Friday, November 29, 2013

Buying a Business to Buy a Job

Buyers have 3 primary reasons for buying a business:

1. Buying a job. Many events in life can lead a person to do some soul searching. This may lead them to wonder “why do I work for someone when I’m at least as smart as my last two bosses…” 
2. Buying cash flow as a return on investment. 
3. Buying a business to bolt on to an existing business to increase the competitive advantage. 

Buying a job is something that sounds great in theory however without access to some serious capital/collateral and an opportunity for buying a business where you already have expertise, few funders will act as your source of financial backing. We have seen deals in the $10M range ready to sign and close but the bankers backed out because the buyer had little expertise in the business. The bank reduced its risk model when they went from 80% funding to 50% funding. Not many individuals looking for a job will have access to that much cash at close. 

 A better alternative may be buying the business you work in now. The boss probably knows you and may even respect your abilities and history. The owner is your best source of funding as they know the business. They clearly understand the risks involved and the real strength and weaknesses of the business. Many owners will perceive a serious offer from someone they know with less of a critical eye than an offer from a total stranger. We have seen owners provide vendor notes from 20%- 50% of the agreed value, with the bank and the employee funding the balance. 

The bank views the exiting owner as a vendor with a certain amount of flexibility. The funders can easily verify you know the business which reduces their risk, and the bank tends to view employee buyouts as a special category of transaction where they literally use different rules and covenant models. 

The icing on the cake is this is also a positive process for you. As an employee you know the business model, the skeletons and history, the team of people, the client base, business cycles, and perhaps even a few key problem areas that would dramatically benefit from what you know you would do if you were in charge. When your goal is to own your own business you should take a moment and honestly assess the potential for where you work. If the business you’re working in has no potential for equity then you may decide to find another place to work. But this time you’re working with a plan and a deliberate agenda; the outcome could change your life. 

We will discuss buying cash flow in the next post.

Tuesday, November 26, 2013

The deal is not done until it’s done.

After 20 months of working with a vendor client to achieve a transaction that accomplished most of the owner’s priorities and the target values ($9M), the vendor walked away from signing the purchase and sale agreement 2 days before closing. At first this seemed like a ridiculous outcome. In debriefing the client later, the client confirmed he agreed to how and why the deal was structured the way it was.  So why not close?

The client eventually shared he walked away because he was not able to overcome the anxiety about what he would do after the deal closed including what he would do with the money. He heard stories of people getting large sums of money and then a few years later having none left. This seemed to have eroded his confidence in how he would manage his future. He knew his business and could live with the ups and downs; the thought of starting out with something new overwhelmed him. After finding out his business was worth buying he started to re-evaluate his priorities. He wanted to be in charge of his destiny. The idea of handing someone the money for his 20 years of blood, sweat and tears on the basis of trusting them to protect his future simply was not comprehensible.

Bottom line: people change their minds and the deal is not done until it is done. 

Tuesday, November 5, 2013

Growth vs. Value: not all revenue is created equally

When you look ahead to next year, will your growth come from selling more to your existing customers or finding new customers for your existing products and services?

The answer may have a profound impact on the value of your business.

Take a look at the research coming from a recent analysis of owners who completed their Sellability Score questionnaire. We looked at 5,364 businesses and found that the average company that had received an overture from an acquirer was offered 3.5 times their pre-tax profit.  When we isolated just the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.

However, the real bump in multiple came when we isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.

Nurture your niche

Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.

A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.

Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.  


Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. 

Friday, November 1, 2013

The hidden goal of the smartest business owners

What are your business goals for the year? If you’re like most owners, you have a profit goal you want to hit. You may also have a top line revenue number that’s important to you. While those goals are important, there is another objective that may have an even bigger payoff: building a sellable business.

But what if you don’t want to sell? That’s irrelevant. Here are five reasons why building a sellable business should be your most important goal, regardless of when you plan to push the eject button:

1. Sellability means freedom

One of the fundamental tenants of sellability is how well your company would perform if you were unable to work for a while. As long as your business is dependent on you personally, there’s not much to sell. Making your company less dependent on you by building a management team and creating just-add-water systems for employees to follow means you have the ability to spend time away from your business. Think of the world of possibilities that would open up if you could choose not to go into the office tomorrow….

2. Sellable businesses are more fun

Running a business would be fun if you were able to spend your days on strategic thinking and big picture ideas. Instead, most business owners spend the majority of their day on the minutia: the government forms, the employee performance reviews, bank reconciliations, customer issues, auditing expenses. The boring details of company ownership suck the enjoyment out of owning a business—and it is exactly these tasks you need to get into someone else’s job description if you’re ever going to sell.

3. Sellability is financial freedom

Each month you open your brokerage statement to see how your portfolio is doing. Not because you want to sell your portfolio, but because you want to know where you stand on the journey to financial freedom. Creating a sellable business also allows you peace of mind, knowing that you’re building something that—just like your stock portfolio—has value you could choose to make liquid one day.

4. Sellability is a gift

Imagine that your first-born graduates from college and as a gift you give him your prized 1967 Shelby Ford Mustang. Your heavily indebted child takes it on the road, but after a few miles, the engine starts smoking. The mechanic takes one look under the hood and declares that the engine needs a rebuild.

You thought you were giving your child an incredible asset, but instead it’s an expensive liability he can’t afford to keep, and nor can he sell it without feeling guilty.

You may be planning to pass your business on to your kids or let your young managers buy into your company over time. These are both admirable exit options, but if your business is too dependent on you, and it hasn’t been tuned up to run without you, you may be passing along a jalopy.

5. Nine women can’t make a baby in one month

There are some things in life that take time, no matter how much you want to rush them. Making your business sellable often requires significant changes; and a prospective buyer is going to want to see how your business has performed for the three years after you have made the changes required to make your business sellable. Therefore, if you want to sell in five years, you need to start making your business sellable now so the changes have time to gestate.


Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements.