More on this book
Community
Kindle Notes & Highlights
Read between
July 27 - August 13, 2020
BuyThenBuild.com
Check online
Other considerations will include Accounts Receivable minus Accounts Payable and Inventory, as well as any additional working capital you might choose to add. Closing costs at the bank are also allowed to be rolled into the loan, so you’ll have to pay 10 percent of those fees up front. In addition, and especially at high debt levels, you’ll want to keep cash aside should the company get tight on cash.
SBA.gov,
Check online
CPA John Bly, author of Cracking the Code: An Entrepreneurs’ Guide to Growing Your Business Through Mergers and Acquisitions for Pennies on the Dollar,
Business Brokerage Press’ Business Reference Guide.
Check online
The top limiter is geographic preferences. Are you okay moving wherever the best opportunity is? Or do you require staying in the same location? If you need to work around where you are, how far are you willing to commute? Or, are you looking for an online business where the company is often completely relocatable?
I am looking for a [choose product, distribution, or service] company with [enter the type of growth opportunity], generating [define size by SDE range], with [enter any limiters].
Out of the few potential buyers that get a true search going, only about one out of ten eventually buy a business. Obviously, the current process is flawed or there would be greater success rates.
bizbuysell.com
Check online
BuyThenBuild.com
Check online
In addition, brokers will increase the amount of potential buyers by putting it online, which makes more work for them as they need to filter through potentially “bad” buyers. This is an inefficiency they need to manage, so they’ll typically put it on an online marketplace only after they’ve reached out to vetted buyers and their professional network. Which brings us to the lesson: you need to get upstream.
Getting the best deal flow means that a firm is always at the top of the list for potential sellers and somehow gets early looks at the best opportunities.
In your case, this is the business brokers, intermediaries, I-bankers, and M&A Advisors44 who get the listings in the first place.
Finding a job that is a good fit for your skillset is probably 90 percent networking. Finding a business is no different.
Axial.net;
Check online
In conclusion, Phase 1 of your search is to meet with every intermediary in your area, explain what you’re looking for, review their current listings, and get on their email list for new listings. This will result in you getting vetted and upstream to the deal flow in your area.
After the broker gets comfortable with you and your ability to transact, they’ll ask you the third question: what type of business you’re looking for.
Entrepreneurship is the art of creating something out of nothing, creating value where it wasn’t before. Bringing a deal together is exactly that. It’s the art of making something out of nothing.
I believe strongly that it is your responsibility to make sure you, not your lawyer, are comfortable where sacrifices in protection are made. They will accept the role of protecting you at all costs; you need to manage them or all you will have is a large legal bill and a promising deal that went south.
I will tell you now that they are selling because, when you own a business, the biggest return payday is in the exit.
Does this mean they are trying to offload a company quickly because it’s about to decline? It’s certainly possible.
Through due diligence, research, and conversations with the seller, you’ll identify what the risks inherent to opportunity are, and what your strengths can bring to the table.
One opportunity that is passed on by one person might be exactly the right opportunity for you, and vice versa.
As an acquisition entrepreneur, you’re buying the company for the future, but you’ll pay for the past. As a result, the initial goal is for you to understand what the business can afford to be bought for so that you can make an offer you are comfortable with.
There is a right time to be cynical, and it’s in due diligence; but when engaging with M&A Advisors and sellers, I always suggest selling them on why you are a good buyer even if not for this specific opportunity. Remember, the broker here is the one with deal flow, and they are always looking for “good” buyers that they want to work with.
Privately held companies do not have one firm valuation. There is a range of value determined by the growth of the company, the earnings of the company, current market conditions, level of competition, and a host of other variables. You’re going to reverse engineer what the business is worth to you, because that’s the only valuation that matters.
Cash being the “oxygen” of an organization is ultimately what you’ll absolutely need to get a rhythm for as the CEO, and studying the financial statements is what will get you there.
So, step one is to make sure you know if the statements you are reviewing are on a cash basis or accrual basis.
