Sounds like a great little business.
If I were you I would look at 5 years worth of net profit...add 'em up and divide by 5. This would be your average annual profit.
Gererally the rule of thumb on the income side is to pay 5-7 years earnings. Taking your number of 200,000 (at 5 years..you being the purchasor
) is 1 million.
Adjust this for any savings on the purchase (like the 75k a year you save on your partner's salary, assuming you do not simply substitute yourself for his salary) and you then have the figure for income.
Then you would look at the balance sheet.
250k in cash is a straight add. No adjustment necessary.
Add in the value of the inventory and subtract the payables.
You need to still be very careful with the inventory. I would forget cost and value it at NRV...what you can actually realise from the sale of the inventory.
Are you buying fixed assets too? The property, the building, shelving, tools, etc etc. These would need to be valued and added to the purchase price.
Finally there needs to be a determination of "Goodwill". Did your partner start the business and poured the last 20 years of his life building the business? If so he might attach a premium to the sale of his company. Don't let this amount get above half the value of the assets. This is a very "mushy" figure and is very subjective.
If you do purchase make sure you hold back a certain percentage of the sale to cover late or unexpected invoices from vendors.
Hope that helps.
