Looking for ideas or advice on how to sell some / all of our brick & mortar business (based in Canada, all figures in CAD). Want to take advantage of capital gains exemption (Canada allows 800k+ in lifetime capital gains exemption for sale of a busniess). Simplified details below:

This is an entertainment based business with 2 locations (+ a 3rd partnership/franchise based location). Company first launched since August 2014, but closed down for 4 months to move to a larger location from Jan 2015-April 2015.

12 month revenue from April 2015-2016 was ~1.5 mil and projecting ~2.5 mil for 2016. Net Margin is approximately 40%.

Assets:
~850k cash
~50k fire sale assets

Outstanding Debt:
N/A

We've considered looking for an individual buyer but the economy is not strong where I live right now (tied to oil), I'd like to potentially offload a portion of the company to a private equity firm but not sure if they'd be interested in a business with low revenue (but a great margin)?

As is always the case on BFI, you're not going to get any good advice unless you actually provide some details.

What further details would you like? I'm happy to provide more (within reason)

You haven't even mentioned what the business does.

My questions:

1. What type of 'entertainment business' ? How stable is the revenue - repeat customers, risk of economic disruption, etc?

2. More history of sales/profits, to give an idea of growth. How did you determine the 2.5 mil projection?

3. Net Margin of 40%, is that all in (including taxes)? Will margin stay stable as you grow?

Regarding the tax element, unless that $850k cash balance is necessary as working capital in the operations of the company, you may run into issues CRA viewing the cash balance as excess and therefore, an asset generating passive income. To claim the exemption, 90%+ of the assets must be used to generate active business income.

There are remedies to be implemented regarding the passive assets, but can take 2+ years to successfully meet the criteria.

There are also other conditions that must be met to claim the exemption, but can't comment without more info about the business. Even if you don't currently have a potential buyer, you may still want to consult (now) with a tax accountant to get the corporation in order to meet the criteria for a future sale.

http://www.taxplanningguide.ca/tax-p...ins-deduction/

Its a room escape / escape room business.

1. Its an escape room business - revenue is stable but may be considered a 'fad' activity. Economy is already weak in my region (oil & gas dependent) but our business has thrived so far. Competition is ramping up now with 10 competitors (with at least 4-5 more in the pipeline that I am aware of). Currently hold a 70% market share.

2: 1.9 mil YTD from Jan 2016-Sept 2016 (we added our second store + partnership third in March of 2016) + winter months are better for indoor recreation activities. 2.5 mil seems like a conservative projection.

3: 3 partners / directors drawing 60k/year salary, stores are passively operated (salaried manager + many part timers) with additional resources (CS team, maintenance, marketing) on staff as well. 1mil is exclusive of taxes. Margin has dropped as directors transitioned off operations (and expanded stores), but because it is service based instead of inventory our largest expense is payroll which can be scaled back if traffic slows. Growth may slow at this point -market may be saturated with so many different offerings. Potential growth options include taking over sluggish competitors and/or diversifying into other recreational activities.

The cash on hand can / will be dividend out to holding companies as necessary.

Given this company has only been around for a couple years and as you said is in a "fad" market, I really don't see a sale as being an attractive option. Keep printing money for as long as it lasts.

How many of your customers are net new vs returning? Do you rely on new customers as a significant source of your customers?

I think the best bet to sell this type of business in the economy you're in is to unload it to somebody where your service will automatically fit into their existing sales funnels. You'll have to consider what is in your area and if their customers would like the escape-room service.

I just participated in one of these a few weeks ago and had a great time. I remember thinking that the business has a quite low barrier to entry. I even found some ready made "games" on the internet that I'm sure could be adapted.

Groupon is the primary traffic source for these right?

I put 'fad' in brackets as I think there is still a comfortable timeline for these businesses as they branch into different directions (higher movie level production, VR, etc). The activity is more accessible than other similar activities (mini-golf, laser tag) and has a good reach for corporate teambuilding. The reason for selling would purely for tax advantageous benefits - we are of course happy with how the company is performing but I don't see any other tax efficient method of getting paid out.

Net new vs. returning is approx. 70/30 (not the easiest thing to track), we have 12 different games available so we are motivated to get returning customers through to play the different offerings. We design & market primarily to new players though (word of mouth is powerful and they are a good source of reviews).

Was thinking cinemas / theatres potentially, but as they are stand alone stores they don't help directly.

