The Right Price for Your Business

“If someone offered me the right price, I’d sell in a minute!” Exit planners and business brokers hear it all the time. “Anything is for sale if the price is right!”

What is the “right” price? Of course, you can fantasize about a windfall from a buyer who has far more money than brains. Some of the fast-talking “business brokers” (the ones who get more revenue from preparing offering books than actually selling companies), will pitch their secret list of buyers in Europe and Asia who routinely overpay for businesses.

In case you didn’t know, the largest advisory firms in Europe and Asia are the same ones we have here. The same accountants, the same attorneys, the same investment bankers and the same consultants. It’s unlikely that they give their wealthy overseas clients lesser quality advice than the ones in North America.

Barring purchase by a lunatic, your business is likely to be priced around Fair Market Value; the arms-length amount that an independent buyer will pay an independent seller.

Beauty is in the Eye of the Beholder

You are the seller, and your company is what it is. Buyers, however, come in a variety of sizes and flavors. Understanding why companies have different values to differing buyers is critical if you plan to maximize your proceeds.

Here is a 2 1/2 -minute video on valuation from our website of free tools for business owners at www.YourExitMap.com.

These are the typical ranges for “fair market value.”

If you are earning less than $500,000 in total salary, profits and benefits from the business, your likely price is between 2.5 and 3.5 times the SDE (Seller’s Discretionary Earnings.) These are “Main Street” businesses; typically sold to individuals.

Once you exceed $1,000,000 in Earnings before Interest, Taxes, Depreciation and Amortization, or EBITDA (but not counting your personal salary and benefits) you are a target for professional investors. These include private equity groups and family offices. In this market, valuations between 4 and 6 times earnings are common. If your EBITDA is over $2,000,000 it could be substantially higher.

Strategic and industry buyers (who may be the same) could pay more, but those transactions are very specific to the situation. In simple terms, the right price is whatever you can get. If the acquirer has a plan to plug your business into an existing customer base and grow it substantially, earnings often become a secondary issue.

The Neutral Zone

The “neutral zone” contains those companies who earn more than $500,000 (SDE) but generate less than $1,000,000 EBITDA. This is a fairly broad range.

Let’s use an illustration. An owner takes a $400,000 salary along with another $250,000 in benefits, and shows a pre-tax profit of $700,000. Clearly that is a healthy small business. In the “Main Street” market the company could value at between $4 and $5 million.

An individual buyer would need at least 25% down ($1,000,000 cash) plus working capital, and be able to guarantee loan payments of about $500,000 a year. That’s well beyond the range of most individuals.

Yet unless this business has a unique product or intellectual property, it is likely of no interest to professional, industry or strategic buyers.

Many of these companies are choosing a staged sale to their management teams. Others choose to kick growth into a higher gear in order to reach the next stratum of buyers and valuation. Either approach will usually take at least five years.

Controlling the Right Price

Some owners are choosing both approaches. They use ownership as a management incentive to achieve growth targets. If the company makes the leap into a buyer market with higher valuations, both the owner and the management team win.

If the company doesn’t attract the target buyers, the owner still has a solid exit strategy from a more valuable company. Getting the right price requires the right plan.

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

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After the Exit: Second Acts

As part of my effort to add variety to the types of exit planning posts here, I will occasionally include “Second Act”, stories about business owners who have already left one career, and are now doing something else.

The Second Act

The 19th century Pearl Brewery exemplified both the potential and the problems of close-in urban industrial sites. Long abandoned, but just a mile or so along the river from the famed San Antonio Riverwalk, it was in the words of one real estate agent (quoted from the San Antonio Express-News):

“…an overgrown creek full of homeless encampments. There was terrible crime in the area, and the ground had massive hydrocarbon problems. The buildings were full of asbestos and lead paint, and some were structurally questionable.”

Located next to the major north-south traffic artery from the airport to downtown, The brewery has now been transformed into what is likely the best industrial redevelopment in the nation.

Christopher “Kit” Goldsbury sold Pace Foods to Campbell’s Soup in 1994. In 2002 he purchased the entire 22-acre Pearl site, announcing that it would be redeveloped as a residential/commercial complex.

His vision far outstripped merely knocking out walls and putting shops in. First, the brewery equipment, largely heavy iron fixtures from the early 20th century, was stripped out, inventoried and stored. Every project in the redevelopment integrates the equipment as a centerpiece, lending a cool steampunk feel to the restaurants and public areas.

He also sent crews through Texas, locating contemporary buildings made with the same yellow bricks, so they could be disassembled and used to match the existing masonry in buildings being restored.

The residences, however, are all brand new, and command the highest rents in the city. Today, a dozen unique restaurants (the complex has a “no-chains” policy for retail) surround the Emma, a 5-star boutique hotel, and the Culinary Institute of America.

