Small Business Buyer Surreal Wealth Thu, 09 Feb 2017 03:44:32 +0000 en-US hourly 1 58428555 Valuations that are Flawed Fri, 18 Apr 2014 21:10:05 +0000 Probably the most important yet most misunderstood discipline in acquisitions is valuations. Let me cut through the junk by offering up the most ludicrous valuation methods and at the same time giving you a few that make sense. When calculating the value of the small business one thing you need not do is take a multiple of sales and use it as a rule of thumb. Multiples of sales are pretty much meaningless unless you are buying a high tech bubble company or something like a motel. Why are they meaningless? Well pretty much because the sales could be one number but the actual money you put in your pocket from profits is totally unrelated. A $1 Million sales company could generate $400,000 in profits or barely break even. Obviously your multiple of sales would come up with the same pie-in-sky number each time regardless of how lousy the profits are. Case closed. DCF is discounted cash flow. This makes slightly more sense – for a growth company perhaps. The problem is that DCF relies on future projections to generate a value. Picture a set of projections that run ten years into the future and then trying to boil it all down to today’s value. Mathematically it can be done but it gives the somebody the license to dream up the most optimistic projections imaginable. A small business has good years and bad. A DCF projection never has a bad year. Liquidation and Asset valuations. One can assign market value to all of a company’s assets and

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add them up to find the value. While this makes some sense if the assets are to be sold separately, it does not take into account any going concern value of the enterprise. In other words it does not take into consideration the operating performance, or, you guessed it, profits. The not-so-ludicrous IRS method, aka capitalization of

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excess earnings method is probably among the fairest of methods. It seeks to take into account both the earnings of a company and the assets. It assigns capitalization rates to the assets and the earnings. It also credits the company for its excess assets which many companies have. For example if a company had spare cash of say $500,000 which wasn’t needed for working capital, then that would be added to the valuation. I happen to use a combination of this

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method and the Rule of Thumb method which is simpler still. In the industry we generally use 2-5x multiples of earnings weighted mostly towards the current year. This takes the place of cap rates and provides a range of values depending on the relative merits and size of the deal. And if there are excess assets they could either get excluded from the deal or added to the valuation. This avoids a lengthy calculation of cap rates against assets and earnings. Yet it generally takes you to the same place except with often more conservative values. Note that we assume the earnings are calculated the same way across the board using EBITDA which deducts the compensation of all essential personnel (but not absentee owners for example). Keeping the calculation simple is the most efficient way to go because your valuation is going to be challenged 5 ways to Sunday no matter what.      

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LBOs: of New Deals and Old Deals Thu, 31 Oct 2013 15:01:46 +0000 A number of my clients run through a lot of deals before finding the ones that interest them. This can be discouraging but my adivce to people who run through a lot of deals is: you are learning a ton, don’t stop!

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Every deal you visit, every broker you meet is a learning experience and just adds to your knowledge of industry, deal structuring and people skills. Never let up. You bring that experience level to each new meeting you attend and you become that much more impressive to the people you meet. The deal business has multiple advantages, not the least of which is when you buy a company you are no longer an employee of any sort but a CEO… instantly. This is like becoming an Eagle Scout (I am a Scoutmaster), the title travels with you and helps you wherever you go. Anyway that is only half of what I wanted to share. The many deals that you visit can have a become a huge benefit down the road. I save all my LOI offers for as long as my computer is alive and kicking. Or even if I have to change computers. They accumulate rapidly and I even

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learn from writing all those documents. The offers are only two short pages and they can be replicated with each offer structure being identical to the last. However, that is a subject for another post. But what is interesting is that over a period of months or years there are many Old deals in my computer that never went anywhere. That is the nature of the business. But I am often curious.

Whatever happened to those deals? Were they sold? Are they still on the market. Gosh the seller was asking too much and the broker was cocky I will laugh if it is still sitting there. Indeed it generally is just sitting there. I periodically go back and check on many of my old prospects, particularly the ones I found compelling but maybe the deal was out of reach. I call the broker, he usually remembers me and I ask about the deal. Sure enough the odds are the deal is still on the market, or if not, was never

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sold and the broker doesn’t even represent them. This phenomenon often presents new opportunities out of old ones and I can say I have completed at least a couple of deals in the past from revisiting old deals. There is a huge benefit from doing this exercise. Deals that sit around for months or years often have exasperated sellers who become more motivated to sell over time. This can reduce the price and make the terms more attractive as the seller becomes more realistic. Benefits all around. This is why the first question I ask a broker is: How long has the deal been on the market?

