Commodities Brokerage With 25 Year History
This futures trading company earns a 52% profit margin. Located in Eastern Nebraska with 700 active clients across 30 states, 80% of contracts are grain or livestock based. Outside of these, futures trading comes from other traditional markets like currency, oil, precious metals and more. In business for over 25 years, the seller is looking to retire and will be leaving behind an additional book of 1,200 inactive clients for a new owner to take on and grow the company.
A buyer looking to broker would need to obtain a Series 3 license administered by FINRA. The test is a straightforward 2 1/2-hour, multiple choice exam to secure a license. This can be achieved during the Due Diligence time period after an offer to purchase the business has been made, and can be taken in testing centers across Nebraska. A buyer not looking to broker would need to hire additional brokers to assist the 2 employed brokers currently working.
This is an excellent chance for a sales professional to break into a lucrative field with obtainable licensing, or for a larger commodities firm to acquire a second location. Sales are steady year-over-year, and an ambitious broker could drive sells well over the $2M mark.
- Years in Business: Over 25 years
- Location and Service Area: Eastern Nebraska with clients across 30 states
- Number of Clients: 700 active with an additional 1,200 inactive on the books; most clients are farmers
- Commodities: Corn, wheat, beans, cattle (agriculture comprises 80% of sales); the remaining 20% comes from foreign currency, crude oil, heating oil, precious metals and more
- Licensing: Series 3 – 2 1/2-hour, multiple choice exam securing a commodities/futures license; average study time if 4 – 6 weeks
- Building: 6,200 sq. ft. – plenty of room for more brokers!
- Reason for Selling: Health
- Employees: 2 employed brokers, 2 contracted brokers
- Seller Training Period Included in Price:
- 1st year at 16 hours/week
- 2nd year at 8 hours/weel
- Growth Opportunities: Develop relationships with 1,200 inactive clients
- List Price: $3,350,000
- Gross Sales:
- 2017: $1,512,775
- 2016: $1,807,855
- 2015: $1,690,992
- 2017 Cash Flow: $788,515
- 52% profit margin
Cash Flow Analysis
|Description of Financial Statement||P&L Statement|
January - December
|Tax Return||Tax Return||Tax Return||Notes|
|Net Income Shown on Financial Statement||$130,681||$832,542||$753,114||$661,568|
|Compensation to Owner||$110,000||$162,000||$162,000||$174,480|
|11% Tax on total W2 Salaries||$12,100||$17,820||$17,820||$19,193|
|Interest||$0||$287||$110||$0||Non-onward going expense|
|Amortization||$150,000||$36,663||$36,661||$31,920||Non-onward going expense|
|Meals & Entertainment||$60||$702||$0||$1,542||Personal expenses|
|Insurance Premiums for Owners: Health||$9,065||$0||$0||$0|
|Rent||$225,700||$252,000||$167,000||$202,994||Rent is $4K/month going forward|
|Onward Going Rent||$-48,000||$-48,000||$-48,000||$-48,000|
|Seller's Cash Flow = Total Addbacks + Net Income||$788,515||$1,266,444||$1,100,996||$1,067,689|
|Profit Margin||52.12 %||70.05 %||65.11 %||56.86 %|
- 2017 numbers reflect the seller’s 5-month absence from the business due to a family illness
Assets Under Management
- $4,462,567 in liquid value
- Money that is available in the customers’ accounts with which to trade futures
- Used as leverage to trade commodities
- “Good faith” money put into accounts for the sake of trading
- Margin represents about 10% of the amount of cash product being traded
- Commodities, whether they are related to food, energy or metals, are an important part of everyday life.
- Anyone who drives a car can become significantly impacted by high crude oil prices
- Anyone who eats might feel the impact of a draught on the soybean supply
- Similarly, commodities can be an important way to diversify a portfolio beyond traditional securities – either for the long term, or as a place to park cash during unusually volatile or bearish stock markets
- Commodities are a place to invest that is uncorrelated with the stock market
- 2 Employed Brokers
- $24,000 base salary plus commission
- 2 Contracted Brokers
- Commission-based earnings
Seller has returned to employing brokers over contracting the positions out, and has seen a drastic increase in sales.
