Business Valution of a Service Business

I'm looking at acquiring a property management company. The company has been in business for 5 years, manages about 50 short term (vacation) rentals. The company is for sale for roughly 2x last years earnings to the owner. As a service business, there isn't much inventory or assets with the deal.

I've never purchased a business before..where would I find values on this type of business? Also, what are some thoughts on how to value a business like this, or frankly any service business?

The problem evaluating this type of service business is the lack of guaranteed future earnings. When you say 2x earnings, do you mean 2x cash flow, ebitda, ebit, or what? Generally my experience with property management businesses is that you are collected 10-12% of the rental fee plus any expenses to maintain the property. As long as the property is rented, you make your fees. In most of these contracts the owner can cancel the contract with little or no notice. This makes the future predictions nearly impossible. The only way I see to reasonably value this type of business is to pay something up front, and an earnout based on monthy/quarterly/yearly earnings. If the business earns $50k/yr and he is asking $100k (just a mathmatical example), then maybe you offer $25k up front, and X% per month for 2 or 3 years. If the business continues as it has in the past, then X% should earn the seller more than his $100k asking price. This is to compensate him for the continued risk, but give him some of the upside as well. This also protects you should the busienss evaporate.

Nice post - thank you. The numbers I've been given are before taxes and owners compensation. Additionally, the owner is the manager.

This is a brilliant way to structure a deal. Also explain to the seller that, in many cases, receiving a payout over time, like this, can create a great tax benefit as well. Put the seller partially on the hook for the continued success of the business.

Good info, GW - thank you. +++

good point on the tax benefit of a structured payment. I have both bought and sold businesses this way and it is an important benefit.