Selling a business vs. selling recipes

[patris]

A friend and I co-own a little (really, really little) marshmallow business, which we have decided to shut down as of, like, now. We haven't completed any formal dissolution paperwork or anything, but we intend to do so over the next few months. Several people have asked if we were going to sell the business, and my gut response has been no - the valuation would definitely not be worth what we have put into it, and I doubt we would be able to structure something that would provide us with a share of any profits from future product sales.

So today, we get a note from the vendor who does our enrobing for us, asking if we would consider selling our recipes (all of which I developed/refined myself - none came directly from any copyrighted source). I honestly have no idea if it was a serious inquiry, but it got me wondering... those of you with businesses, if someone offered to buy your recipes, would you sell? And how would you go about determining a value?

[Kerry Beal]

Good topic - can't wait to see peoples input on this. I've wondered about the value of recipes I develop for other people too.

[Holly Moore]

My first inclination would be to attempt to license the recipes to the vendor with you receiving an ongoing fee. If that doesn't work, and they want to purchase the recipes, ask them to make an offer. That will give you a feel for the potential value. You can counter offer and let things go from there.

I guess it depends on the potential value, but if it is practical (worth the cost) see a lawyer both to work out the agreement between the partnership and between the partnership and the vendor.

Even if an attorney doesn't make sense, a sound initial step would be to arrive at a written agreement with your partner. It may not hold up legally, but would at least demonstrate intent.

[bmdaniel]

A friend and I co-own a little (really, really little) marshmallow business, which we have decided to shut down as of, like, now. We haven't completed any formal dissolution paperwork or anything, but we intend to do so over the next few months. Several people have asked if we were going to sell the business, and my gut response has been no - the valuation would definitely not be worth what we have put into it, and I doubt we would be able to structure something that would provide us with a share of any profits from future product sales.

So today, we get a note from the vendor who does our enrobing for us, asking if we would consider selling our recipes (all of which I developed/refined myself - none came directly from any copyrighted source). I honestly have no idea if it was a serious inquiry, but it got me wondering... those of you with businesses, if someone offered to buy your recipes, would you sell? And how would you go about determining a value?

Why does this matter? Maybe I'm missing something but it would seem like any money you got would be better than just shutting down.

[patris]

A friend and I co-own a little (really, really little) marshmallow business, which we have decided to shut down as of, like, now. We haven't completed any formal dissolution paperwork or anything, but we intend to do so over the next few months. Several people have asked if we were going to sell the business, and my gut response has been no - the valuation would definitely not be worth what we have put into it, and I doubt we would be able to structure something that would provide us with a share of any profits from future product sales.

So today, we get a note from the vendor who does our enrobing for us, asking if we would consider selling our recipes (all of which I developed/refined myself - none came directly from any copyrighted source). I honestly have no idea if it was a serious inquiry, but it got me wondering... those of you with businesses, if someone offered to buy your recipes, would you sell? And how would you go about determining a value?

Why does this matter? Maybe I'm missing something but it would seem like any money you got would be better than just shutting down.

It most certainly matters to us. Based on our sales, I am 100 percent positive that no reasonable, appropriately derived valuation of the business would be sufficient for either of us to sell it and walk away. We have put an awful lot of work into this business, have a delicious and marketable product, and may well wish to pick it up again when we have more time (50+ hour/week day jobs and aging parents have us both fully subscribed).

I have a rudimentary understanding of how to put a value on a business, but no idea how to value recipes; that is at the heart of my inquiry. Selling the recipes right now would have to be well worth it, and it may be that a licensing agreement (thanks, Holly!) is the best way to go .

The business has no debt, money in the bank and a reasonable quantity of sellable equipment, so it's not like we will walk away penniless. Ultimately it's not about price; it's about the value of our intellectual property, if one can accurately assign that term to a set of recipes. I am simply looking for input from professionals who might have thought about, or actually done, this kind of thing before.

