Questions & Answers - January 10, 2020
As a general rule, here are the factors that have to be in place for you to likely to be able to sell your company:
- Profit. A buyer has to be able to pay the debts to acquire the business and get a return of the owner of the investment. There has to be that profit available in order to do that.
- Location. If you have dismal location chances are that the buyer is probably going to take a hard pass. For example, in manufacturing, access to rail or highways or air is important. Having an ideal location amplifies the likelihood of a sale.
- Equipment. The equipment has to be in good operating condition.
- Inventory. If the business is selling products, the inventory that the buyer is acquiring has to be a good saleable inventory.
- Customers. Customer concentration, the composition of customers, longevity of customers… these make the business saleable. If you have long-term contracts, that’s a good thing for a buyer because it makes the future revenue predictable. And predictability in small business amplifies value, not detracts it.
- Competition. Look at what the competition is out in the marketplace. Is it a saturated market? Is it a race-to-the-bottom-with-the-lowest-price-wins? Is there an opportunity to take advantage of the unique attributes of your particular business in order to compete at a much higher level?
- Intangible Assets. If you have copyrights, or trade secrets, or intellectual property, that is something that amplifies the value and increases saleability (assuming that it can be transferred to the next person).
- Accounts Receivable. This goes hand-in-hand with customers. If you have a composition of sloping customers, that is a red flag because the quicker cash comes in the less working capital that the buyer has to obtain in order to acquire the company.
- Employees. Having a good quality workforce is certainly a big plus. In fact, there’s a lot of companies that acquire other companies just simply because of the opportunity to acquire talents.
- Their own database. Ed and his team have done roughly 2,100 deals so they have a lot of empirical evidence within their four walls.
- When Ed goes outside, he goes to a few places to find market data:
Look at it from the standpoint of “Are you a target?”. If you look at the landscape of who are your potential buyers, look at customers, suppliers, competitors, who would benefit from acquiring you? From a cost standpoint, do you share the same suppliers, vendors, customers? All those types of attributes amplify value.
The rule of thumb is that the target company is five times smaller than the acquiring company. If you’re doing a $1M in revenue, a $5M company is the likely candidate to acquire. There are differing opinions on why that is, most of it has to do with risk. When we look at putting the two companies together in order to mitigate the risk, the company tends to be substantially larger than the company that’s for sale.
Ed wants to stress caution in approaching a competitor. It’s better to approach an intermediary just simply because you can maintain confidentiality on a more sound basis than you personally doing it.
A guy is looking at buying a sign manufacturing company with the description:
“Independent, family-owned and operated sign company. Offering a huge array of products and services including monument signs, channel lettering, custom signs, etc. The company has several skilled technicians with 20 years of experience in the signage industry and all are licensed electricians. The company also has a fleet of equipment with the capability to create any signage.”
Quick Business Review:
- Has 6 employees
- Located in a couple of acres of land (it doesn’t look as though the land is included in the purchase price)
- Looks like the business owner is retiring
- Company does roughly $1,350,000 with an adjusted cash flow of $350,000 and the asking price is $800,000
That’s not a bad number. Sign companies are tough to sell, especially when facing the digital advertising challenges of 2020. But from the multiples that Ed has reviewed as well as looking at this particular business, it seems to be priced pretty good.
For more questions, you have a couple of options:
- Visit www.defendersofbusinessvalue.com and submit a question.
- Email your question to email@example.com.