Archive for category: General

Congratulations to Jay Lehenbauer for seven years as a successful Apex Business Advisor!
Jay joined Apex in 2005, has completed some of our largest transactions, and has been one of our top brokers for several years. He is dedicated to his clients and always strives to be the best intermediary possible. As proof of his dedication, Jay has completed the necessary education and training to be a Certified Business Intermediary which only a small percentage of brokers ever complete.

My sincere appreciation goes out to Jay, because it’s people like him that make Apex Business Advisors a leader in the brokerage industry and such a great place to work!

Buy Low – Sell High: This practice makes sense with investments and it makes sense when thinking of your business value. If you started the business from scratch, hopefully it has been built up to a profitable venture and you have plenty of equity. If you bought a business and have increased it revenue and profitability, most likely you have increased the overall value of the business (as you have read in past blogs, there are other variables to consider).

What most people are looking for when buying a business are the revenue trends over the last 3-5 years. If the revenues are stable or growing – great. If they are in decline, we need to understand the reasons for it. The reasons for the decline might keep a buyer interested, however, there are more perceived risks associated with a downward trend. This will prove to be a negative impact on business value. One of the other difficulties in selling a business with downward trends: banks willing to finance a business in this situation are an endangered (maybe extinct) species, forcing the seller to become the lender.

Many times we see business owners pass up the opportunity to sell at the high point, and who are instead pressed into selling at the worst time due to age and health concerns. An owner who decides to keep working into their 80’s inspires many of their family, friends, and peers. I’m sure any of us would feel blessed to be able to do that. But too often those companies lose momentum as the owner loses energy and passion and we end up with a distressed business.

Buyers want good businesses with strong trends and business owners can get more for their business when they exhibit strong revenue trends. Hmmm, seems like a winning combination!

Current Financial position and historical records are the major factors in putting a value on a business. Last week the focus came down to trust issues around the financials. This week we’ll focus on the numbers.

Definition of Cash Flow: owner salary, net profit, depreciation, interest expense, and discretionary expenses not necessary for continuing operations

As mentioned in last week’s blog, the typical business advisor (accountant, financial planner, attorney, banker, business coach, etc.) needs to understand the existing situation and historical information to unlock some mysteries in the business. What are the trends, opportunities, threats? Solid financial information should lead to solid advice.

When selling a business, the marketplace puts a value on the cash flow of the business. Have the cash flows been steady, increasing, or decreasing? Are the cash flows readily apparent in the financial statements? Is the cash flow expected to continue or are there major changes expected? A buyer needs to understand the cash flow in order to make a good offer on a business. That offer takes the following into consideration:

1. Return on the buyer’s initial investment (paying the new owner’s salary),

2. Cash to pay off debt for the acquisition, and

3. Retaining cash in the business to support operations.

A business that shows a cash flow of $100,000 may be able to achieve a market value of 2 or 3 times that amount. Let’s say the value is $300,000 (3x $100,000). Last week I used an example of someone sending a family of 15 on a European vacation. Let’s say that the tax deduction used for that vacation was $25,000, and the tax savings was approximately $7,500. It feels good to save $7,500 on taxes; however, the value of the business went down considerably more than that. A $25,000 expense translates into lost business value of 3 x $25,000, or $75,000!

Sure, there is negotiation, and this is just a simple situation that should be easy to explain to the buyer and the bank. It does illustrate a point, however, that some simple tax dodges to save a few bucks will certainly make a much larger reduction in business value.

Talk to one of our Apex Business Advisors to help you plan and improve the value of your business before it is time to sell.

Over the next several weeks you will read about keys to business value.  These are some basic drivers that will make your business or the business you are pursuing, more (or less) valuable. We are talking about the attractiveness to a potential buyer in an open market.  Disclaimer: There are lots of different things that can impact the value of a business – and we won’t cover them all.

Sure there are times when some of these drivers don’t impact the value of the business – like if you find a gullible buyer, family member that will be taking it over, a strategic buyer that may focus on only one driver, etc. However, a business owner can’t rely on these buyers to be there when it’s time to sell the business, so it’s better to make the business more appealing to a broad market.

This week the focus is on a Business Owner Who Works in the Business. The alternative is the owner that is working on the business.  If the owner is working in the business, i.e., driving the truck, running the machinery, or making the sales calls, then the potential buyer pool has been shrunk to those who can fill those shoes, and fill them well. A potential buyer would have to possess the same technical expertise of the current owner.

You’ve probably heard the adage “Work on the business, not in the business.” There are good reasons why consultants and professional advisors repeat this. First of all, if you are working in the business, you will get really tired and not be able to put energy into growing and enhancing the business. (The E-Myth, by Michael E. Gerber, has some good examples of how working in the business can bring it down.) The impact on business value is dramatic. Is a buyer of the business buying a job – or buying a system, a brand, a process, etc.? We do have buyers that are interested in “buying a job”, but they are a small population and are also very selective.

Call your Apex Business Advisor for more information.

We enjoy sharing success stories about the buyers and sellers that we work with. We had a business owner with a technology based company that wanted to sell. They were asking $950K for the business based on the current revenue stream. (This was all happening in the middle of 2011.) Potential investors were concerned that the core technology might be outdated, so they kept passing on the opportunity.

The seller continued growing the business through new implementations of the technology. Over the next six months, they also bought a competitor. (Interestingly, our buyers had a chance at that business as well, but passed again because they were still nervous about the technology.)

Fast forward to January 2012. The asking price went from $950K to $1.9M because of the acquisition and overall increase in revenue. The increased asking price was justified based on performance. The happy ending is that the seller just accepted an offer for close to the full asking price.

Everyone wins in this story:

The seller had bought the business with a plan to grow it and sell it for a profit. Accomplished.

The buyer had been looking for a business for 4 years. It is a husband and wife team that really liked the clean cash flow and growth potential of the business. They had experience with the core technology and are excited to own and grow their own business. Success.

Connecting buyers and sellers so that everyone wins is what we do best. If you are on either side of that equation, we would love the chance to talk about how we can help.