The Truth

Buying vs Starting your own

Analysing and Valuing a Round

Questions to Ask

Sales Contract etc

Analysing & Valuing A Customer Base

Before we can calculate or begin to analyse the true value of a lawn mowing business we need to assess and understand exactly what the customer base is in terms of sale.

Customer lists, business tactics and databases can be classed as intellectual property. However unlike items such as patents, designs, trademarks and copyright this type of intellectual property is often lumped in with the goodwill and the value calculated as a whole.

What is goodwill? Goodwill is an intangible asset which reflects the reputation viability and potential of a business. There are three types of goodwill: personal, corporate and situational.

The goodwill which a lawn mowing business is comprised of is classed as personal goodwill.

Neither Corporate goodwill nor situational goodwill apply to the bulk of our industry.

Corporate goodwill is attached to the business separate to the owner (s) e.g. retailers, wholesalers & manufacturers. It may be because of the nature of the business, brand names etc. that they remain customers. In such a case a customer has no interest in who owns the business.

Situational Goodwill more so applies to businesses such as Service Stations, Milk Bars, Convenience Stores, Motels etc. as the location of the business plays a large role in the success of the business e.g. visibility, accessibility, time in the same locations etc.

Personal goodwill exists in businesses such as lawn mowing, hairdressing, professional practices etc. The proprietors or other key people have a personal following. When a business where personal goodwill exists is sold customers often follow the vendor to a new location or in our case reapproach the vendor at a later date.

Unless the vendor can guarantee that the customers can be retained e.g. by staying on in the business long enough to introduce customers to the purchaser and agreeing to a restraint of trade clause in the contract of sale no part of personal goodwill should be included in calculating the price of a business.

Without the above guarantee the customer base is worthless. Therefore this analysis and calculation of worth is based on a business with the above mentioned guarantee.

Goodwill & It's Worth

Personal Goodwill will rely on a newly established relationship or following between the purchaser and clients and therefore can be unstable even with a guarantee.

  • Other factors which will effect the customer base include :
  • Potential cancellation or expiration of important contracts
  • Increase in competition
  • Decline in appeal of the products or services of the business (perfect example would be due to drought)
  • Changing economical circumstances
  • Lack of management skills by the purchaser
  • And so on.

Unfortunately in our industry businesses are often not established when they are sold being as young as 6 months old. Another issue or problem that our industry faces is the sale of customers on their own and not as a whole business. This is often due to vendors selling their worst clients or looking for a quick dollar. It is a common thing for a business to be split and only a portion of the business sold. Without the purchase of a legitimate business as a whole you are paying for goodwill that may not exist.

Known Sales Techniques

The following two examples of how rounds are sold hold no merit in evaluating the true worth/value of Personal Goodwill within our industry.

Annual Income: There is no accurate gauge to calculate annual income from any one customer as there are to many factors which can effect how often a customer is serviced and such an income cannot be guaranteed. The closest indicator we could have of annual income from one customer would be by analysing and averaging the annual income for this customer for a minimum of 4 years. Unless the customer is on a yearly contract and payment is spread out during the year and not effected by any physical aspect as with a customer not on contract.

Due to annual income for one customer being so variable within our industry many businesses are sold using a per cut (per service) calculation. For example a business has a customer worth $25 every service, using this method a customer will be sold for $25 multiplied by an amount e.g. "8". The theory behind this method is that you are likely to recover your investment after servicing the customer 8 to 10 times, taking into consideration operating expenses. The problem with this method is that the goodwill is overpriced, it is not viable to sell a customer for top price when you have only had this customer for only a short time and this is rarely taken into consideration as the customers are totalled then the sale price calculated. Giving the goodwill that is being sold no meaning, therefore no value at all.

The Standard For Calculating A Lawn Mowing Round

Taking into consideration all of the above a new standard has been set which is a true and fair evaluation of Goodwill in the lawn mowing Industry.

The method of evaluation is based on the customer value (per service), the loyalty of the customer (length of time the customer has been with the business) and the evaluation will be effected by the life of the business.

Rather then calculating the price as a whole, customers are broken into groups and price is calculated individually.

Group #
Time Factor
Calculation
1
6 months or less

Price x 1.5

2

12 months or less

Price x 2
3

2 Years or less

Price x 4

4

3 Years or less

Price x 7

5

4 years or over

Price x 10


* Time Factor Being how long the customer have been with the business

* To calculate the Price for any of the above groups add the cut price (price of lawn) for each customer to calculate a total Price.

 

Copyright © Independent Lawn Mowing Contractors Of Australia 2001-2008
Disclaimer - We will freely give advice  to all who visit this site, however we will not be legally responsible for any advice given.

p;to all who visit this site, however we will not be legally responsible for any advice given.