How much is a customer list worth?

[Pete Cofrancesco]

I have a colleague who is looking to retire in a couple of years. He has asked if I would be interested in buying his business. I said I would but I'm not sure what is a fair price. We are talking repeat business of filming dance and theatrical performances. I've been doing the same work on a smaller scale, so I have all the equipment and experience to do it.

Let's say he has 30 clients that average gross 30k/year, what's a fair price? There isn't a lot of overhead, besides the initial investment of the camera, computer, printer and burner, there's only the cost of the ink, dvds, cases, shipping .

The biggest cost is time to travel, film, edit, produce and ship the dvds. The other major cost is many clients require you pay them a cut for selling their performance and helping take orders, collect the money, and distribute the completed dvds.

Another difficulty of this work is that it happens over a very short period of time, on the weekends of 3 months out of the year. From year to year a client can change what weekend it falls on causing you to be double booked. In which case brings up a final cost of hiring someone else who's qualified to cover the job.

Now that I think of it there is a fair amount of cost especially if you include sales and income tax. On 30k, 30% tax (-9k) , all other expenses (-5k) = 16k net. But even knowing the net what is a fair lump sum payment for this annual income?

[Mike Watson]

I would also want to know how entrenched he is with his customers, and how many will immediately dump you because you're not him.

Given what you've said, I'm not entirely sure you're not buying a problem.

[Pete Cofrancesco]

It's a risk but I think a small one. I've covered jobs for him and seen his finished work (and it's good but not beyond my standards). Were talking low end 1 camera dance recital stuff. I think you'd have to be pretty big screw up not to be able to keep the clients happy.

Just talking about it makes me more concerned about the 3 month grind and giving up my weekends.

[Jim Michael]

That last statement makes me question your commitment. You could use this as an opportunity to start ramping this up into something big in which case it's a given you'll be adding staff for managing clients, sales, and coverage. If you go that route then you need to start looking at other types of similar events that permit you to shoot year round. As for the value of your friend's business, it depends on the degree of his involvement to help retain those customers and bringing you up to speed on his business processes etc. Perhaps it's a residual based on sales year to year which would help mitigate attrition risk. Probably a good question for your CPA.

[Pete Cofrancesco]

I'm a guy, of course I'm scared of commitment!

[Shaun Roemich]

A customer LIST is worth the amount of time it would take to generate a similar (but more inclusive) list via an afternoon of google searching. The real value, if any, is having your friend prepare a letter of introduction to the person he has chosen to take over his business in that field and do a small amount of consulting from time to time.

[Chris Harding]

The dump factor would be the issue that would worry me! Whether you pay $5K or 50K the clients can still dump you! They might look at the retirement as an opportunity to look for someone with a better price and ignore you completely.

For me the ONLY fairly safe way to ensure that you get his clients is to partner up with him a year before he throws in the towel and hopefully by then you have established yourself as the person who will be taking over in the future.

Signed and paid for pre-orders for me might have a value but not just a client list ...I would be very careful on this one as you have absolutely no guarantee that even one of the 30 will continue using you as a successor .... It it were me I work work for him (even for a pittance) meet the clients and get their assurance that they will commit to you once he retires ... With that scenario I would then place a value "per client" who actually agrees to continue with the company led by you.

[Pete Cofrancesco]

Good point. I thought about instead of a lump sum offering to pay him a commission for the first two years of net profits. Year 1 = 15% Year 2 = 8%

[Chris Harding]

Hey Pete

That sound very sensible! If he hurriedly backs away from that deal then you know straight away that he wasn't confident that the clients would take you on as a "new supplier"

He still wins in this case and you only pay if you get the jobs. Just for interest have you calculated the value of all 30 jobs for 12 months ? Would 15% the first year and 8% the second year (assuming all 30 take you on) amount to more or less than the lump sum you would be prepared to pay him??

Chris

[Pete Cofrancesco]

Thinking out loud has helped me figure out a starting point for a negotiation. It might come down to making an offer and he'll see what someone else would offer and let me match it. Then modify the commission % to meet that number. 3-5k seems fair but that could seem low for someone who has spent a lot time and effort building a business. Frankly I could take it or leave it. I prefer it that way, bad decisions are usually made when you feel pressure. And I could have grossly miscalculated his view of things.

[Dave Blackhurst]

This is the downside of the "small business" with a "sole proprietor" - much of the value lies with the proprietor, NOT the "business"... once the proprietor is gone, continuity is speculative at best in a "service" business (as opposed to say a larger company with a list of "regular" customers). Transitions in business are always tricky at best, and can be disastrous!

I'm guessing that someone (whether you or someone else) would be getting his old customers one way or another, presuming they will continue to "need" the service and the prices in the market are comparable? The only advantage to his "list" is that you would know who to target, and if he gives you introductions/recommendations, you'd have your "foot in the door" first, so to speak. What is that worth...?!? I'd guess in a seasonal niche market, not a whole lot, but it would add to your income... another approach would be to estimate your cost to acquire a new customer (not something everyone can estimate!), and pay a portion of that, but again with a seasonal niche market... that's a bugger to try to estimate, I'd guess!


Is there a possibility you could retain the other guy as a shooter/part timer at an agreeable rate during the transition and thereby "enhance" your business, ease his transition into "retirement", and also give you additional manpower to handle the "extra" customers... I see problems trying to service more clients as a "one man operation", but if you could gain a reliable "second shooter", could be a "win-win"?