Paul Noble was interested in purchasing a small business. Having saved money from the annual bonuses he received at a major aerospace company, he planned to commit up to $200,000 and supplement it with a Small Business Administration loan, and anticipated debt taken by the seller as part of the deal.
A bicycle enthusiast, Noble had frequented Saddler Cycles, a three-store, high-end retailer, for years. With an established reputation and customer base, as well as well-trained staff members with little need for supervision, the business would be an appealing investment. As luck would have it, the Saddler brothers were open to the idea.
Pursuing the opportunity, Noble reviewed the company’s financial statements for the past five years. The brothers used an average of $500,000 net profit and offered a nine-times multiple to sell the business at $4.5 million. But Noble’s accountant came up with different numbers, weighing recent profits more heavily and proposing a five-times multiple, to value the business at $1.5 million.
Though he was reluctant to damage his relationship with the Saddlers, Noble was candid with them about the valuation discrepancy. Unoffended, they were candid in turn and explained that they were not confident that even the higher figure would support their retirement lifestyles; they decided not to sell.
Noble went on to explore other potential investments with the valuable experience of having refined his abilities to assess and negotiate — and with the knowledge that when the Saddler brothers were ready to sell, they would reach out to him first.
The preceding is adapted from Phillip G. Romans (EMBA ’13) and Professor William W. Sihler’s article “Hitting a Roadblock en Route to Buying a Bicycle Retailer,” which appeared in the 17 May 2015 issue of The Washington Post as part of the Darden School of Business/Washington Post “Case in Point” series.