and I don't think it would be fair to hold someone under contract in this situation. If you want to run a real dojo, get rid of the contracts and the store and stop charging so damn much ($150 per month--come on!). That's just my opinion--I run my dojo to train good martial artists and to improve my own skills, not to make a ton of money. Don't we have enough McDojos already?

Schanne

1-Find out what percentage of the $$$$$$ you get from the contract.
Alot of contract business involves the owner selling the contract for a percentage on the dollar.
Depending on how its structured the owner may have already been paid for the current students.

2-Find out what the "churn" rate might be---how many students drop over a certain period of time.
I'd find out in at least these increments:

-One month
-3 months
-6 months
-1 year

You also need to know how fast new students are coming in.

3-How long is willing to stick around and help the new owner get settled--help him meet the current students/their parents?

4-If he is open 6 days a week---whom is going to be teaching the classes?
Are you going to have to do it all?
Or are you going to need to hire help?

5-What is he paying for insurence, lights, heat, AC, cost to him for the MA equipment he sells (and what he makes on selling it) snow removal, promotinal materials--and how much stock does he have of those left--and are you going to have re-do them all when the guy is no longer there???
Any changes on the name of the school when he leaves--any signs that need re-painting?

BTW--is there a website that needs to be paid for and maintained?

6-How is the lease in the current space set up?
Is it almost up--or are their many years to go?
Is it set up to automatically increase over time--or is the cost locked in?

7-You also need to look at the growth pattern---what its worth "today" might be very different in 3 years.
School could be growing or school could be shrinking.
You need to find out what the growth pattern has been over time.

8-What the competition like?
Is he nearly the only game around?
Or is there another school the next block over?

9-Find out how old the equipment really is and what he paid for it when brand new.
The cost to YOU depending on how old it is--when it needs to be replaced etc might be a A LOT less than you think.
Besides, if you have to replace it soon---then that should bring the price down.

10-What kind of advetiseing is he doing if any?
Another cost you need to consider.

11-Tougher to get a handle on---but is the school "personality driven?"
By that I mean is the guy the main driving reason for students to be coming and staying?
If it is---then without him the school is worth FAR less than the W-2's would indicate.
Not going to be easy but you need to find this out.
Again, the big questions are:

-Just how much net income is he really makeing right now?

-Based on that, how long will it take you to recoup your buy-in expense?
At what point are you going to makeing a profit?

-What is the growth potential of the school--along with the chances of the school shrinking?

-What is a complete list of his actual financial outlay and income.

Best I can do at the momment.

Sorry for the length.

k b!tches im here. Sorry Oldman had to page me:

first I would look at his financial statements. Usually a solid business would have some sort of financial statements either on Quickbooks, PeachTree, or another accounting software package.

When looking at his financials see how much revenue he makes over the past 3 - 5 years and also compare that to whats listed on his expenses to get a feel as to what he makes versus what he has to pay out on a regular basis.

I would base the selling price on the balance sheet portion of the financial statements:

Assets: Cash in the bank (as of a certain date), Accounts Receivable (amounts still owed by current students), pre-paid items (insurance for the entire year paid upfront), Inventory, Fixed assets (Bags, computer equipment, leasehold improvements)

Plus

Owner's Equity (start up costs as well as net income/loss factored in each year the school has been operating)

Plus

Goodwill (does his name or school have any reputation. That will have intangible value. this would be decided amongst you two)

Less

Liabilites: short term loans (ie credit card debt), long term loans (ie start up loans), taxes due to the government.

Equals:

A round about selling price.

If he does not have any financial statements (which would cause for some concern) you should ask to see his Schedule C filed for his income taxes for the past 5 years to see if the school makes any profit in the eyes of the IRS and then decide to value the assets within the dojo. Please bear in mind that accounting for income taxes are not the same as GAAP (Generally Accepted Accounting Principles) used to create financial statements used to obtain loans and present to possible buyers.

Also take the advice of CXT as he has made some valid points.

If you have any questions you know my number Schanne.

Guys, this should probably be a sticky.

This one seems really comprehensive and at the bottom goes somewhat step by step on how to evaluate and includes other ways to value a company besides the asset approach I gave:

http://www.choicebizops.com/Valuation_Basics.htm

Thanks CXT, Raul....good advice, I will let you know if anything else happens.