Hi Everyone, Happy New Year's. Watch the video, then take a moment to answer a questionnaire or send me an e-mail. I want to make my 2016 videos and blog posts the best they can be.
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Thursday, December 31, 2015
Friday, December 25, 2015
Merry Christmas
My Christmas e-mail has gone out. If you are on my e-mail list, you would have received it in your inbox.
I put together a collection of classic videos that are my most popular.
If you have any friends who would benefit from following my material, this would be the e-mail to share with them.
View online here: http://eepurl.com/bK6UAT
Thanks, Happy Holidays
I put together a collection of classic videos that are my most popular.
If you have any friends who would benefit from following my material, this would be the e-mail to share with them.
View online here: http://eepurl.com/bK6UAT
Thanks, Happy Holidays
Thursday, December 24, 2015
Looking forward to our Sweet 16 year..
Whether you have a job or own a business, planning and goal setting is an important part of moving forward and achieving things in life.
Thanks to Marc Mawhinney at Natural Born Coaches for sharing his 20 question planning tool.
I've gone through it and I know you'll all find it useful to reflect on 2015 and set goals for yourself in 2016.
Download it FREE here: http://www.naturalborncoaches.com/2016doc/
Thanks to Marc Mawhinney at Natural Born Coaches for sharing his 20 question planning tool.
I've gone through it and I know you'll all find it useful to reflect on 2015 and set goals for yourself in 2016.
Download it FREE here: http://www.naturalborncoaches.com/2016doc/
Monday, December 21, 2015
[VIEWER QUESTION] How do you put a price on a business with no profit?
How much can you sell a business for that makes no profit? Here's what I used to do and the rationale. Also, be prepared for a deal that works for the buyer.
Hey there, it's David Barnett again. This time I have a question from a business owner who wants to ask about selling a business and a few weeks ago I did a video about the three different ways that you could evaluate a business and if you recall, I talked about market valuation methods, I talked about income or capitalization market of evaluation methods and I talked about asset evaluation methods.
So the question is, how do you put a price on a business that has no profit? Interesting question. Let's take a look at those three methods in a little more detail.
So if you recall from that earlier video, I had said that there were three different camps or methodologies for evaluating business. There are market comparison methods where we look at the subject business and compare it to other similar businesses of a similar size in the same industry. There is the capitalization method where we actually look at what rate of return are we looking for from an investment in this particular company. Then there is the asset accumulation method which are simply looking at what material things are part of this company.
If we are looking at setting a price on a business that has no profit, then obviously we can't use these methods at all (capitalization) because we have no profit for which to apply our mathematical formula, we can't capitalize zero. Within market comparison there are two different methodologies of how we compare one company to others we've already sold. One method is a multiple of the cash flow or sellers discretionary earnings. The other method is what these businesses sell for as a percentage of sales.
If we have a business that doesn't earn a profit, then that also means that we can't multiply the sellers discretionary earnings or if we can, maybe it's a figure that's actually below the firm market wage of what a manager would earn? So, it wouldn't give any kind of accurate result. So this method then is off limits to us as well. What we are left with is comparing the subject company that doesn't make any money to other companies that have sold and looking at what those other companies sold for as a percentage of sale. That's one method we can do. We can also do the asset method.
So, a business that doesn't earn any money or has no profit. What exactly do you have to sell? Well, you got stuff, your tangibles; inventory, machinery, equipment etc. But you also do have sales. There are customers that come and they buy things from you. The problem is, either there aren't enough of those customers or your business is not being managed in a proper fashion so that it produces a profit. That could be because of some structural problem, maybe you have twice as much space as you should have for this type of business and so you got an overly burdensome overhead for example. It could simply be that employees are stealing or there is some other problem in the way that the business is being run.