A Vision with Influence

Using the proceeds from the sale of a successful business to create another successful business is admirable, but not unheard of. Doing it in a way that changes an entire city is something else again.

Spurred by The Pearl, the city has extended the Riverwalk north to the complex, with a linear park, art installations and locks to lift the tourist barges to the level of the river’s terminus. Museums and downtown venues are now a 20 minute walk away.

On the “inland” side along Broadway and across the river, other developers have put up new apartments whose chief attraction is “within walking distance of The Pearl.” Another developer is planning a similar complex (18 acres) directly across the street.

Spurred by this successful example of “close-in” living for young professionals, mixed multi-family/commercial development is now underway or in the planning stages for tracts of 8, 15 and 20 acres in and around downtown.

Of course, The Pearl has been quietly purchasing adjacent land for years, and will eventually add roughly 50% to its current footprint.

In the next decade, we are likely to see San Antonio complete the transition from a typical modern office-dominated downtown served by sprawling suburbs to one of the most livable inner cities in the nation.

It Takes a Village

Kit Goldsbury isn’t driving all this development personally. He had a cooperative city government, pent up demand for close-in urban-style living, and plenty of money. There are others who have stepped up, both out of a love for San Antonio and from the lure of opportunity.

I’m working on a presentation for a national conference in September. It focuses on the challenge of helping Boomers think about life after the business. So many see a void; an aimless drifting without the anchor of their companies.

You may not have the financial resources of a Kit Goldsbury, but you will always have the vision, the problem-solving ability and the tenacity that made your business successful. That doesn’t go away when you exit. You just need to plan a second act that puts them to good use.

 

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

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Why GenXers Won’t Buy Your Business

There are six reasons why GenXers won’t buy your business.

Last week I presented a webinar for the Exit Planning Institute entitled “The Perfect Storm.” It looks at six factors impacting the desire and the ability of Generation X buyers to acquire a Baby Boomer business.

The first three, demographic, psychographic and sociographic, are macro trends that make Xer’s unlikely to buy any business that requires capital or more than full-time commitment. .

The last three factors, Regulation, Disintermediation and Entitlements, describe why all businesses are harder to sell today than they were even ten years ago.

The presentation is a bit long (38 minutes), and the quality isn’t perfect.(My apologies for the “dings” when viewers check in. That wasn’t controllable on my end.) None the less, if you are an advisor to owners, or an owner who is planning to sell, you might want to watch this data-based approach to the market forces you’ll deal with.

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

 

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Posted in Building Value, Economic Trends, Entrepreneurship, Exit Options, Exit Planning, Exit Strategies, Politics and Regulation, Selling a business, Strategy and Planning | Tagged , , , , , , , , , , , , , , , , , , , , | 2 Comments

2 Responses to Why GenXers Won’t Buy Your Business

  1. David Cunningham says:

    John, the video is a compelling review of the events that have created our exit dilemma. I would add the impact that automation will have on our consumer driven economy, when workers are displaced and the population can no longer buy what the robots build. A more immediate challenge is that companies like Amazon and Uber have used high risk investment dollars to provide superior service at lower cost without a current imperative to make a profit. The end result will be those companies becoming monopolies, eliminating SMBs. Millenials can see the writing on this wall.

    • John F. Dini says:

      Good points, David. Both job displacement and the Internet come under the general heading of Disintermediation (the elimination of the person in the middle) and none of us can stand up to the Internet.

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The Nimble Small Business

Almost since time began, the nimble small business has been axiomatic. Large corporations are like big ships, the common knowledge goes. They take a long time to change direction.

That is a comforting thought to business owners who choose to see their one-person strategic planning team as a competitive advantage. Like the small furry mammals that survived as the dinosaurs died out, they are adaptable. The nimble small business can react to changes in the market faster, with less bureaucracy, and with greater attention to the customer’s needs.

There is one problem. That “common knowledge” is no longer true. In fact, a new definition of nimble is rapidly becoming the proprietary playing field of giant corporations. Privately held companies, already under increasing competitive pressure, are being squeezed out of their traditional role as innovators.

The Competition for Data

The new player in the big/small competition is data. Companies are in an arms race to understand the buying habits of their customers. It is a race that, by nature, goes to the player who has the most customer contact.

Amazon is the most obvious example. Their prices on any item change on a minute to minute basis. They are adjusted depending on the individual customer’s buying history, time of day, and current sales volume of the product.

I’m guessing that they might also be impacted by geographic area of the buyer, weather in that area, and purchases by family members. If that isn’t the case now, it soon will be.

A friend bought a couple of gas cans for his ranch. The next time he went on the web, he was fed an ad for a gas can holder made specifically to hold those two cans. He bought it, although as he said “It ticks me off to have them know that I want a product before I do.”