Getting Deal Flow When You Don’t Know Nuthin Thu, 03 Oct 2013 16:54:55 +0000 Not everyone starts from the same place when buying a business. Some folks have been around and understand a little bit of the game. They have talked to a few brokers, maybe see a few information memos even spoken to a seller or a bank or two. Yet, as I continue to find out when talking to clients, I encounter many who haven’t been out there at all and simply do not know where to start. This is what happens when you have been working a

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to learn some things about the outside world. That said, people have jobs and so time is limited and the learning process is thus tedious. That’s why I’m here. Talking to brokers isn’t easy if you have not done it before. They can be intimidating because they ask all the obnoxious questions that you don’t want to answer. Like “how much money do you have”? Or “how many companies have you bought?” I don’t like to answer that one. Even if I owned five companies it’s like “why don’t you own ten?” The simple motivation is that brokers do not want to be embarassed by their buyers. So there is a screening process but the good news is there are always ways around it. Over the years I have been able to get a look at every size deal even though I didn’t have a prayer of buying the bigger ones. I recall working through an investment banker to get hooked up with a big Textile company, a couple hundred million in sales. The vetting process was quite thorough but our undercapitalized investor group was, for a while at least, the frontrunner. Other deals in the $30-$50 Million sales are in industries ranging from manufacturing to oil wells were similarly easy to get a look at. Which is not say we bought all the companies but that the screening process wasn’t really screening anybody at all, even at high sales levels. The moral of the story is that brokers generally need to give all reasonably credible buyers the opportunity (no matter their resources) to look at their deals. So new buyers need to start with this fact in mind. You WILL be able to get by the broker screening process and get plugged into deals both big and small. You just need to push a few of the right buttons, talk at the broker

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for a bit and you generally get look at just about any deal you want. It won’t happen day one but over time you will have enough discussions under the belt to build up great relationships with brokers so that they send you a consistent flow of deals.

Never Bought a Business? Start Right Here! Mon, 30 Sep 2013 15:46:56 +0000 If you have never bought a business before you can start right here. Why on earth would you want to buy a business? It is a big job to buy one and a big job afterwards to run one. Even if you don’t run your company, and sit back and

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collect checks which I like to do, you will be responsible for it just like a child. You will not be able to ignore it. You will be able to take expensive vacations but when you come back you will have a company waiting for you to take care of. I’ll tell you the reason I bought my first business (and I got the idea from Ollie North): I thought it was a neat idea. If that is not the world’s worst reason to buy a company then I don’t know what is. I always thought it was a neat idea both when I had a job and when I didn’t. Although it might have been a terrible reason it did one thing for me: It keep going after the prize, it gave me persistence. Moreover, buying a business is much easier and profitable than getting a job and I don’t even need to prove that anymore. If nothing else you should take away this: It takes hard to work to buy a business but buying a business doesn’t have to be hard work. Which is to say you will have to spend many hours to buy a business but many of those hours can be extremely fun and rewarding. The proceess of buying a business will give you these skills: 1. Networking 2. Face to Face communication 3. Industry familiarity and analysis 4. Legal document reivew and preparation 5. Account principals and structure 6. Dealmaking skills 7, Negotiating skills 8. Phone skils 9. Company top management skills 10. Wealth building skills To Name But A Few In short, the process of buying a business touched on virtually every aspect of business and wealth even when I hadn’t even completed a deal yet. Just the preliminary process alone of sourcing deals, and working with brokers, sellers and business professionals educated me well

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beyond the limited scope of each of these areas. Once I went through this process a few times, again even if I hadn’t done a deal, I was no longer an employee, or, to be blunt, a cog in a machine. I was now a dealmaker, a founder, a CEO, a partner, all positions of exponential credibilty which build on your access to the next opportunity. So, ok, you sold me – what does a new buyer do to get started? The first thing you do is to keep your day job. The second thing you do, if you cannot do the first thing, is secure an interim source of income. Holding your own financialy is important to do while undertaking months of dealmaking. The third thing you do is for those who can’t do the first two things. This website is for

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you. Your back is against the wall and you are not alone. You need the shortest distance between your current situation and a competed deal. So start here: 1. Start getting deal flow – contact brokers, websites, pick some deals, and get info 2. Pick up the phone start talking to business brokers, go to the small ones first the ones with retail stores and small deals 3. Collect packages and review the materials. Keep an email dialogue with the brokers. Ask questions via email. 4. First set up meetings with networking contacts. This should include accountants, lawyers, bankers and other businessmen. Practice your pitch on them, tell them who you are and what you are trying to do. 5. Set up meetings with brokers. Talk about the deals they have and how they structure their deals. 6. Finally, you are ready to meet with your first seller! If all this sounds time

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consuming while at the same time you are in a hurry because you have no income then yes, it is. But then, trust me, when you are motivated by financial need, fear and greed you WILL make these things happen fast. You won’t get lazy when things are tough.

