When it comes to selling a house all homeowners think it’s worth more than it really is. Yet a 4,000 square foot house on an acre lot surrounded by similar houses is going to be worth more than a similar house built on a small, teardown lot that has 60-year-old 1,500 square foot ramblers surrounding it. Yet when homeowners see the former house sell for a certain price they think their house, the latter example, is worth the same.
The same is true with small businesses when it comes time to sell. I wrote last year about the pricing of middle-market companies and an article in the Zachary Scott newsletter titled “8 is the new 6″ (referring to multiples of EBITDA on middle-market deals). I’m seeing more and more owners of small businesses ($3-10 million or so in sales) thinking their company is going to be priced the same as a $50-100 million firm.
Now what adds some sanity to this are the banks. They are not investors so they won’t let prices to be bid up too much (more on this later).
Sellers must be perusing the Internet and getting their heads filled with info on larger deals. It’s always been a good story to say when an owner sees in the Wall Street Journal that a $400 million company in their industry sells for 9X EBITDA and expects their small business will also sell for 9X EBITDA (it won’t). Or perhaps they figure the prices for business have skyrocketed like the stock market.
In the last few weeks owners (of companies doing $3-10 million in sales. or less) have said to me:
I heard my business is worth 5-7X EBITDA.
I expect to sell my business for 6X total cash flow (profit or EBITDA plus owner salary).
I want to sell for one times annual revenue (98% of the time revenue and price are completely unrelated).
Some real life examples of businesses my clients have seen include:
A highly technical service business requiring the owner to do much of the technical work, the asking price is about 7X profit (after a modest owner salary).
A firm with volatile sales, low earnings and an owner who thinks he should get one times revenue.
A seller who wants to sell, take the money and keep the job (and very high salary) of running the business.
The owner of a business whose sales have been declining for four years and while it’s still profitable he won’t share any information until a buyer shows him he can pay the asking price all in cash (now how is a bank going to make a decision without seeing financial information?).
A small glitch to a $100 million business (a machine breaks) could be a catastrophe to a $5 million business. One key employee leaving out of 500 total employees won’t matter. One key employee out of 25 could have a huge impact. These are just a couple of the reasons for the pricing differences.
And speaking of banks, back to our sanity test. Banks are in business to be paid back and they have certain rules they must follow. Of prime importance to a buyer or seller is the debt coverage ratio. Most banks minimum is 1.25:1 (meaning $125 of profit for every $100 of loan payments). Good bankers won’t go near the 1.25:1 ratio. They’ll want a ratio of at least 1.5:1 (and I say the smaller the deal the higher the ratio should be).
One similarity between the sale of a house and small business – the neighborhood matters. As with my above example, the price of the house is influenced by the houses nearby. The general pricing for businesses of the same size and type influences the price of a small business. The price is not influenced by the pricing of businesses 5-50 times larger.
Last week I discussed Rotary’s emphasis on sustainability, training and the use of metrics on International projects. I mentioned what I called the most important part of the project – training of the teachers on how to best use technology to improve classroom efficiency.
The background is Rotary rejected our first grant application for 2015 as we were primarily “giving stuff.” They want training. So, we put in a program to train the teachers and were fortunate enough to find a trainer, in Antigua, with a Masters Degree from Columbia University in the exact subject of our training, mentioned above.
The first three-day session went very well, in my opinion. There was a pre-test, post-test, ongoing monitoring, and each teacher had to create two exercises from a lesson plan, using technology. A tech novice used PowerPoint while teachers more comfortable with technology used YouTube and mind-mapping software to create lessons to reach their students.
I’m telling you this not just to report on the project but to show how Rotary is emulating the business world, or at least how the business world should act. We have to know if what we’re doing is effective. We have to have metrics.
We need to know if certain activities generate results and if not, we need to change those activities. It could mean more sales calls, increased productivity on the shop floor, or managing supply costs better.
We can all take a lesson from Rotary, which has taken a lesson from the business world, and know the results of what we’re doing. As I wrote recently, it’s not the number of people who are connected to you on LinkedIn, the number of people who open your newsletter, or how many comments on a post you make. It’s the number of people who contact you and lead to increased business.
