Get input from potential clients
Question: My wife has worked as an elder-care provider for a number of years. We’d like to start a business that serves the nonmedical home-care needs of seniors. How do I find out how large the demand is locally and who would be our main competitors?
Answer: Start exploring your potential market by going directly to the source: senior citizens and their families. Ask what kinds of home-care services they need. Ask what companies are providing those services. Ask what services they would like to have but find are either unavailable or too costly.
This kind of grass-roots research will be time-consuming but should be fairly easy and inexpensive. Your wife can talk to current and former clients. You can ask friends and neighbors about their experiences. You can make appointments to visit several convalescent homes, senior centers, adult day-care centers and hospitals in your area and speak with social workers and their patients.
“Most seniors have good ideas about these things and have talked among themselves about these issues. Tap into their knowledge,” said Daniel Morales, interim director of the Los Angeles/Mt. San Antonio College Small Business Development Center.
Make sure you talk to many sources rather than rely on scanty input from a handful of people. Keep track of trends that emerge. Make a list of the caregiver companies mentioned and get all the information you can on them, Morales advised.
“Once you’ve gotten an idea of how many companies are already operating in this market, I would suggest you look for a particular niche” that is underserved, he said, “and be very specific about how you approach filling it.”
If there are companies doing exactly what you’d like to do, find out how they provide services and how their business model works. See whether there’s a geographic area or a particular clientele they don’t serve, and think about targeting your company there.
How to figure out the fair sale price for a business
Q: I have an opportunity to purchase a small business with a tremendous reputation and excellent production record. But I think the asking price is too high, based on inventory and fixtures. What’s the best way to determine a fair purchase price?
A: The value of the business is mostly determined by its cash flow. “Business brokers use a term called SDE, or seller’s discretionary earnings, which is defined as net income before taxes [operating income]; interest; depreciation and amortization; owner’s compensation; owner’s benefits; and nonrecurring expenses,” said broker James Y. Jun of Sunbelt Business Sales & Acquisitions in Torrance.
Most small businesses sell for 1.5 to 3.5 times the yearly SDE, Jun said.
The variation in the multiple depends on myriad factors including the stability of the company’s historical earnings; the company’s growth history and the recent growth of its industry; the type of business being sold; its location and facilities; the stability and skill of its workforce; the competition it faces; the diversification of its products, services and geographic markets; the desirability of the business; its depth of management; and the terms of the sale.
The material assets you’ve evaluated -- such as inventory, equipment and fixtures -- figure into the sales price. But they are only one of many variables that must be considered before a fair market value can be arrived at for an established business.
For more information, you can purchase valuation software at www.valuationresources.com/Misc/ValuationMultiples.htm, buy a book on this topic from www.businesstown.com/valuing/index.asp or see what the International Business Brokers Assn. (www.ibba.org) or California Assn. of Business Brokers (www.cabb.org) have to say.
Got a question about running or starting a small enterprise? E-mail it to karen.e.klein@ latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012