When I was a business broker, putting businesses up for sale, if I had a business that didn't have a profit, what I would do is I would use the market comparison method and use the percentage of sales, let's say for example that give me a figure of $100,000 and then we would do an estimate of the asset accumulation; add up the value of all the things in the business, and let's say that gives me 80,000. What I would do, is suggest a asking price that kind of averages the two. So let's say we are going to ask 90,000.
here is the other problem though. A business that has no profit can't demonstrate to a banker that it's going to be able to service any debt, right. So whenever I have a seller that has a business like this, I always have to give them an explanation as to what kind of offer they were going to be receiving. In all likelihood, they were going to be getting an offer that
didn't involve any institutional or bank financing. So for example this $90,000, maybe a buyer will come and say, I'll give you $40,000 down and I will give you payment over five years adding up to another $50,000 for example.
This price would certainly be negotiated downward from the asking price and the terms would always have to be flexible for the buyer because the buyers would all know that the only alternative the seller would have would be to close the business and liquidate the assets, send them to an auction for example.
What I often say to many of my seller was, get any offer you can where your cash down payment from the buyer is likely going to exceed what you could hope to get in an auction scenario. If an auctioneer might get you $20,000 for the asset and you can find a buyer willing to give you $25,000 down and then you hold a note overtime for the balance; then that's a great deal for you. The employees get to keep their job, the customers get to keep doing business with the business. It's better for everyone all around, but it's going to require a lot of flexibility on the part of the seller and if there are debts in the business that aren't be serviced or can't be serviced and the debts exceed the likely amount that we are able to get out of it, then that's a really bad situation.
Unfortunately, I have had people who have run businesses down to the point where they weren't making any money, they weren't able to service debt. They sold them for what they could and then they had to go to their banker and say, look, this situation is bad, I am not going to be able to pay you anyway, this is an opportunity I have to get out of this situation, and this is the kind of money I am able to bring to you. Can we work out a deal? They have been able to do something with their bankers to try to work themselves out of that debt, or in a really bad situation, they end up having to declHey there, it's David Barnett again. This time I have a question from a business owner who wants to ask about selling a business and a few weeks ago I did a video about the three different ways that you could evaluate a business and if you recall, I talked about market valuation methods, I talked about income or capitalization market of evaluation methods and I talked about asset evaluation methods.
So the question is, how do you put a price on a business that has no profit? Interesting question. Let's take a look at those three methods in a little more detail.
So if you recall from that earlier video, I had said that there were three different camps or methodologies for evaluating business. There are market comparison methods where we look at the subject business and compare it to other similar businesses of a similar size in the same industry. There is the capitalization method where we actually look at what rate of return are we looking for from an investment in this particular company. Then there is the asset accumulation method which are simply looking at what material things are part of this company.
If we are looking at setting a price on a business that has no profit, then obviously we can't use these methods at all (capitalization) because we have no profit for which to apply our mathematical formula, we can't capitalize zero. Within market comparison there are two different methodologies of how we compare one company to others we've already sold. One method is a multiple of the cash flow or sellers discretionary earnings. The other method is what these businesses sell for as a percentage of sales.
If we have a business that doesn't earn a profit, then that also means that we can't multiply the sellers discretionary earnings or if we can, maybe it's a figure that's actually below the firm market wage of what a manager would earn? So, it wouldn't give any kind of accurate result. So this method then is off limits to us as well. What we are left with is comparing the subject company that doesn't make any money to other companies that have sold and looking at what those other companies sold for as a percentage of sale. That's one method we can do. We can also do the asset method.
So, a business that doesn't earn any money or has no profit. What exactly do you have to sell? Well, you got stuff, your tangibles; inventory, machinery, equipment etc. But you also do have sales. There are customers that come and they buy things from you. The problem is, either there aren't enough of those customers or your business is not being managed in a proper fashion so that it produces a profit. That could be because of some structural problem, maybe you have twice as much space as you should have for this type of business and so you got an overly burdensome overhead for example. It could simply be that employees are stealing or there is some other problem in the way that the business is being run.
When I was a business broker, putting businesses up for sale, if I had a business that didn't have a profit, what I would do is I would use the market comparison method and use the percentage of sales, let's say for example that give me a figure of $100,000 and then we would do an estimate of the asset accumulation; add up the value of all the things in the business, and let's say that gives me 80,000. What I would do, is suggest a asking price that kind of averages the two. So let's say we are going to ask 90,000.
here is the other problem though. A business that has no profit can't demonstrate to a banker that it's going to be able to service any debt, right. So whenever I have a seller that has a business like this, I always have to give them an explanation as to what kind of offer they were going to be receiving. In all likelihood, they were going to be getting an offer that
didn't involve any institutional or bank financing. So for example this $90,000, maybe a buyer will come and say, I'll give you $40,000 down and I will give you payment over five years adding up to another $50,000 for example.
This price would certainly be negotiated downward from the asking price and the terms would always have to be flexible for the buyer because the buyers would all know that the only alternative the seller would have would be to close the business and liquidate the assets, send them to an auction for example.
What I often say to many of my seller was, get any offer you can where your cash down payment from the buyer is likely going to exceed what you could hope to get in an auction scenario. If an auctioneer might get you $20,000 for the asset and you can find a buyer willing to give you $25,000 down and then you hold a note overtime for the balance; then that's a great deal for you. The employees get to keep their job, the customers get to keep doing business with the business. It's better for everyone all around, but it's going to require a lot of flexibility on the part of the seller and if there are debts in the business that aren't be serviced or can't be serviced and the debts exceed the likely amount that we are able to get out of it, then that's a really bad situation.
Unfortunately, I have had people who have run businesses down to the point where they weren't making any money, they weren't able to service debt. They sold them for what they could and then they had to go to their banker and say, look, this situation is bad, I am not going to be able to pay you anyway, this is an opportunity I have to get out of this situation, and this is the kind of money I am able to bring to you. Can we work out a deal? They have been able to do something with their bankers to try to work themselves out of that debt, or in a really bad situation, they end up having to declare bankruptcy and stuff like that.
Anyway I hope that answers your question, how do we put an asking price on a business that doesn't have any profit? Basically what we look at is what is the worth of the sales and the tangible assets and we figure out how can we make it possible for someone to buy this business when in all likelihood, no bank or any other institution is going to finance a business who doesn't have any cash flow.
Thanks and don't forget to sign up for my e-mail, newsletter that comes out every week. We'll talk with you later. Bye.
Hey, you made it to the end of the video. That's great. Don't forget to visit www.investlocalbook.com. Sign up for my e-mail list. It's right down here under the welcome video.
Thanks and we will see you next time.
are bankruptcy and stuff like that.
Anyway I hope that answers your question, how do we put an asking price on a business that doesn't have any profit? Basically what we look at is what is the worth of the sales and the tangible assets and we figure out how can we make it possible for someone to buy this business when in all likelihood, no bank or any other institution is going to finance a business who doesn't have any cash flow.
Thanks and don't forget to sign up for my e-mail, newsletter that comes out every week. We'll talk with you later. Bye.
Hey, you made it to the end of the video. That's great. Don't forget to visit www.investlocalbook.com. Sign up for my e-mail list. It's right down here under the welcome video.
Thanks and we will see you next time.
The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback. Sign up for my mailing list and don't miss a thing! [CLICK NOW]
Transcript:
Hey there, it's David Barnett again. This time I have a question from a business owner who wants to ask about selling a business and a few weeks ago I did a video about the three different ways that you could evaluate a business and if you recall, I talked about market valuation methods, I talked about income or capitalization market of evaluation methods and I talked about asset evaluation methods.
So the question is, how do you put a price on a business that has no profit? Interesting question. Let's take a look at those three methods in a little more detail.
So if you recall from that earlier video, I had said that there were three different camps or methodologies for evaluating business. There are market comparison methods where we look at the subject business and compare it to other similar businesses of a similar size in the same industry. There is the capitalization method where we actually look at what rate of return are we looking for from an investment in this particular company. Then there is the asset accumulation method which are simply looking at what material things are part of this company.