That is one less visit to his local farm and ranch store. They’ve been good vendors for years. They let his contractors pick up supplies for the ranch and he pays the next time he comes in. He likes them, but they don’t know what he wants before he does.

Not Just Internet

This capability isn’t limited to Amazon and Facebook. In 2016 General Motors invested $500 million in Lyft. In a recent article, GM’s CEO said that they were preparing for the day when ride sharing reduced new vehicle volume.

They hope to make up at least some of the missing revenue with data sales. If they know where people are going and when, they have a valuable commodity to sell.

Grocery stores are climbing on the data bandwagon. Who knows better what you like or avoid? They can tell suppliers (those who can afford to buy the data) where to direct advertising dollars for the greatest impact.

Netflix now has over 50,000,000 active subscribers. A fortune awaits anyone who can correlate viewing habits with buying patterns. If they don’t have the capability already, I’m sure someone is working on it.

Nimble Small Business

What does this have to do with exiting your business? A lot. Whether you are planning to sell to employees, family or a third party, the buyers are almost by definition younger than you. They understand the value of data.

When they ask how well you know your customers, what will your response be? If you have their names, addresses and emails, that’s a start. If you regularly reach out to them with content that is opened and read, that’s another level up. If you can target them by past purchases, age, location or income, that’s beginning to be nimble.

If you think that greeting them by their first name when they walk in is enough, you are nearing the end of the Cretaceous Period. You want to be with the mammals, not the dinosaurs.

 

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It is ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

 

 

 

 

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Quality of Earnings Part 3: Cash Flow

In the past few weeks we’ve discussed how quality of earnings audits look at your income and expenses, and their impact on company value.  Since Revenue less Expenses equals Profit (P=R-E), you could be forgiven for thinking that we have picked apart your earnings as much as possible.

Unfortunately, that’s not the case. Merely dissecting your customers, lines of business, contracts, one-time expenses and unrecognized liabilities isn’t enough. Quality of earnings also examines how your cash flows.

Accounts Receivable

Just selling at a decent margin isn’t enough. That margin suffers from invisible erosion if your customers don’t pay on time. I’ve heard plenty of owners say ” They are our biggest customer, even if they don’t pay for 90 days.”

Buyers may look at that as “financing” the customers average balance. Even if you aren’t borrowing for working capital, that is money that might be more efficiently used elsewhere.

The math of earnings quality assigns an interest rate to those funds. If the customer takes three months to pay, and maintains an average over-30 balance of $500,000, a 6% cost-of-funds calculation could lop $30,000 from your earnings. If the offered multiple is 5x, that’s $150,000 deducted from your sale price.

Working Capital Needs

Another oft-heard claim by sellers is “This company could grow a lot, if only we had the capital.” Don’t be surprised if an experienced buyer tries to use that to lower their price.

I don’t think this one is necessarily fair. If your valuation is based on past performance, then what the buyer plans for the future is his problem. It has little to do with the numbers underlying your value. None the less, some buyers will put it on the table as a negotiating tactic.

On the other hand, if your selling price includes projections of future performance, or there are obvious issues of deferred maintenance (all your computers still run on Windows 7 for example), then expect an attempt to deduct the additional cash needed right after closing from the purchase price.

Run Rates

Most of us anticipate that a fast growing company will demand a higher multiple than a slow-growing or flat business. That doesn’t mean a buyer won’t try to “double dip” by offering a lower multiple and discounting for performance in the post-LOI due diligence period. Angry sellers will exclaim “But you knew my numbers before you made the offer!” True, but if an outside auditor emphasizes a lack of revenue or profit growth in his report, expect it to be on the table again.

It will absolutely be an issue if your growth rate falters during due diligence. It’s hard to go through the machinations of a transaction and pay attention to driving the company at the same time. Just be aware that taking your foot off the gas will be noticed, and accounted for.

The bigger issue is when growth on your top line isn’t equaled or exceeded on your bottom line. It may indicate that you are “buying business” with discounting. Failure to increase margins with additional volume may point to a lack of scalability. Either will become a part of the discussion on final price.

Quality of Earnings

In my three columns in this topic, we’ve examined eight major areas where a buyer can claim your earnings are worth less than they seem to be. I’m not an auditor. I’m pretty sure they could point to a few more.

The biggest single point I’d like to drive home is this. Most business owners consider the Letter of Intent to be the end of a negotiating road. When it comes to savvy buyers, it may just be the beginning.

 

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It is ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here!

Share
Posted in Building Value, Exit Planning, Exit Strategies, Selling a business, Strategy and Planning | Tagged , , , , , , , , , , , , , , , , , | 1 Comment

One Response to Quality of Earnings Part 3: Cash Flow

  1. Marsha Kelly says:

    Great detailed advice. Cash flow can make or break a small business. I know from my own experience and that of my clients. Run rates are a complex but necessary calculation.

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