The valuation multiple formulas available to compute the value of a business for sale are numerous and can be confusing to many small business owners. In fact, many professionals can be similarly confused by the various multiple formulas currently in use.
When working through a business sale, an inordinate number of resources on both sides of the table are dedicated to drafting and negotiating the Stock Purchase or Asset Purchase Agreement. This is true especially in the last one-to-two weeks before the closing. In fact, I’ve had clients remark that during their entire tenure as an entrepreneur, they never spent as much time speaking to their advisors as they did during the last week of their business ownership journey!
In its purest form, Mezzanine Debt is a business debt instrument that carries along with it certain rights to convert debt into equity (stock, common shares, partnership interests, LLC membership units, etc.). Mezzanine debt financing is not a pure debt or a pure equity instrument. It is something in the middle. In fact, the word ‘mezzanine’ is derived from the Italian word ‘mezzano’, meaning middle, and is used to describe how this particular form of business capital combines elements of both debt and equity financing into one instrument.
Business Brokers and M&A Intermediaries may use or reference the ‘Lehman Scale’ when discussing their compensation method with a business owner contemplating the sale of their business. The Lehman Scale was originally developed in the late 1960’s and used by the Lehman Brothers when raising business capital for their clients.
Business Valuation Experts come in many forms, and for a business owner it can be very difficult understanding the various designations. More importantly, when the business owner is in need of a valuation, understanding exactly what type of expertise is necessary and ultimately who to hire can become a daunting task.
Many small business owners borrow money to start and grow their business. And is often the case those same business owners find themselves hitting credit limits established by banks and other lenders causing enormous growing pains for the business. Simply stated, running out of business capital when you’re growing a business is difficult at best.
Debt Service Coverage Ratio compliance often is required or necessitated by covenants in a bank loan agreement. A bank loan covenant regarding the debt service coverage ratio will specify the amount of income a business and/or its guarantor must generate relative to the debt principal and interest payments on an annual basis to remain in compliance with the covenant. The business owner, or his or her CFO or Controller, should monitor this ratio carefully on a monthly basis so the covenant is not unintentionally broken.
The debt service coverage ratio is a measurement used by lenders to determine if a business is able to meet its debt servicing obligations through its operating income during a given period of time. In most cases, a lender wants the operating income to exceed the debt servicing costs by some measure. This ratio defines the extent to which a business’s operating income (or other defined measure of cash flow) exceeds the cost to service its bank loans.
One of the many questions asked by entrepreneurs as they plan for the sale of their business is related to the Adjusted EBITDA definition.
You have endured multiple meetings with potential buyers. You’ve written dozens of emails and suffered through several rounds of negotiations to secure the best price and deal structure. At last you have decided on the offer to accept. That’s the worst of it over then? Think again – you have yet to experience the joys of due diligence and sale contract negotiation.
If a customer’s total revenue for the year represents 8% or more of all revenue for the same year, you have a customer concentration risk.
For Bill Hinchey, his entrepreneurial journey was one of rapid growth. Just not in the way he initially hoped for. In just 13 years, he saw the sun care product company he started with two partners in a Pennsylvania basement develop into a worldwide leader in the medical device industry.
It’s the late 1980’s and Bill Hinchey just saw his young company, Solar Care Technologies, featured in a complimentary Wall Street Journal piece. Hinchey, along with two other guys he met while working for consumer products giant Proctor and Gamble, had recently set up shop in a business incubator in Pennsylvania’s Lehigh Valley to develop a sunscreen towelette.
If you’ve grown a valuable business, there is no doubt your employees are a big part of your success. You also know that hiring, training, and managing a great team of productive employees is a difficult task. And keeping your best employees is yet another accomplishment! But the painful truth is your competition would be very pleased to hire away your best employees.
Check out the website of your favorite fast food chain and you will see most have multiple business entity structures noted in the fine print. For a large business, this practice has been commonplace for decades. It involves layering one form of a business entity either alongside or in conjunction with an operating business.
Many business owners are under the wrong impression that their business debt will disappear when their business is sold. In some cases, the debt is absorbed or is assumed by the buyer. But usually this is not the case.
When the Letter of Intent (LOI) expiration date and time is defined, the buyer is putting the seller on notice that he or she must either agree to the terms defined in the letter or lose the opportunity to sell the business to the buyer authoring the LOI.
In many cases, the Entrepreneur finds it difficult to know who they should target as a potential buyer for their business. At first glance, any buyer with a checkbook may be attractive. In practice finding the right buyer when selling a business is both an art and a science.
Selling a business is one of the most exhausting endeavors an entrepreneur will undertake. Unfortunately, many simply do not succeed. In fact, only one out of ten entrepreneurs will actually complete the business sale process and transfer their business to another. Selling a business involves many different parties, all of whom have a special role and a unique skillset. Most importantly, they must all work together. Those entrepreneurs who succeed recognize ‘it takes a village to sell a business’.
Often, business owners ask me one of those “quick questions” – what can I do to maximize the sale price of my business? The answer? Not as simple as you may think. But there are 4 factors that can increase the value of your sale price.
Selling a business for the entrepreneur often is a tumultuous, emotionally draining experience. Unless the entrepreneur has sold a business previously, the journey feels awkward and is marked with multiple high and low points. To guide the entrepreneur, we’ve created the 10 Steps to Selling a Business Infographic.
After enduring the economic downturn, this entrepreneur executes his exit plan with the assistance of an experienced exit planner.
The Bank Workout Group is a department in a bank that handles what is known as the bank’s special assets. Banks send their troubled loans to this department to handle negotiation and management of the bank’s forbearance agreements.
If you have ever endured the process of selling a business with the assistance of professional advisors who specialize in mergers and acquisitions, you will agree with me that this is not something to try at home!
Success doesn’t come without its obstacles. Just ask Richard Hagerty, a 40 year business veteran and successful entrepreneur.
As we gathered last week, instead of receiving the financial documentation we were promised, we were all relieved of our duties. Isn’t that a nice way to say “you’re fired”?
This three part series tells how one entrepreneur took a chance on an emerging market, weathered an economic storm, and exited with a bright future.
Right Place at the Right Time
It almost seems like cliché advice a commencement speaker would offer to a group of graduates.
Keep your ear to the ground, work hard and always be on the lookout for the next big thing. And when that next big thing does indeed come, don’t be afraid to take a chance on it.
EBIT is an acronym for Earnings Before Interest and Taxes. This is a term Bankers often use as a measure of a business’s earnings from operations. The EBIT reveals operating profitability without non-recurring or unusual income or expenses.
The DBA is often misunderstood, but it can be a valuable way to promote your business and gain some protections of your rights as a business owner. However, you need to make sure you know the limitations of a DBA to protect your intellectual property and trademark rights.
As I meet with entrepreneurs, I’m often asked the same question: “When is the best time for me to sell my business?” The answer to this question is not the same for every business owner, for many reasons.
EBITDA is an acronym for Earnings Before Interest Taxes Depreciation and Amortization. EBITDA is often used as a measure of a business’s cash flow. Also it is used frequently in many business valuation formulas, depending on the business’s specific industry.
In part 1 of this series, we discussed the various options to incorporate multiple businesses while keeping each business as a separate entity. But what if you want to keep all of your businesses under one roof?
Profitability is directly related to a company’s gross revenue, particularly as it relates to its varied customer types. What does gross revenue mean to your company’s profitability? Everything. Let’s back up to review the concepts we’ve covered in previous posts so we may explore gross revenue further.
Recently I took my nine year old daughter and a carload of her friends to our town’s Volunteer Fireman’s Carnival for an evening of ferris wheels, funnel cakes, and laughter–of course! It was a Friday night after a long week. Truly, I would have benefited from a simple dinner at home to unwind from the week. Sound familiar? However, I intuitively knew that the laughter of those children was most important and desperately needed…so off we went.
Last week was one of those weeks I will never forget. Over the course of a few days, we closed a business acquisition and celebrated with another client his retirement after forty plus years of entrepreneurship. These back-to-back events served to prove the truth that in life one will get what one gives.
The best solution to a problem lies in uncovering what the root cause of the problem really is. So often, this is the case when an entrepreneur is struggling with profitability in their business. Over the past few posts, we have discussed the concepts of how a minimum order policy and Pareto’s Principle applied to the customer/client base can be very powerful to help an entrepreneur improve the value of their business.
If I have said under my breath once, I have done so at least one hundred times… “The devil is in the details!” As we work with business owners and deal makers on the hunt for profitable businesses to acquire, this expression has become our theme song!
If you own a business, you want to know that your entrepreneurial efforts will result in making money. However, many entrepreneurs struggle to recognize where they are making money and where they are not!
Most entrepreneurs find themselves extremely reluctant to turn away an order for any reason. The notion of telling a client or customer that their business or order is too small is frightening to even the most seasoned entrepreneur. However, if you don’t want to leave money on the table, and instead desire to make more profit, setting and enforcing a minimum order policy is absolutely necessary!
I continue to be surprised as I meet with entrepreneurs who truly regard Venture Capital as their Holy Grail. It’s as though they are looking for a Super Hero to make their dreams of entrepreneurial success come true. But having spent more than a few sessions on the entrepreneur’s side of the table in negotiations with venture capital firms, I know better. And it seems there are others who share my opinion!
Not long ago, one of my dear friends abruptly stated “it’s not about you” after patiently listening to my long story about a business relationship which changed, without warning. I just love this friend and how she was able to candidly share her observation which has proven to be brilliant and incredibly powerful.
It takes a special kind of person to start a business: a rare combination of drive, ambition, creativity, tenacity and impatience for action. But even within the community of business experts and entrepreneurs there is a special breed of person known as a “serial entrepreneur.”
As I listen to the stories told by many entrepreneurs, it reminds me of the dangers they face in part because of their own abilities. Many entrepreneurs are literally jack of all trades. They are very good at doing many things! This trait has allowed them to strike out and start their own business. How in the world could this trait be bad you wonder?
Working with successful entrepreneurs who are dedicated to growing and selling a valuable business offers me the opportunity to learn from the best. I pinch myself most days as I am invited into the lives of my clients and have the privilege of experiencing the ups and downs of entrepreneurship. Truly, it is my pleasure!
It is a unique pleasure to find two equal partners or shareholders acting in harmony over selling a business. Unfortunately, when I say “unique”, I mean rarely ever. Please understand, it is not as if this never happens. It is just so unusual, that when faced with the situation, I find myself warning both parties before they proceed to sell their business.
Recently, I had the good fortune to attend a conference where a gentleman and his wife shared their personal story about forgiveness in their business and personal lives. It was an unforgettable story that hit home.
When applied in a business situation, Pareto’s Principle likely will reveal to the entrepreneur that thier business is serving (at least) two very different sets of customers/clients. And in trying to do so, he or she and their staff will suffer anxiety, frustration, and the loss of company profit.
Often entrepreneurs find themselves in a situation where their commercial bank considers their existing line of credit too risky to extend or renew. This places the entrepreneur and their banker at odds, and many times pushes the business owner to take drastic steps to keep their company’s doors open and paychecks coming. Has this happened to you or one of your fellow entrepreneurs?
The Great Recession has been a great teacher for many seasoned entrepreneurs. Those who have survived have been the ones willing to truly look at their businesses objectively. And in doing so, they have learned many lessons.
Just recently, one of my colleagues Bernadette, whom I have known for several decades, called me for help. As I listened intently on the phone, this successful woman entrepreneur shared with me that one of her biggest clients said something to her that was devastating. Before she even began to share her story with me, I could tell by the tone of her voice she was very upset.
When you sell a business, typically you will find language in the Stock or Asset Purchase Agreement that defines exactly what the Seller and the Buyer agree to do or guarantee as part of the transaction. In other words, each may agree to make the other party not responsible. The term used to identify this particular form of guarantee is indemnification.
The “indemnification basket” is one of the most important deal terms found in the Letter of Intent and ultimately in the Purchase Agreement and is often misunderstood by both the buyer and seller of a business. Buyers want the basket to be as low as possible and Sellers want it to be as high as possible. Baskets may be one of two types: a deductible basket or a tipping basket.
If indeed, a greater amount of profit remaining at the bottom of the Profit & Loss Statement is what a business owner is striving for, then one should consider undertaking this exercise before attempting to grow the business by increasing sales.
Recently I found myself looking around for a candid camera and asking “is this really happening?” You see, over the past three weeks or so, my own business continuity plan has been tested and tested and tested again.
Many people discuss the importance of pivoting in the context of a startup business. And I agree, once a business launches, the entrepreneur must be mindful of what is working and what is not. That’s when it is time to pivot the startup.
Recently, small business owners and people who start a business were identified in both the Rasmussen Reports and the Harris Poll with the highest favorability ratings. These two reports confirm what I have observed for decades. Entrepreneurs are good people who work very hard, create opportunities and help others succeed.
Bankers and Entrepreneurs rarely see eye-to-eye. Recently, my observation of this unfortunate reality caused me to chuckle as I sat with one of my clients and her business banker. What made me laugh was how two extremely accomplished individuals could define the term “special assets” so differently.
There are ways to improve the likelihood you will achieve a successful sale of your company if you take the time to develop ground rules with your business partners. The sooner you do so in the process of selling a company, the better.
It never ceases to amaze entrepreneurs how certain seemingly simple decisions, made during the early years of their business startup, can become fatal errors down the road. After meeting with many business owners across a broad spectrum of industries it’s common to find them enduring the consequences of the same, or similar, errors over and over again.