According to the Federal Reserve Bank of Chicago’s Small Business Financial Health Analysis,60 88 percent of poor and below-average financially healthy businesses have revenues under $1 million. This is one of the reasons I don’t often consider companies under this level of revenue for a first acquisition.
As you begin to review financial performance and statements, there are five areas of specific importance you’ll be wanting to look into: revenue, profit, operational efficiency, cash flow, and the total Owner Benefit (the SDE). All of this information can be found in their financial statements provided in the OM.
Non-cash expenses can be a little tricky to learn but it’s an important concept for the acquisition entrepreneur.
Non-revenue generating IP is typically referred to as a “startup looking for funding.”64 Instead, you, as an acquisition entrepreneur, will be looking to acquire a company’s infrastructure only so far as its ability to generate cash flow.
Goodwill is an intangible asset that represents the value over and above the value of the hard assets.
Owner’s equity is calculated simply by taking the value of the total assets and subtracting the total liabilities.
One important metric you can pull from the comparative balance sheet is the Cash Conversion Cycle, which is insightful when determining how long the time is from when inventory is purchased and when the cash is collected from the sale.
Understanding what a typical gross margin percentage is in an industry you’re analyzing is important because gross margins as a percentage vary drastically by industry.
Because expenses are what reduce the profitability of the company, managing operating expenses will be one of the critical things you as the leader will do.
The purpose of the cash flow statement is for a potential buyer to understand the working capital demands of the business, and to make sure the company is producing enough cash to pay its expenses.
However, you need to create your own spreadsheet and recreate all the financial statements yourself. This provides two benefits: first, you will learn the business intimately as you enter in each number, processing what percent of revenue it is and noticing anomalies; second, it provides the information in your own spreadsheet for financial analysis and modeling. You’ll want to analyze the past, but also project the future. Having your own spreadsheet will provide that.
The rule of thumb is that no customer is greater than 10 percent of revenues. If this is not the case, you’ll need to intimately understand the relationship and value provided to that customer because it adds an element of risk to your acquisition.
An additional calculation that measures a company’s productivity is revenue per employee. The higher the number, the more the company is doing with less expense. This is a great tool for understanding how efficient a business is simply because it’s typical for the largest expense to be labor. Leveraging the people inside the company to execute more efficiently makes for a healthy company.
You’ll also want to understand a certain company in light of its industry. Getting benchmarks from industry reports and online research are key to understanding how a company is doing within the realm in which it’s playing.
When you are an acquisition entrepreneur, there is a critical piece of the story that is not apparent in common ratios or analysis—you. When you are analyzing past performance, it’s important to understand that this performance is what happened under the current owner’s management. If the results are good, what happens when they leave? What is their skillset? How, exactly are they getting these results and how can you make sure you keep those great parts performing?
The most common ways to value a company are asset based and cash flow based. It’s important to understand them, even if they’re not applicable, so that you can begin to understand how others apply or calculate approximate value.
There are three main asset-based valuations: book value (BV), fair market value (FMV), and liquidation value (LV).
Book value we discussed earlier while reviewing the balance sheet. It’s the net worth of the company as reported by its financial statement under owner’s equity. It applies the value of the assets currently on the books, then subtracts the liabilities. This can be an interesti...
This highlight has been truncated due to consecutive passage length restrictions.
We’ve discussed that the assets are only as good as their ability to produce earnings, and this is the second reason book value doesn’t apply for you. As a buyer, what you are really interested in is the cash flow that is generated by the business.
Liquidation value estimates what all the assets in a company would sell for in a fire sale, then subtracts any outstanding liabilities. Essentially, if the company were to liquidate today in order to turn everything into cash, how much cash could it generate? This is the lowest possible value a company could have and is experienced only in occurrences of bankruptcy auctions. LV is an important calculation for turn-around experts looking to acquire underutilized opportunities, but you won’t see any Offering Memorandums highlighting liquidation values.
Valuation is not an exact mathematical calculation based on research; you need to calculate what the business is worth to you.
Instead, let the future value of the business be the driver of your interest, then price that future value on past performance. This will assure the value you build in the company will be yours to enjoy.