“Do what you feel in your heart to be right – for you’ll be criticized anyway.” Eleanor Roosevelt
I’m writing this in Antigua, West Indies while I’m here as part of my Rotary service project. We are putting computers in schools, as we have for many years, my wife is leading the initial teaching at a new sewing center (our fourth), and most importantly, kicking off a round of teacher training seminars.
I say “most importantly” because training and sustainability are Rotary International’s new mantras. No longer will they fund Global Grants just “giving stuff,” whether the stuff is computers, books, equipment, a well or a water purification system. There has to be a proven plan for the project to sustain itself.
I think too often they have seen “stuff” delivered and after the International partner leaves nobody knows the effectiveness of the stuff. Computers sit unused, books sit in boxes and when a part goes bad a well becomes useless. A business wouldn’t stand for this.
When we started our projects 10 years ago we fell into the above category. We delivered computers and left, hoping they would be used and used correctly. Since then we got smart and realized we needed to have metrics to show the value we’re delivering. Three metrics we were able to use were:
Statistics showing the passing level of Antiguan Primary public school students on their entrance exams (to Secondary school) increased by 50% from the first year we worked on our computer labs to the fifth year (a 12% increase in the private schools, which started out at a much higher level).
In 2014 third grade students receiving a dictionary increased their proficiency by an average of about 15% from February to June, even with a much tougher second test in June.
We’ve tracked the sewing students advancement from beginner to making clothes for their family to selling items.
More on this next week.
“Two wrongs don’t make a right, but they make a great excuse.” Thomas Szasz
While working on the marketing for my Rotary club’s fundraiser, the Bellevue 10K, our consultant said that many races are giving everybody a “finishers medal.” Whether you take first, last or are in the middle, you get a medal, which create a sponsorship opportunity!
I looked at our historical demographics and noticed that 55% of runners are under age 40, and 81% under 50. Not coincidently, this is the age group that, as kids, got a trophy for taking last place in their soccer (or baseball, basketball, etc.) league.
It’s also the same time period that schools started the self-esteem push. You’re all great, you’re all wonderful, don’t worry about anything else. (I know, I remember it at the school my kids went to and where my wife worked.)
Something to keep in mind when dealing with people in that age range, whether they’re employees, customers or suppliers. Not that all of them are like that, but as finishers medals show, it’s something important in many peoples lives.
I’ve seen a plethora of articles lately on how many devices there are to stay connected to some kind of technology all the time. Wear this, embed that, bury your face in your phone all the time, etc.
So what’s the problem? Over the last few months I’ve also talked to three business owners or corporate managers who’ve told me that one of their obstacles with employees is getting them to make personal contact with customers. And these are (supposed) salespeople who prefer to text or email a customer or prospect instead of picking up the phone and calling them (much less going to see them).
I like technology. I’m pretty good with (using) it. In fact, my kids call me every so often to ask me how to do something involving technology. But it’s often the easy way out; “Oh I emailed them” is the lazy salesperson’s way.
I see the same thing with prospective clients, people who want to network with me, and others. They email me and ask about “next steps.” Well, I can write a lengthy response, miss the mark and waste a lot of time. Or, we can talk so I can answer the right question.
It’s even easier for a customer to ignore an email. True, they can ignore a voicemail message but often will take the time to call back or take the call so you can add the personal touch.
I don’t care how much technology we have, the personal touch, by phone and especially in-person, provides so much more value and gets much better results.
Recently I had three speaking engagements in one week. At two of them the subject came up about how long it takes to get a buy-sell deal done these days. The bottom line is that buyers and banks are more cautious than ever and nosier than ever.
In January the following three items appeared in the press, and show why buyers are so cautious:
Radio Shack was preparing for bankruptcy. Online sales have killed them.
Sky Mall declared bankruptcy. People can now play, watch or read on their devices while flying and there’s no need to peruse and buy from a catalog.