Edited April 30, 2010 by patris (log)

[Edward J]

Selling a business is a lot harder than selling anything else--figure on 24-30 mths to sell a foodservice business with a 75% range of your original asking price.

[Just loafing]

It seems to me that if they are your personally developed recipes and you might wish to return to the business in the future, that you should just cease trading for the time being and not sell anything. Most purchasers are going to ask for a non-compete clause to last a few years, at least. You could just sell the equipment if you need to realize some cash.

[Aloha Steve]

There are many different ways to value a business.

We are an ESOP company and by law we are evaluated every year.

We have chosen to use the cash flow method.

IMO, it would cost a minimum of $3,000 for an appraisal company to value any business. We pay more than that and the same firm has appraised us every year for the last 10.

The easiest method to come up with value for your business would be based on the company's profit. What you would do is determine a multiple of your annual profit before taxes. For a low risk business, that could be as high as 5 x, for a moderate risk business, 3 x is more the norm. How long you've been in business, how many of those years were profitable, current market conditions (you will have to probably provide tax returns to prove all) is what to think about.

Doing a multiple of your profit is the easiest way, because you do not have to worry about the value of your equipment, because its was used to generate the profit, so that it is being paid for and is included using the profit method.

As far the recipe part, again, without the recipes, there would not be the profit, so its part of the price.

If you get a big price/multiple, then you have to decide if they get the recipes no strings. They negotiate you down, or you get a less than stellar price, then they get exclusive use of them for a certain period only. Does that make sense ?

BTW, any buyer who has any smarts or seeks any professional advice is going to ask for a 'covenant not to compete', that is for a certain period of time and for a certain geographical area, you and your partner may not operate a competing business. Maybe you tie in the exclusive use of the recipes to coincide with that time frame. Then, if and when you and your partner decide to take up being in business again, you have the recipes to use.

Good Luck

[xxchef]

Your recipes are just a part of your business' worth. Buildings and or leases, tools & equipment, vehicles, inventory, accounts receivable, capitalization accounts, and customer account lists are some other assets you can consider selling when you liquidate.

There is a certain simplicity and elegance to selling the whole as a "turn-key" business but it sounds like you've already ruled that out so parting-out the various assets is what's left. After you and your partner decide who wants to keep which assets (if any), and after deciding if you are ever likely to want to start the business up again you can then decide which assets should be offered for sale to outside parties and at what price.

I'm now running a small business where we offer 3-day hands-on workshops where we take people and do a full-immersion mini apprenticeships. They end up doing everything we do and by the time they leave, they are basically doing every job from start to finish, if not actually running the business. In their packet of workshop materials is included all of the recipes they will make while here - pretty much our whole production list. A number of these workshop participants have gone on to start their own, very similar businesses (several of them within our target market area) and they usually use our recipes as their business base. None of them, as good a job as they are doing, do I consider as serious, worrisome competition. I guess the point I'm trying to make is that, at least in my opinion, the recipes themselves are a very small part of the whole business. That doesn't mean that you can't get a pretty penny for them, I'm sure, but even if you do decide to sell them and then get back into the game - chances are that you'll not have lost much (once those pesky non-competition issues are resolved!)

Good luck.

[Aloha Steve]

Several people have asked if we were going to sell the business, and my gut response has been no - the valuation would definitely not be worth what we have put into it, and I doubt we would be able to structure something that would provide us with a share of any profits from future product sales.

Let us know what you have decided to do when you make your decision.

[patris]

Many thanks to all for your thoughtful feedback. Our chocolate vendor's question about selling our recipes does not appear to have been a serious inquiry. There have been a few other "my uncle (neighbor, neighbor's uncle, neighbor's uncle's dogsitter's third cousin twice removed) is going to call you"s as well, which is perhaps just what people do when a business they like shuts down. At this point, barring any unexpected earth-shattering offers, my sense is that we will probably just dismantle the business structure and hang on to the recipes and business name trademark. Who knows what the future will bring; if we end up doing something interesting, I will definitely let you know.