Why you WILL buy a business Thu, 26 Sep 2013 15:11:51 +0000 If you buy a business, and I am not saying that you will, it will be because of the following reasons:

1) You have enough cash in the bank to complete the purchase 2) You have the time to search and find the right business 3)

You will never be dissuaded from the goal of working for yourself. That about sums it up. However, the above scenario assumes, for example, that you

are loaded with cash and need no financing for a healthy sized deal. Or it assumes that you have rather little cash but just enough to own a very small company. Either way the scenario presumes you forgo the leverage of an LBO because you would rather deploy all your savings towards the deal. Make no mistake, this is the fastest way to do a deal. But most folks arent in this kind of cash position. Even if they have done deals before. I have done deals before and I still would never deploy all my hard earned cash towards one deal. Cash is king, keep it. Dont buy a liquor store if, with the same

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savings account, you can buy a distributor. The distributor will outgrow and outperform the liquor store every time. Its called scalability. While it takes longer to do an LBO the rewards are exponentially greater. Here is why YOU will do an LBO and not just buy a business: 1) You dont have enough cash

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to buy a company but you will find it. 2) You dont have enough time but you will make it. 3) You dont have the skills, but you will learn them 4) You dont have the financing but you will get it. 5) You dont have a team to help you but you will assemble it. There. That should do it. The LBO is defined more by what resources you are lacking than what you have. Always realize that if you are but one person, two people, even a small investor group or a small business, you will be lacking nearly everything you need to pull off an LBO. Even if you have done one before. That is the beauty of it. If everyone could do it. well.. everyone cant.

Why Did You Fail To Buy A Business Thu, 26 Sep 2013 14:33:51 +0000 As a buyer who has failed to buy a business on more than one occasion, I am fully qualified to answer this. Many words come to mind for things that are lacking. Time,

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experience, background, and the list goes on. Indeed most first time buyers will probably fail, which is good news. Buying a business is very much like other business ventures: it requires some failure in order to succeed. If you bought a business on the first try, you will not have learned much, and in fact you may do more harm than good. In the process of failing to buy a business you accumulate a wealth of knowledge, including, financial, negotiating, valuation and even picking up specific industry experience which always comes in handy. I still go into injection molding shops armed with experience I acquired fifteen years ago when I failed to buy a several of them. When you fail to buy a company it means you at least tried. In trying to buy that company you went out to see the shop, you spoke with the owner, you looked at the financials, you put together a proposal, you negotiated and may have even tried to raise money. All of which put you way ahead of the competition in buying businesses. It is great experience even if you ended up getting a job afterwards. However beneficial the experience of failing to buy the business is, you still failed, right? So why do we fail? Trick answer: To gain experience. Not the answer you were expecting? You didnt really want to know why we went through all the trouble of failing, you wanted to know why the buyout didnt happen. There is an answer to this too. Of course there are many reasons. 1) You underestimated the time involved 2) You tried to buy a deal above your means 3) The deal was undoable 4) You were afraid to jump in 5) The Seller was afraid to get out. These are some of my favorite reasons for failing. And the all time best reason for failing to buy a business? Another trick Answer: You havent failed enough yet. This simply means you are in a numbers game and you need to pour through 100 deals or so before you get to the one that gets done. Meanwhile you pick up all the required experience in buying a company. Does this take a serious amount of time and commitment? You bet it does. It could take 6-12 months to buy a business or longer. Easily. The buyout process is not for those short of time because their day job is all they can handle. When undertaking an LBO, you must have a secondary source of income or assets to live on. You cannot do an effective job of buying a company while you are worried about feeding your family. Keep the job, do it on weekends or wait until the time is right but do not ever, ever assume you will complete an LBO on your own timetable. This goes for even smaller

companies underneath the LBO radar as well.