EP 22: Frequently Asked Question Friday Jan 10, 2020

Ed Mysogland  0:01  
Please welcome please welcome, welcome. This is another episode of the defenders of business value podcast podcast where we talk about what makes a business valuable learn the tips and tactics to increase your company's value that only veteran dealmakers know. And now, here's your host it miso clamp.

Welcome to the defenders of business value podcast. I'm your host, Ed Mysogland. I help business owners understand what creates preserves and transfers value in small businesses. Today, we're going to begin something new. And that is frequently asked questions. And we're going to do this every Friday. So the podcast has done substantially better than I would have anticipated. And as a result, we've received a number of questions about business value, market multiples, deal making, and small business in general. So we're going to expand our content or frequency of content, and open this up to questions. So we'll put out or I'll put out a three questions each week on Fridays, as well as maybe some additional commentary regarding some of the deals that we're seeing. So I appreciate you being here. And we'll get started with our first question now.

Okay, question number one.

What makes a business saleable? You know, over the almost 30 years that I've been in this business, you know, I thought I had pretty much everything down and buyers do some odd things that, you know, kind of defied logic. But as a general rule, here, here are the factors that

have to be in place for you to likely be able to sell your company, the first one is profit, a buyer has to be able to pay themselves, pay their pay the debt, to acquire the business and get a return of an on their investment. It just there has to be that profit available in order to do that. And it's funny, so many business sellers just totally disregard that, that that's the buyers problem. Well, no, that's not really the case, that is really your problem, because the buyer is going to use that income stream in order to get financing pay you back excetera. The next thing is location. If you have a dismal location, chances are that the buyer is probably going to take take a hard pass. And the fact of the matter is, is that the location is important. Especially, for example, if it's retail, or let's just say if it's manufacturing, I mean access to to rail, or highways or air is important. And so having a an ideal location, amplifies the likelihood of sale. Next is equipment, the equipment has to be in good operating condition. I mean, it's it's astounding. And you see this with a lot of older business sellers where they stop working on replacing equipment, they just they keep on mandating it not putting a whole lot of capital back into the business, because they're trying to and rightfully so, I mean, it's their business that they continue to pull the profits as opposed to reinvest. And and then the buyer is, has a decision to make, do they buy the equipment as is? Or do they penalize the seller from a value standpoint in order to cure the deficiency of equipment, so having equipment that's in good operating condition, as well as that is?

I don't want to say necessarily new, but it's certainly not antiquated. Next, the inventory, if the business has a particular type of

if they're selling product, the inventory that that the buyer is acquiring has to be good saleable inventory. It's remarkable when we see business sellers that have slow moving inventory and they think that the buyer is just going to to kind of turn a blind eye and say, Yeah, all right, I'll I'll buy it all. It's just not the case anymore. Next, customers couple things first, obviously customer concentration and when I say concentration, if you're in excess of 20% You know that's a red flag, but the the composition of customers and longevity of customers that makes a business sale saleable. If you have long term contracts, you know that that's a good thing for a buyer because it makes the future revenue predictable and predictability in small business. It amplifies value not detract

Next up

next is competition, we have to look at what what is competition out in the marketplace? Is it a saturated market? Is it a race to the bottom is that with the lowest price wins? Or is there the opportunity to take advantage of the unique abilities or the unique attributes of the of your particular business in order to compete at a much higher level?

Next intangible assets if you have

copyrights or trade secrets or

intellectual property, that

that is something that amplifies value and increases saleability. Assuming that it can be transferred to the next person. Next is accounts receivable, slow pain, and this kind of goes hand in hand with customers, you if you have a slow pain, if you have a composition of slow paying customers, that is a that's a red flag.

Because obviously, the quicker cash comes in, the less working capital that the buyer has to obtain in order to acquire the company employees. You know, that's a that's a lightning rod right now. Because every I think everybody in every industry is fighting that same talent, attraction as well as retention. So 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 talent. So those are my initial thoughts on what makes a company saleable. The next question is, where do you get as in? Where do I get my market data? First place is our own database. I mean, we've done roughly 2100 deals, so we have, we have a lot of empirical evidence within our four walls. But when I go outside, I go to a few places. The first one is bootcamps, bi, Z, C, Om, PS, I go to key value data. So it's, as its as it sounds, KEYVLUE, da ta.com.

I use value source

data from key value data. I use deal stats from business value, resources, we did a podcast with them a couple months ago.

I also go to the Business Reference Guide. And those are the primary places I go to find market data for our purposes.

The last question is, how do I know if I'm a candidate for a strategic acquisition? So it's fairly, I don't wanna say easy, but from the standpoint of, are you a target? Well, if you look at the landscape of Who are your potential buyers? So look at customers, suppliers, competitors?

Who would benefit from acquiring you? I mean, from a cost standpoint, do you share the same suppliers? Do you share the same vendors? Do you share the same customers, all those types of

attributes amplify value, but, and I and let me stress to you, I would really caution you to approach a competitor, I think I would probably go through an intermediary, just simply because you can maintain confidentiality and in a more sound basis than, than you personally doing it. So that's strategic value that I was referring to

the rough rule of thumb, and this is, again, take it for with a grain of salt. But the rough rule of thumb is that the target company

is five times smaller than the acquiring company. And that's just a rough rule of thumb. So if you're doing a million dollars in revenue, a $5 million company is probably the likely candidate to acquire now, there's differing opinions on why that is, most of it has to do with risk that, you know, it's understood that a lot of the mergers

failed to simulate and I've read up to like 80% tend not to work as as planned. That's a that's a challenge. And so 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.

I received this question about a about this guy that's looking at a sign manufacturing company. And he sent me this link about it. So I'll just read you the description. It's a company, independent, family owned, operated Sign Company, offering a huge array of products and services, including monument signs, channel lettering, sign cabinets, sign face, neon signs, vinyl signs, custom signs. The company has several skilled technicians with 20 years of experience in the sign industry and all are licensed electricians. The company also has a fleet of equipment with the capability to reach almost any signage.

So let's see there are six employees.

Let's see it's located on a couple acres of land, it doesn't look as though the land is included in the purchase price.

Let's see what else it looks like the business owner is retiring. And the company does roughly 1,000,003 50 with an adjusted cash flow of 350,000. And the asking price is 800,000. So I guess my initial

thought is, that's not a bad, that's not a bad number, it's just kind of

a click over

to multiple, which is which is fairly attractive now.

In the deals that we've done in the valuations that I've done

it I mean, they sign companies are tough to sell,

you know, no one, I shouldn't say No one wakes up and says, you know, when I think I want to be a manufacturer signs, especially facing the the digital advertising challenges of 2020. So but but like I said from from, from the multiples that that I've reviewed, as well as looking at this particular business, it's it seems to be priced pretty good. So anyway, I hope that helps if, if I can answer any more questions about it, you can certainly reach out to me at ed at defenders of business value.com. And I'll be happy to share with you some additional thoughts that I might have with if you offer some additional specifics. Okay, so that's this first episode of frequently asked questions. I hope you found it beneficial. If you have questions. You have a couple options. One, you can go to the defenders of business value.com web website, and on the side of the website you can see submit a question all you simply do is click it and it will prompt you to record a question and then we'll put it on the air. Or you can just email me at ed at the vendors of business value.com And I'll be more than happy to review and hopefully we can answer your question on the air. Thanks so much for listening. I hope you found this beneficial.