Sales Commission Rates
- $3,000 - $7,000: 35%
- $7,000 - $14,000: 41%
- $14,000 - $17,000: 44%
In addition to brokers, there are various office personnel to assist with front-end office tasks.
Series 3 Licensing
- Permanent license
- Required by the National Futures Association and Commodities Futures Trading Commission in order to be considered a commodities and futures professional
- Administered by the Financial Industry Regulatory Authority (FINRA)
Series 3 – National Commodities Futures Examination
- 150 minutes in duration
- 120 questions
- $125 fee
- 2 parts to the exam (Market Knowledge and Regulatory Knowledge)
- Multiple choice and true/false questions
- Candidate must score 70% on each part to pass
Nebraska Series 3 testing centers:
- Prometric Testing Center
- Kearney or Lincoln
- Pearson Professional Center
- Lincoln, North Platte or Omaha
Licensing may be obtained during the Due Diligence phase of the purchase of this business if the buyer does not already have a Series 3 license. Average study times are around 4 – 6 weeks.
- 80% of contracts are grain and ag-based
- 1 contract for grain is 5,000 bushels (corn, beans, wheat, etc.)
- National average for 1 farm acre produces 175 bushels
- 1 contract for cattle is 40,000 pounds, or 32 head
- Typical contract example:
- 100,000 bushels on 20 contracts
- Sell 40 calls and 40 puts
- Buy 20 puts
- 100,000 bushels on 20 contracts
- Contract types
- Basis, delayed payment, forward, hedge-to-arrive, minimum price, offer, delayed price, or futures and options
- Commodities include:
- Grains (wheat, corn, beans)
- Foreign currency
- Crude and heating oil
- Precious metals
- Bonds, T-bills
- And many more
- Typical client is a farmer looking to sell crop yields
- There are 700 active clients that have money in their accounts
- In addition to active clients, there are 1,200 inactive clients on the books that could be a huge growth area
- Current clients come from roughly 30 states and trade for 1 of 4 reasons:
- Marketing – products to sell or buy
- For fun
- For a challenge
- For money
- Owner has bought several books over the years to increase the client base and has used this as the main avenue for growth
- Hedgers - some farmers need to buy corn to feed cattle and some farmers are raising corn to sell to those that feed it
- Speculators – not involved in the cash side of the product
- Use the markets to try and make a profit from the marketplace
Competition & Growth Outlook
- 1 immediate competitor that focuses on merchandising of grain and feed products in addition to brokering futures
- Outside of this competition, similar businesses are located across the state and are largely national brands with multiple locations
- Growth exists in developing relationships with the 1,200 inactive clients on the books
- Hire more brokers to increase sales volume and client base
- 2 or more brokers could take the position of the current owner for the same price
- Diversify markets served
- Current owner has focused in ag due to the tangible value of ag products and personal connections to the farming community
- Breaking into other markets to diversify sales would lead to less volatility and a larger client base
The Firm Business Brokerage used a Cash Flow Valuation methodology to determine the Purchase Price of the business. The formula used is as follows:
Cash Flow x Multiplier = Price
“Cash flow” is the sum of net income plus any owner perks and non-onward going expenses.
“Multiplier” is a prescribed number between 1 and 5 determined by a 100-point, 20-question rating system used to determine the business valuation (average is 3).
The Cash Flow for 2017 is $788,515. The prescribed multiplier is 4.25.
With this information, the computation result follows:
$788,515 x 4.4 = $3,351,189
The List Price for the business is set at $3,350,000.
45%Up Front: $1,507,500
Of the 45% up front, a buyer could pay just 35% down ($527,625) and finance the rest through a bank loan.
55%Seller Financing: $1,842,500
Based on retention and a guaranteed net of $750,000 to the buyer: to be paid back over 3 years on a quarterly basis.
Please note that the decision of whether to extend a loan on any sale belongs to the bank, and this document does not guarantee specific terms or verify that financing is available.
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