We are going to start a new column that is intended to answer basic questions that some may have but afraid to ask. “There are no stupid questions” sound good in theory, until you have one that you think everyone around you knows, and you would be laughed out of the building for asking.
So, for all the well-versed, high-powered finance types, keep it moving, this is not for you. If you have just started a new business, maybe you slept through accounting class, or numbers just have never been your thing, welcome to “Treat Me Like I am in Kindergarten”.
Our first topic, business valuation. We hear all the time, “how do I value my business if I am looking to sell?” Good thing is, there isn’t really a hard and fast set of rules to go by. Bad thing is, your business is only worth what someone is willing to pay for it.
Somewhere in the middle is what we are going to discuss briefly here.
While there are no strict rules on business valuations there are a few key parameters which are generally accepted as a jumping off point.
First, how much money does the business make. EBIT, EBITDA, Net Income, Net Profit, Discretionary Income, are all typical places sellers and buyers usually like to start. After all, no matter what your sales or revenue numbers look like, if you aren’t making any money, you don’t really have a business, but an expensive hobby. If buying a business, start with EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This is a great way to evaluate actual operating success without factoring in the way a business does their financing or tax decisions which can vary from entity to entity.
Most sellers will want you to base your decisions on some version of Seller’s Discretionary Earnings/Income. This is used to give the potential buyer an idea of actual cash flow of the business if the current owner were to be out of the equation. So, things like officer’ salary, officer’s benefits, rent (if selling the building), some travel and entertainment, officer’s benefits, are often added on to EBITDA to increase the true earnings of the business.
So once earnings, no matter how they are calculated, are established, typically a business will tack on a multiplier of earnings to come up with the sales price. For easy math, let’s say a business has annual earnings of $500,000. The sales price, or valuation, or this business is $1,500,000. So, this business’s price is based on an earnings multiple of 3. How does one come up with a multiple that is appropriate for their business? Many factors can weigh in like sustainable management, industry, competition, product offerings, etc. So, if you have a truly unique product in an industry without much competition, and opportunities for growth, naturally you can ask a higher multiple for your business. If you have a business that doesn’t have a strong management team, or the owner is the lifeblood of the business, a product/service that is not easily distinguished from competitors, a lower multiple is probably what is in store.
Additionally, most industries have an average or guideline of what multiple businesses are being sold for. Viking Mergers has a pretty good breakdown by industry. BizBuySell can have industry averages from time to time. Or if you really want to get crazy, check out the annual Pepperdine Private Capital Markets Report which is a snoozefest, but has tons of useful information should you want to dive deep.
Again, this is the “101” version of business valuation and there are many, many other factors that will be at play. The best thing to do is get some advice from firms or people that have done this before and can hold your hand throughout the process. The cool thing is, no one is going to be right, and there is no one way to value a business. All this adds up to some spirited negotiations should you want to sell or buy a business.
At least let the ink dry before you start changing everything. Jeff Bezos channeled his inner Sam Walton on the first day of officially owning Whole Foods by slashing prices as much as 43%. As reported by Bloomberg, the Amazon crew wasted no time in re-positioning John Mackey's empire he started 37 years ago. Is this new pricing model here to stay, or just an attempt at grabbing some headlines? For many Americans, the barrier to entry to Whole Foods was not selection, but price. If he plans on competing with Walmart, or even HEB and Aldi's of the world, he better pack a $14 sashimi lunch, beacuse it is going to take a while.
Is Whole Foods expensive? Absolutely. But, they have carved out a niche in the marketplace that expects a certain quality and is not afraid to pay for it. Whole Foods shoppers almost wear it like a badge of honor to pay high prices. They walk out of the store, heads held high, with their two bags of food they just dropped 60 bucks on. Can't wait to see what the end game is with Amazon's purchase of Whole Foods. Should Amazon keep tinkering with the Whole Foods model, or let it be? You can't be something you are not. Walmart learned that in apparel when they moved their office to NYC and wanted to carry "higher-end" clothing. Didn't work. Back to socks, underwear, and more cargo shorts than you can shake a stick at.
10 Tips for Starting a Business...great article from Mike Kappel in Forbes who offers some great insight about starting a new business outside of the basics that you propably have read 1,000 times. There are so many great success stories out there from ordinary people who decided they could do something better than it is currently being done. Read the success stories and the failures...learn from everyone.
After a few years of starting and running our own businesses, plus acting as CFO for a few ventures around Northwest Arkansas, we have decided to expand our reach and open our doors for anyone who needs some help in growing their business. Sounds pretty generic, but its true. We want are in the business of using our combined skill sets to help others put the systems in place to grow. Typically, when a person starts a business they do so because it is something they are passionate about. Whether it is building skateboards or selling real estate, peole that go into business for themselves start from a place of curiosity and passion. Once the business grows however, the passion gets replaced by the realities of owning and operating a business. Managing cash flow, payroll, benefits, operations, supply chain...the business owner is spending less and less time doing the things they love, and more time devoted to doing things to keep the business operational. Add to that, some business owners just aren't adept at crunching numbers or putting systems in place to maximize operational efficiencies, they just want to crank out more t-shirt designs or invent the next toy for distribution into Walmart.
That is where we come in. We have a team of professionals, that believe it or not, actually love to work with numbers. We have guys that enjoy pouring over spreadsheets and getting into the weeds of a business to find out what is working, what isn't, and creating a path for success. The Black Sails team has experts in sales and marketing, accounting, operations, sourcing, collections, and even a division that is geared toward providing financial capital for the continued growth of a new or existing business. We want to act as an extension of your team to handle the aspects of the business you can't or don't want to do. Our team wants to let you concentrate on doing the stuff you love to do, we will take care of the rest.