Selling my business....tips?

[nomo-aloha]

Hello all,

First let me say that I am overwhelmed by the sheer collective intelligence displayed on this board. Several members stand out individually, but as a whole, this place is a godsend.

I have read the contents of this board, thread by thread, over the last several days. Sometimes 12-16 hours per. I was hoping to find some answers on my own, but there are not many topics related to this thread....so I'll get on with it.

I have a business here in Hawaii. I am a state licensed contractor and have a product that affords me the luxury of little competition. The product, while new in the islands, is a standard in the construction industry across the mainland. Nords will agree that things move a bit slower here.

I have had this product for 3+ years. I have an investment of approximately $300-400 thousand in related equipment and promotion of this product. It is starting to take off, as all the real (big) players in the industry here know that it is far superior to products currently in use.

I have blown out my back (severely) and I am now limited to how much time I can spend romancing customers and setting up jobs. My crew is very competent and some have been with me for over 15 years. They can handle the work...but I need to be the mouthpiece and I need to line up the work.

Long story short; I fear that with my current condition, the company will lose ground. As of today, we are still very much "ground floor". I have watched sales over the past 3 years climb from (approximately) $700,000 to around $1 million in 05. At the advice of my accountants, I have spent alot of this money on vehicles, equipment etc....I guess the term is "discretionary spending".

It is my firm belief that a profit of $500,000 per year is VERY doable and with very little exposure. Back to my fear. I definately want to sell and feel I need to sell. However, I have been told that a construction (type) company is worth no more than 1/3 of yearly gross. So let's say $250,000 - 300,000.

Does this make sense to you or is this particular broker looking to score a quick, effortless sale?

I am concerned that this year's numbers will more than likely be smaller than last year's. I do not want to worsen matters by allowing this to happen and feel the time to move is now. I have great tech support, fantastic equipment and an even better reputation. Because of my back and other recent personal set-backs, I feel it is time for me to join the ranks of the fine members of this board. I am jaded and need seperation.

Your advice will be much appreciated and I thank you in advance. I want to remove the "Nomo" (no more) from the "aloha".

Re-reading my post, I do not know if I've asked a clear question. Clearly, I want to sell and I'm seeking the advice of people who know about selling a business and how to gauge the worth of a business. Also any tips on marketing the biz...or a mainland broker of reputation would also be welcome. I am hesitant to deal with Hawaiian outfits as i cannot afford word getting around that I want to sell. This is also why I am not describing the actual product. Anyone within the state (reading this) would know who I am immediately.

Thanks again.

 

[thefed]

I'm unsure of that type of business...but I know a fellow who sold a contracting type business for about 2 yrs net profit....

im sure that doesnt help much, but hey....

 

[wabmester]

Business valuation metrics are all over the map.    One fairly universal approach is discounted cash flow, so you might want to compare that to what the broker gave you.    Brokers will probably have a pretty good idea if they specialize in your segment, so if you can find another broker to give you a second opinion, that's a safe approach.

I've used to this site to browse potentional acquisition targets before, and I was pretty impressed by their inventory.

 

[PJ03]

hey Nomo,
Im in the same business as yourself, I'm in MD. I looked into selling my business. I had a guy place a value on it and basically what he did was take three years and average the net then add in a bit for future contracts.
They also came up with a couple of good ideas, your welcome to pm me and I can give you some of the details.
Pat

 

[TargaDave]

Nomo,

Just some general reading:

http://www.businessbookpress.com/articles/article148.htm

Also a decent reference book:

The 2005 Business Reference Guide (Essential Guide to Pricing a Business/ 15th Ed) by Tom West

Take care of getting that back healthy again and good luck.

 

[nomo-aloha]

Good mornin' folks,

Thank you very much for the links and well wishes. All very interesting and most helpful.

I fear the answer to at least one of my questions is becoming painfully clear; The biz just isn't worth as much as I'd hoped or anticipated.

I've never shyed away from hard work but damn, I just feel like I've put way more into this than the equivalent of 2 years net profit. In fact- if I am reading your post accurately, PJ03-I think you are saying that you were quoted a value of just one year's net!

I don't know why anyone would even bother to start a (new) buisness if one can be purchased turn-key for such a nominal investment. I don't know if I'm more dissapointed or embarassed.

Again I thank you for the replies. I think the reality here is I need to figure out how to stay afloat. I've worked too hard to give this thing away knowing what the future holds for this product.

I hope you all have a great and stressless day!

Please do not hesitate to add more to this thread. There is definately a lesson here that may be useful to others in a similar situation. 

 

[brewer12345]

Hey, nomo, what about finding a partner? Maybe one that might come in with the understanding that you would be interested in potentially selling the business to them if it works out right?

 

[CybrMike]

Take 5 - 8 times EBITA (earnings before interest taxes, and appreciation). So if the business made $100,000 profit you would be selling it for $500K - $800K, depending on the ability to reproduce that revenue without you there and the amount of growth that is possible. If you say that the business is going to be doing less than last year, you should probably stay close to the 5 multiplier mark instead of the 8.

I sold my business for about 8 times EBITA but it was an internet business in a very fast growing market with the ability to scale very easy. For instance, it would not be unheard of for the company to go from 8 million in revenue to 100 million in revenue with the correct management and capital.

I say all this only to say that a business is only worth what someone is willing to pay. When someone buys a business, they are purchasing a future stream of cashflows.

 

[PJ03]

Nomo, I did not finish my post...was in need of coffee.
well they did a three year average and did a 2.5 to 3 times that average then added in for tools trucks and equip along with upcoming contracts, I think they valued the upcoming contracts at about 11%.
They also give me some better ideas on selling the company which I'm working on at the moment.

 

[nomo-aloha]

Hey, nomo, what about finding a partner?  Maybe one that might come in with the understanding that you would be interested in potentially selling the business to them if it works out right?

I have given this some thought as well. I suppose that along with such an understanding, I could request them to sign a no-compete clause, thus protecting myself from breeding my own competition.

Do you think I should advertise on the mainland for such a situation...or deal thru a broker? I have always harbored the thought that enticing someone in this field, perhaps from the winters of Wisconsin, to the climate of Hawaii would be quite easy. Especially this time of year, where northerners are either inside...or out of work.

Thank you very much for your reply. I have read about a thousand of your posts and I am very impressed with your stock trading. Are you in the Bahamas?

 

[nomo-aloha]

Take 5 - 8 times EBITA (earnings before interest taxes, and appreciation). So if the business made $100,000 profit you would be selling it for $500K - $800K, depending on the ability to reproduce that revenue without you there and the amount of growth that is possible. If you say that the business is going to be doing less than last year, you should probably stay close to the 5 multiplier mark instead of the 8.

I sold my business for about 8 times EBITA but it was an internet business in a very fast growing market with the ability to scale very easy. For instance, it would not be unheard of for the company to go from 8 million in revenue to 100 million in revenue with the correct management and capital.

I say all this only to say that a business is only worth what someone is willing to pay. When someone buys a business, they are purchasing a future stream of cashflows.

Wow...that sheds a whole different light on the subject! Thanks for your response, cyberMike. Sounds like you created a nice little niche, there. Congrats on the sale!

I mentioned earlier that my accountants really frown on my taking profits. They constantly have me spending on new equipment, trucks, etc. and I pay myself a relatively meager salary. With this said...I think the books would still show a minimum of $150,000 per annum of absolute profit after everything. Again, I guess this falls under "discretionary spending" because I know that I could just as easily be designating $250,000 as profit

While not as attractive or comfortable as a business as yours, It is definately an up and comer. It requires a hands-on kinda guy that can read blueprints and buy lunches, lol. I am just one of two people in the state with this technology and anyone else trying to get in will be 3-4 years behind. All a potential buyer would have to do (to realise the upside) is punch in this product on a search engine and see the incredible popularity it maintains everywhere else. This product will dominate any market that has building, money and weather. Welcome to Hawaii.

So....just so that I fully understand. If my "bring home pay" shows as $150,000 per year..I should ask 5-8 times this amount? This seems much more reasonable and if this formula applies to the construction industry as well as yours, I feel alot better. Thanks again!

 

[nomo-aloha]

Nomo, I did not finish my post...was in need of coffee.
well they did a three year average and did a 2.5 to 3 times that average then added in for tools trucks and equip along with upcoming contracts, I think they valued the upcoming contracts at about 11%.
They also give me some better ideas on selling the company which I'm working on at the moment.

Thanks again PJ03, Looking at cyberMike's post and using his equation involving EBITA....does this seem pretty much in line with the formula you used?

Looking at the two, one would almost get the impression that the numbers would be similiar. If this is the case, I definately feel like I can at least begin to have an idea of what to ask...or expect. Your company was also construction related, right?

Please consider your sale price if conducted like cyberMikes and let me know. This seems to make much more sense than 1-2 years net or 1/3 annual gross.

Any regrets??

 

[Nords]

While not as attractive or comfortable as a business as yours, It is definately an up and comer.  It requires a hands-on kinda guy that can read blueprints and buy lunches, lol. I am just one of two people in the state with this technology and anyone else trying to get in will be 3-4 years behind. All a potential buyer would have to do (to realise the upside) is punch in this product on a search engine and see the incredible popularity it maintains everywhere else. This product will dominate any market that has building, money and weather. Welcome to Hawaii.

Geez, NA, you're killin' me here.

When this is resolved, could you PM me the name of the product that you're selling? Spouse & I are home-improvement junkies and I'd hate to be missing out on something that we might have the gimmes for need to make our home nicer.

BTW I regularly see Pacific Business News listing companies for sale via MergerPlace.com. Have you looked at MergerPlace's or PBN's website and seen what tools they have?

 

[nomo-aloha]

I have used this in the home sector...in fact, my company is the first to do so, but it's more of a commercial / indu$trial thing. we just completed the work down at the pier II cruise terminal for Miller/Watts and we also work with Dick pacific, Swinerton, Hawaiian dredging etc. FINALLY breaking in with the big boys.

We have every Marriott in the Pacific rim as well.

I'll send you an e-mail.

 

[PJ03]

Hey Noma, No regrets here on my plans to sell, Yes the system seems to be the same but the sales price would come in well under 8X.

 

[brewer12345]

I have given this some thought as well. I suppose that along with such an understanding, I could request them to sign a no-compete clause, thus protecting myself from breeding my own competition.

Do you think I should advertise on the mainland for such a situation...or deal thru a broker? I have always harbored the thought that enticing someone in this field, perhaps from the winters of Wisconsin, to the climate of Hawaii would be quite easy. Especially this time of year, where northerners are either inside...or out of work.

Thank you very much for your reply. I have read about a thousand of your posts and I am very impressed with your stock trading. Are you in the Bahamas?

I really have no idea how you would go about finding a partner. Maybe a broker, but maybe an industry association (local builders, realtors or property owners association, perhaps) or another connection would be a bettter choice. I suspect that a broker would have a strong financial motivation to get the deal done and quick, which might not be in your best interest. If you have someone who works with you for a while and then takes over, you might be able to structure part of the payment as a series of earn-outs over a few years after the transition. You wmight also structure some continuing involvement in the business for yourself.

Hahahah, no I am not in the Bahamas. I live in NJ, pretty far from the Carribean.

 

[justin]

So....just so that I fully understand. If my "bring home pay" shows as $150,000 per year..I should ask 5-8 times this amount? This seems much more reasonable and if this formula applies to the construction industry as well as yours, I feel alot better. Thanks again!

Your "bring home pay" or net profit, would have to be reduced by a reasonable salary to get your real profit. You said you pay yourself a meager salary. How much would someone make if you had to hire them to do your job? $50k/yr? Or is that "meager"?

 

[Nords]

I'll send you an e-mail.

Thanks, gotcha-- check your e-mail.

 

[nomo-aloha]

Your "bring home pay" or net profit, would have to be reduced by a reasonable salary to get your real profit.  You said you pay yourself a meager salary.  How much would someone make if you had to hire them to do your job?  $50k/yr?  Or is that "meager"?

Ahhh, Sorry Justin, I thought this thread had fallen thru the cracks. That is exactly what I draw, $50k per year.

I suppose a manager would be satisfied with the same. So, I guess my multiple would be x 100 and not 150. This still better than that crazyass 1/3 gross rule...atleast in my case. Thanks for the help again.


Hey Brewer, I don't know what gave me the impression you were in the Bahamas, lol.....I read so many posts and threads that I guess I got confused. Were you in the Bahama..or planning a trip there?

I do reacall being impressed with your stock-picking though. Right guy...right? You work in the market? Definately a field i would like to figure out. I didn't do so good with my telecoms, lol.


Hey Nords....You have e-mail too!


For anyone that doesn't already know, Nords is about as generous and cool of a guy as you will ever hope to encounter. I can't believe the time I've wasted on Seahawk boards and the likes, lol. This is where the action is.

Thank you all. I'm getting quite the education.

 

[Maximillion]

$50K won't even get you a Carpenter, a GM for a medium sized business would gross at least $150k plus benefits plus car.

noma, don't screw around with a bad back , you are rolling the dice and they are all loaded.

One wrong move and you can be in major problems, Back Surgery is one of the most complex surgeries performed and results are not always great.

Sometimes you just have to cut your losses, and Yes, I am very famiilar with Orthopedics that is why, if you can choose an alternative to Surgery , do so.

You are still Gambling.

 

[Craig]

nomo-aloha, the 5 to 8 multiple above is on the high side, as an internet business will not be a comp for yours.

I'm CFO for a company that buys about 10 dealerships each year.

All businesses are sold based upon their earnings ... EBITDA is the usual measure ... earnings before interest, taxes (i.e. income taxes), depreciation and amortization.  It is a rough approximation of cash flow.  A buyer will adjust your EBITDA to determine what it will look like under their ownership ... perhaps taking into account compensation for a general manager, for example.

That EBITDA number, usually on a TTM (trailing twelve months), is multiplied times a multiple.  Those multiples vary by industry, and investment bankers and other pros research industries to determine which multiples apply in the market.  For example, if a pro was valuing your business, they would look at comparable sales in the market, compare their TTM EBITDA to the sales price, and calculate the multiple.  That would provide a range of multiples for use in your business.  Multiples are a function of actual transactions in the marketplace ... they don't really set prices, per se, though most folks view them that way.

That data would likely be tough to find for your market, and all of this is obviously also subject to prospects for the business (e.g. higher multiple if high growth is expected), quality of the business assets, and circumstances of the seller.

That last item concerns me.  IF you can take care of your back so that you can function, then I would suggest you search for a solid GM to run the business.  Not a partner.  Give them an incentive comp plan that helps drive them to grow the business.  You handle client relations, accounting, "senior" management.  Check the candidates out very carefully, of course ... interviews, background checks, careful reference checking.  You manage the business carefully, and their comp plan is probably based upon EBITDA ... you can give them a % of EBITDA, a bonus for performance over a certain Plan number, etc.  The important point is that you don't have a partner, the business remains yours and yours alone, but you wisely share the profits with a GM who has great incentive to build your business.

The time to sell a business is when things never looked better, just came off of your best year, every prospect for great future success ... the exact time your gut tells you not to sell.    The worst time to sell is when it is apparent the business has turned down, and a buyer may understand you're in a weakened state and must sell.

Last point.  Look at the multiples above as reciprocals of return percentages.  For example, if someone buys your business at a 5 multiple of EBITDA, then see this as 1/5 ... they are getting a 20% return on their money, assuming no changes in business.  Not bad compared to the S&P 500, but an investment in your business is not liquid, and much more risky.  Use the 8 multiple above ... it is 1/8, or a 12.5% return, roughly.  Why would someone pay this, when they can invest in the S&P 500 for slightly less return, but much less risk ... only reason would be if they thought they could take your business to great heights.

Also note that you should get capital gains treatment (for the most part, depending upon entity) for sale of your business ... that is a lower tax bite than the normal income taxes on your net profits. Thus, you can't directly compare the business values driven off of multiples to years of business profits.

We've paid 20 multiples, and even infinite multiples for businesses losing money.  We were only willing to do that to get the franchise rights and existing plant / equipment / personnel / customers.  We knew we could turn the business around, and it didn't cost much to take the current operator out.

Best of luck ... if possible, gin your business up before you sell.

 

[dory36]

Here are some thoughts from my past life as a business broker and appraiser.

Earnings mean vastly different things depending on context. Brokers and appraisers working with businesses with gross sales under, say, $2-5 million will usually use multiples of a number that is called different things, but amounts to how much cash could the owner/manager take out next year if he wanted to maximize his take without impacting the business. This means restating the income statement and eliminating expenses that are owner perqs such as the board meeting in Hawaii (oops - you are in Hawaii -- so maybe the board meeting in Minnesota?), the company car that is mostly used for commuting to and from work, unusual one-time events, sponsoring Junior's little league team, etc. Also added back are costs of financing (unless financing costs are a typical part of the business, as they are in, say, car dealerships), tax credits for depreciation and amortization, and a zillion other things. Brokers are supposed to, but often do not, adjust DOWN for the "real" depreciation, i.e., the reserve for replacement of stuff that wears out.

Brokers vary in how aggressively they approach these adjustments, and the results can go all over the place. But in the end, a potential buyer needs to agree with the rationale for the adjustments.

Gross sales is far more objective, as no one has gone in and made adjustments -- they are what they are.

Multiples of the earnings described above and of gross sales are never used by buyers to decide what price they are willing to pay -- there are far too many other factors involved. They are just used in reality checks, and often in establishing a price when a sale is not contemplated, as in deciding on asset values in a divorce, etc.

Investors, contrasted with small business buyers, value businesses differently, using, for example, discounted cash flows and comparative investments -- but those are almost never used when the buyer will be taking a full time role in the business, and almost never when the books aren't fully audited, the business sales in the many millions of dollars, and so forth.

What small business buyers do is very simple. They look at (a) can they make a living in the business, and (b) can they afford it?

Simple example: Someone buying a business that will reliably produce $100,000 available for owner compensation and financing will likely try to keep their annual debt service costs down to no more than 30-35% of that amount.

The roughly $33,000 per year in loan payments will support a loan of somewhere between $100,000 and $200,000. (Rates are high and terms are short, especially when the business lacks hard collateral such as marketable real estate and machinery.)

That leaves something like $67,000 for the owner to live on.

What does that say about the purchase price? Well, if the borrowed amount is in the $150,000 range, then the rest of the purchase price has to come from the buyer as a down payment. So how much is someone likely to pay as a down payment for something that will let them take home $67,000?

In practice, between the likely amount of liquid savings available for a down payment plus cash reserve for initial operations and the psychological aspects of paying out a lot of money and taking on significant debt, buyers will typically pay between a year's "pay" for them ($67,000) to a year's total cash flow ($100,000) as a down payment.

So, add the likely loan amount of around $150,000 to the likely down payment of around $75,000 and you get a purchase price of around $225,000, or 2.25x the $100,000 "cash flow" (commonly used term for the amount that the business can pay out to an owner-manager, as I described above).

For a business to get this 2.25 multiple of cash flow, it needs to be reasonably attractive to a buyer, offer a real promise of growth potential, have clean books, and a track record that makes all these numbers look very real, not just wishes. If things aren't so clean, then a multiple of 1 is well within the boundaries of typical sales, and when things are fabulous, multiples of 3 - 3.5 are sometimes encountered.

(What makes a business "fabulous" in this context? Very low risk, very stable earnings, very low complexity, etc. An example that comes to mind is a local burglar alarm monitoring company we had, where many hundreds of customers paid by automatic credit card debit for monitoring, the labor was cheap, and customer turnover was minimal.)

So when you hear that a business will sell for around a little over 2x cash flow, that is really an expression of what the market will bear.

You said you are hearing that a business is worth around 1/3 of the gross sales. That's an easier number to understand. It is simply based on what has happened.

I am posting below a couple of scanned graphs from stuff I was able to dig up from my old days. The first is a graph plotting sales price against the "cash flow" (as defined above) for a bunch of actual business sales. As you can see, the sales seem to average around 2x cash flow. The diagonal lines show the 25-75% boundaries and the 10-90% boundaries, so you can see that only the best 25% of businesses sold for more than 2.4x and only the worst 25% sold for less than 1.1x cash flow.

The second is a similar plot, but using gross sales instead of cash flow. The average selling price is 41% of gross sales. Only the best 25% sold for more than 58% of gross, and only the worst 25% sold for less than 25% of gross.

Hope this info helps you at least see how this stuff works...

And by the way -- lots of this info at http://www.valuationresources.com/ if you are a glutton for this stuff.

 

[Sheryl]

I know nothing about this subject compared to all the very knowledgeble folks who've posted, so I should just shut up. :

But: I think Charles point bears emphasizing: "The important point is that you don't have a partner, the business remains yours and yours alone, but you wisely share the profits with a GM who has great incentive to build your business."

I know of two absolute horror stories (family friends) who brought in "partners" and were essentially eaten for lunch and forced out of their own businesses for peanuts.

Keep it with a manager or sell it but don't partner with anyone you don't know well.

Just my 2 cents.

 

[Maximillion]

Great Advice.

 

[nfs]

Good advice above. Let me add this.

The OP should strip out the "discretionary spending" to come up with something that looks like a reasonable annual cash flow, before any draw in the form of salary or bonus. Then estimate what a skilled person would be paid in order to run the business. Above estimates run from the $50k the OP is taking - almost certainly low - to the $150k that Max estimated and deduct that. Deduct reasonable - not tax, reasonable - amortization of fixed assets. What you're left with is an estimate of the economic profit.

Any sane buyer will pay a multiple of that economic profit. The multiple varies by industry and by size of business, but with small private businesses, it's not going to double digits and there are lots of times that it's low single digits.

The biggest single mistake that business owners make when trying to value a business they want to sell is to imagine that any buyer will apply the multiple to their own draw. I've seen this over and over.

"My business makes $100k a year when I run it. I pull out about $80k a year to live on and, if I weren't running it, I'd have to pay somebody $80k a year to run it for me. "

If such businesses go for 5x "earnings" as a matter of course, that business is worth $100k to a buyer, not $500k. Nobody is going to pay an extra $400k to buy themselves a job, which is what "running the business" really is.