It surprised me when I saw that in less than a week my podcast on business buy sell facts was one of the most popular educational episodes we have. Given that popularity, I figured it also makes for a good newsletter, so here we go.
Dave Chappelle took some heat for saying gender is a fact. Of course, he gets into hot water every time he does a special because he insults just about everybody. Ignore what he said (is a fact), just pay attention to the word fact because in business buy-sell there are facts (musts) buyers and sellers must pay attention to no matter how special a buyer or seller thinks they or their business are.
I did the video version of the podcast with the background being the island of Monserrate, with steam coming out of its volcano and I say if you don’t pay attention to these facts your deal could blow up just like that volcano. FYI, the following are for buyers and sellers of small and midsized businesses. They don’t necessarily apply to private equity size deals.
- Sellers don’t care if you have Six Sigma or are a Lean expert, they care that you can run their business and you show that by demonstrating how you had profits 10% more than other divisions every year or that you cut attrition by 50% over two years.
- You will get buyer fever Just keep it under control and don’t let it get you into a dumb deal.
- You will sign a personal guarantee if you’re using a bank and probably if it’s seller financing if the seller has good lawyers. The bank making you sign a personal guarantee always reminds me of a story my friend Mike Flynn, former publisher of the Puget Sound Business Journal, told about a bank president who said if you’re not willing to put up your house why would the bank take a risk on you and lend you money.
- You will need some of your money for the deal. It will not be 100% financed by the bank and the seller; you will have skin in the game.
- It is work and it is hard work and time consuming to find a mature, profitable, and fairly priced company. They don’t come to you so don’t sit there waiting for the phone to ring or just looking at ads on the Internet.
- The seller controls the deal, if it’s a mature profitable company. If you want to control the deal look for a turnaround business and roll the dice.
- It’s not just the numbers. The non-financial factors are just as if not more important than the financial statements. The customers, the employees, the supply chain, the technology, the lease. Jessica recently lost a deal because the landlord wouldn’t give a long-term lease on a location driven business.
- Dependencies are real and they are a serious issue. I asked a business broker about a customer concentration issue on one of his listings as the top two customers were almost 60%. He said, “I don’t see that as an issue.” Really? Especially when the number two customer, about 25%, had been brought over two or three years prior when the company hired their general manager from a competitor. Do customers like the company or the general manager?
- Don’t overleverage like the big players do. Keep your debt coverage ratio between 1.5:1 and 2:1.
- Don’t get analysis paralysis. There can always be another question. As I write in the preface to Buying A Business That Makes You Rich, you will make a leap of faith and you want to make it off a chair not the roof.
- The numbers are the numbers, and they must be correct. Don’t rely on AAA – addbacks, adjustments, and assumptions to make profits look higher (than they really are).
- Buyers pay based primarily on history, but they won’t buy unless they see growth opportunities.
- There are valuation ranges and your business isn’t so special those ranges don’t apply. Every industry is different, and ranges vary by size. In the small business world, the more profit the higher price.
- Make yourself expendable. The business should not be you. Buyers want to see a team.
- Planning increases the business’ value. You can’t say I hired a new manager two months ago and now everything’s fine and profits will be higher. You have to allow a few years to show stickiness because three years is typically what banks and buyers ask for in financial statements and those statements will show the results of your planning.
- Show growth. Don’t say you can grow, just do it. Show growth even if you don’t want to work a little harder, don’t want to hire another employee, etc.
- Realize the buyer is buying your people. Okay, legally they’re buying the business but practically they’re really buying your people.
- The IT department, internal or outsourced, is more important than ever. Just think about all the cybersecurity stuff going on.
- Depreciation is a real number. EBITDA is misleading in an asset heavy business. At some point it represents cash out of your bank account.
- It’s open kimono time. You will be asked more questions about the business than you ever thought imaginable and just when you think there can’t be any more, the bank will ask more.