An aggressive shareholder is pushing Staples to merge with or acquire Office Depot, which recently acquired Office Max. The logic is that with Amazon, Wal-Mart, Target and others selling office supplies it would not create a monopoly but the scale is needed to compete.
The connection is that things move faster than ever these days and business buyers see the changing world and want to make sure the company they buy is not going to fall prey to the same fate as those above.
For people buying a business it’s usually the largest transaction of their life, and highly leveraged. They want to make sure they ask the right questions, get the right answers and if there’s any doubt they will ask deeper, more probing questions.
Not only are things moving faster than ever and for a buyer, the recession is still visible in the rearview mirror.
I find it interesting that during Super Bowl week so much press is being given to underinflated footballs. Yes, it’s a rule and if knowingly broken someone needs to pay the price. However, the best post I read said, basically, “Who cares?” Why not just let each team use their own balls, inflated the way they want them. If the NFL truly wants more action, and more points let the offense dictate little things like this.
We do the same in business, don’t we? We take every legal advantage we can to do better (by providing more value). And if we prefer to deliver our message differently than others deliver theirs, it’s our choice.
Let’s hope not, other than for tax purposes. I’d hate to think that you and I are starting anew with no projects, no suspects, prospects, clients or momentum.
For some it might be a nice thought to wipe away the past but for most of us it’s the experience we’ve gained that is the most valuable asset we have. It’s why we do business with others and they do business with us.
In a way it’s like the old cartoons of little kids getting up on January 1, expecting a monumental change, and then saying (usually to their dog), “It looks the same as yesterday.” Let’s hope we’re doing the same (productive) things we were doing last month and that the two weeks of holidays, magnified by a mid-week Christmas and New Year’s, is a refresher not a fresh start.
“Spare me the grim litany of the realist. Give me the unrealistic aspirations of the optimist any day.” Colin Powell
I was having an exchange with my friend Ted Leverette on the subject of webpage views, clicks, Google Adwords, etc. when I used the term “Business Voyeurism” to describe all the lookiloos who use the Internet to wish, hope and dream.
The Internet is great; it’s a valuable resource, as long as you watch out for all the people walking down busy streets with their faces buried in their phones. It’s also a fantastic place for dreamers. Five or six years ago I wasted a few thousand dollars on Google Adwords and similar from Yahoo and Bing. What I got was one short game of phone tag. I never talked to a live person or exchanged emails with anybody. Business voyeurs.
It’s so easy to click and look without serious intent. It’s super easy to inadvertently click on something (that will require a payment to the host website). In the old days (waaaay back in the 1990’s) people still looked at newspapers and magazines for a lot of their information. We never knew how many people read our ad, our story or had a modicum of interest in what we had.
Now people are fascinated by page views, clicks, newsletters opened, etc. Yet the result is the same – the serious will pick up the phone or write an email. The rest are just part of big data that gets some people excited over nothing. It’s almost as ridiculous as getting excited that a certain number of people, most whom you don’t know, like a picture you posted on facebook.
I realize it does take people looking at websites, blogs, newsletters, etc. to capture interest. My point is that we shouldn’t get excited over the numbers, just because we now have access to those numbers. We still need to get excited over real live people who show an interest in what we have.
“Experience is the name everyone gives to their mistakes.” Oscar Wilde
The Supreme Court recently ruled that Amazon warehouse workers will not get paid for the time they spend standing in line and going through a security check after their shift ends.
I can’t say it surprises me, but it disappoints me. I can relate to these workers as when I was working hourly jobs, in high school and college, every minute counted. I remember one summer job where you couldn’t punch in early (or late). If you arrived early you sat around with others until the magic minute and then punched in. The same on way out, you were expected to clean up, tools put away and ready to punch out at the anointed time.
At that age I also always had things to do and places to go after work. Waiting around for up to half an hour would have been irritating (and not fair).
Having helped scores and scores of businesses and business buyers I can’t imagine (the vast majority of) my clients treating their clients like Amazon is treating their employees. If you put yourself in the shoes of the other person you often see things from a different perspective.