Re: low barrier to entry it really depends where you are located.... places like LA, NY, Orlando have movie quality sets powered by lots of technology and have incredible experiences. Some parts of NA just have lockboxes with different types of locks on them in office type settings. In a market with no ERs you can launch a bare bones one and do well, but as the 5th or 6th to market you likely need to put some more thought into quality

We don't run Groupon, many place do but they tend to be ones that are lower quality and/or are unable to generate business otherwise. You just give up too much $ and lower the value of your product when you go through DOTD.

Why cant you just say what it is your business does?

He did, they run escape room games.

I highly suggest tracking this stat. Of the metrics that are important when considering a purchase, I have to imagine this is one of the biggest metrics.

Could you have people sign a waiver that they won't publish answers online or something silly? Can you get email addresses to blast when you open a new type of room?

This is important for marketing as well as tracking business metrics, but if I am buying this company my biggest question is how sustainable the revenue is.

Have you spoken to a small business broker? A local broker can advise you on what to expect as far as revenue multiple. You could always list yourself on a site like BizBuySell as well...

I looked into investing into one of these a couple years ago. Start-up costs were very low and you are basically betting on the people you would have running it as well as the build out and experience you are providing. Competition could appear suddenly due to low barrier to entry. You are not going to have people repeating rooms so you have to constantly redesign and bring in new rooms. If this wasn't in Canada Id take a look, seems like you have done very well.

Will start tracking it immediately, its already posed by our game hosts at the beginning of the briefing, will be a simple change for them to take note of it. Canada works on an 'opt-in' basis rather than 'opt-out' for anti-spam laws so its a bit harder to harvest emails but we have a solid mailing list (~7k emails) and we do our best to send out regular newsletters with okay content / flash discounts.

Hard to really say how sustainable the revenue will be, if oil rebounds a bit then there is a strong potential for further upside. The dream would be to find a whale of a buyer, but I think a realistic valuation range would be 2-3 x EBITDA based on the future uncertainty.

Our team believes that our local market for escape rooms is saturated - at this point we are planning on starting up another entertainment based activity that integrates with some of our existing infrastructure (booking system, customer support team, accounting, etc). I don't see an easy path forward for strong continued growth aside from potentially franchising out to other cities.

Nothing formal. Chatted with some business brokers, but have set up a formal meeting with an accounting firm next week for valuation assessment and/or discussion of potential options. How serious are online buyers in the 2mm+ range on BizBuySell though?


Lots of competition has appeared (with even more in the pipeline), but being first to market has proven to be an amazing edge in every city. Different companies have leveraged this in different ways (expansions, franchises, licensing with major corporations, etc). I think its very hard to enter the market in most cities with a super low budget cheap room, room production quality as well as technology is advancing at a rapid rate. There seems to be an equal mix of mom & pop operations, haunted house people who are good at scenic decor, and agressive business minded individuals in the owner demographic.

We have 12 unique rooms at this point, and surprisingly our data shows that re-making rooms for repeat purposes is not needed nowhere near as often as initially expected. While I am of course a bit tired of some of our older rooms which are coming up on 18+ months, they are still booking strong and generating revenue so in reality there is no need to fix what isn't broken. Despite being busy and having 120k+ (non unique) visitors through this is still a new activity for the vast majority of the population in our region.

Sorry, didn't get a chance to catch up on this thread until now.

In general, my immediate thought was the same as what Larry posted. I'd print money as long as possible, because honestly your EV is probably higher to keep it and operate it well.

The real question in terms of selling is what you would want for the business (not asking you to post that). I'd guess something like a 1-2x multiple on revenue is the ballpark you'd find potential serious buyers. That's probably low for your growth/profit, but there's also a lot of potential risk to a buyer.

Good to see you're realistic here. Most people aren't.


Only caution here - an accounting firm will love to have you pay for a valuation, but unless by some miracle they know anything about this type of business, the valuation they come up with could be totally worthless in terms of a discussion with a real buyer. I'd probably figure out who the dominant business broker is in the area and talk with them instead.

I think we would probably take an offer around 2x, but of course we'd try and push for higher with a buyer. We have some decent brand momentum and ideally we'd find a whale but I am guessing that the any prospective buyer would be smart enough to realize how difficult it would be to sustain or grow our revenue numbers.

My fear on the valuation is that they basically just spit out whatever you want to hear as the result and its of no use to a real buyer... but we'll at least go in for the consult and look at various options (i.e. Shareholder loans was another interesting option brought up that we hadn't considered).

Shareholder loans?

I think I've been to one of your locations in the SE - it was a good experience.

edit: If I have the right company, you could probably reduce the expense of giving the bracelets as my entire group through them out after leaving.