Here is a good article from Forbes to compare profit margin percentages of the most profitable small businesses around. Accountants: 16%, Chiropractors & Dentists: 15%, Lawyers: 13% The Most Profitable Small Businesses
Here are some excerpts from the practices currently for sale:
First of all, there is a selection bias involved here: these are businesses which are currently for sale; I doubt that these numbers represent the average profit margins of such practices, which is what you’ve cited from the Forbes list. Second, I imagine that these profit figures include professional services as well as hearing aid sales, which further distorts the margins. Finally, I’m not easily shocked and am generally unimpressed by hyperbole.
I would also point out that Seller’s Discretionary Cash Flow is not the same as net profit.
Nope. Discretionary Cash Flow is similar to EBITDA so it is the figure before taxes and some other costs (like interest and depreciation). Payment to owner hasn’t come out yet either. DCF also assumes the owner can be replaced without affecting the business, which may not be true of most hearing aid shops, but it is a good way to compare the operations of different businesses.
As everyone has contributed: Profit without knowing a host of information relating to the type of business isn’t too valuable. Most are trying to sell for 5 times “earnings” which isn’t out of line for an established concern. The concern would be how the change in ownership affects that. A situation that could go either way. Based on what I see, a good, potential owner would be more inclined to get a nearby location for a fraction of the cost. It would take a very well run operation to attract a buyer or a buyer like Sonova that can adjust true cost of goods.
Frankly, I think the fat hog at the trough is the manufacturer with volume and margin. And Sonova looks like it might end up being the bigger disruptor over Costco. Its experiment with Connect etc. points in that direction – over time. So far, they’ve just dipped their toe. If they continue, 5 times earnings is out the door.
Seller’s Discretionary Cash Flow is a very important term you must know if you’re looking at a small business to buy. Depreciation, amortization and interest paid by the business are items that are discretionary and generally “added back” to the bottom line of the business. Also, many, if not most, small business people pay lots of bills out of their businesses because they are deductible to the business but not to the individual. The owner may buy or lease a car or pay country club dues or use cell phones or many other things that are purely discretionary to the owner. A buyer may or may not choose to pay the same items. So, take the cash flow or profit off the bottom line of the profit & loss statement or tax return and add back items such as depreciation, interest paid, and the discretionary items mentioned above and you have Seller’s Discretionary Cash Flow (also known as Owner’s Discretionary Cash Flow), the MOST important number a small business buyer needs to know.
This is an important point for a sole proprietorship, because the way SDCF is calculated ignores one of the largest ‘costs’ of such a business: the proprietor’s labor.
this may or may not be true. i as a sole proprietor may pay myself a salary. over the past forty years, each time i have been in business most of the time i didn’t but once i did. at the time i had my reasons for doing so.
Whether you pay yourself a salary or not, that cost is not subtracted from the SDCF. Or rather, if you pay yourself a salary, that is one of the things added to the net profit to find the SDCF. Things also added back into the SDCF include depreciation, interest, one-time expenses (though one-time payments are not subtracted), and taxes.
the best business i ever owned was a small water company in 1980 that provided water to a residential subdivision of 300+ homes. i was able to operate it without any full time employees. i occasionally hired someone to help me install new piping. reading the meters took me about four days every other month. the revenue was roughly $15000 every other month. the primary cost was chemicals and electricity, $450 per month, since i charged enough for new connections to pay for meter, labor and materials.
collections weren’t a serious problem because most people will pay all or part of their bill when their water is cut off. i was more than reasonable but my customers had to pay something as good faith.
the best part of this business was it was dependable reoccurring revenue. no advertising, no competition, a water well costs several thousand, and no full time employees but me. i had an insurance agency that kept me busy at other times.
As Ken pointed out in many business situations it is less expensive to start a new business at a nearby location than buy someone’s business. Additionally, you have to assume the numbers have been optimized in an attempt to sell the business at the highest possible price. Given the risk to the owner’s capital, the capital equipment expenses, lease expenses,etc.,the numbers do not appear to me that these business owners are getting “rich”.
actually when you buy a business you should always factor in the cost of management or in this case the dispenser. i always want to know how much profit i will make as a non participatory owner. my labor is not free. why should i treat it as such. if you want to own several locations, this would be the only way to determine the feasibility of each location. to grow above one location, you have to think in this manner otherwise you are stuck in a single location. i have experience in building small restaurant chains which always require local mgmt. trust me you cannot effectively manage more than one at a time, i tried it and it was not effective.
I’m sure that’s true. But that’s not what the SDCF is. It explicitly excludes such costs. That’s why it is not a valid way of measuring profit to make the kind of judgment that fuhgeddaboutit is making. If a sole proprietor like my audiologist sell $400k of aids in a year and has an SDCF of 25%, that’s $100k. But if she pays herself a salary of $75k (about the average salary for an audiologist in 2014, according to Google) and has depreciation of $5k on her equipment, her net profit is actually just $20k, or 5%, which is less than half of Costco’s profit margin of around 10.6%.
Seller’s Discretionary Cash Flow or SDCF is a common Cash Flow based measure of business earnings for owner-operator managed businesses. According to the International Business Brokers Association, SDCF can be determined as follows:
Start with the business pretax earnings.
[*=left]Add non-operating expenses and subtract non-operating income.
[*=left]Add unusual or one-time expenses, subtract non-recurring income.
[*=left]Add depreciation and amortization expenses.
[*=left]Add interest expense, subtract interest income.
[*=left]Add a single owner's total compensation.
[*=left]Adjust compensation of all other business owners to market value.
[LEFT]
while i agree with this definition i acquired somewhere else, i will subtract the cost of the manager if the owner is the manager. these are all done as a owner operator but that creates a false illusion of the value of the business to me. i don’t want to actively manage any business for a long period of time.
bottom line, trying to determine if a business charges a fair price based on its bottom line profit or loss is a silly way to determine fair price. a price can be determined by charging the highest price i possible can that doesn’t prevent all of the customers from buying or charging every customer the most that customer can possibly pay but not lower than my bottom price which will means some pay one price others pay another.
i consider fair pricing occurs when i can add up the costs of the hardware and the costs of my services and add in a fair retail markup to the hardware. fair retail markup is highly subjective. then after i determine my profit on each aid, i can determine how many aids i would need to sell to cover all of my other costs and a profit for me. it might be that i must raise the price of each aid to cover all of the expenses because the number of aids that need to be sold may not be possible and provide the services i have committed to. since i am not a dispenser, i on’t know how they generally figure their price but i have owned other types of businesses.