If we are looking at setting a price on a business that has no profit, then obviously we can't use these methods at all (capitalization) because we have no profit for which to apply our mathematical formula, we can't capitalize zero. Within market comparison there are two different methodologies of how we compare one company to others we've already sold. One method is a multiple of the cash flow or sellers discretionary earnings. The other method is what these businesses sell for as a percentage of sales.
If we have a business that doesn't earn a profit, then that also means that we can't multiply the sellers discretionary earnings or if we can, maybe it's a figure that's actually below the firm market wage of what a manager would earn? So, it wouldn't give any kind of accurate result. So this method then is off limits to us as well. What we are left with is comparing the subject company that doesn't make any money to other companies that have sold and looking at what those other companies sold for as a percentage of sale. That's one method we can do. We can also do the asset method.
So, a business that doesn't earn any money or has no profit. What exactly do you have to sell? Well, you got stuff, your tangibles; inventory, machinery, equipment etc. But you also do have sales. There are customers that come and they buy things from you. The problem is, either there aren't enough of those customers or your business is not being managed in a proper fashion so that it produces a profit. That could be because of some structural problem, maybe you have twice as much space as you should have for this type of business and so you got an overly burdensome overhead for example. It could simply be that employees are stealing or there is some other problem in the way that the business is being run.
When I was a business broker, putting businesses up for sale, if I had a business that didn't have a profit, what I would do is I would use the market comparison method and use the percentage of sales, let's say for example that give me a figure of $100,000 and then we would do an estimate of the asset accumulation; add up the value of all the things in the business, and let's say that gives me 80,000. What I would do, is suggest a asking price that kind of averages the two. So let's say we are going to ask 90,000.
here is the other problem though. A business that has no profit can't demonstrate to a banker that it's going to be able to service any debt, right. So whenever I have a seller that has a business like this, I always have to give them an explanation as to what kind of offer they were going to be receiving. In all likelihood, they were going to be getting an offer that
didn't involve any institutional or bank financing. So for example this $90,000, maybe a buyer will come and say, I'll give you $40,000 down and I will give you payment over five years adding up to another $50,000 for example.
This price would certainly be negotiated downward from the asking price and the terms would always have to be flexible for the buyer because the buyers would all know that the only alternative the seller would have would be to close the business and liquidate the assets, send them to an auction for example.
What I often say to many of my seller was, get any offer you can where your cash down payment from the buyer is likely going to exceed what you could hope to get in an auction scenario. If an auctioneer might get you $20,000 for the asset and you can find a buyer willing to give you $25,000 down and then you hold a note overtime for the balance; then that's a great deal for you. The employees get to keep their job, the customers get to keep doing business with the business. It's better for everyone all around, but it's going to require a lot of flexibility on the part of the seller and if there are debts in the business that aren't be serviced or can't be serviced and the debts exceed the likely amount that we are able to get out of it, then that's a really bad situation.
Unfortunately, I have had people who have run businesses down to the point where they weren't making any money, they weren't able to service debt. They sold them for what they could and then they had to go to their banker and say, look, this situation is bad, I am not going to be able to pay you anyway, this is an opportunity I have to get out of this situation, and this is the kind of money I am able to bring to you. Can we work out a deal? They have been able to do something with their bankers to try to work themselves out of that debt, or in a really bad situation, they end up having to declHey there, it's David Barnett again. This time I have a question from a business owner who wants to ask about selling a business and a few weeks ago I did a video about the three different ways that you could evaluate a business and if you recall, I talked about market valuation methods, I talked about income or capitalization market of evaluation methods and I talked about asset evaluation methods.
So the question is, how do you put a price on a business that has no profit? Interesting question. Let's take a look at those three methods in a little more detail.
So if you recall from that earlier video, I had said that there were three different camps or methodologies for evaluating business. There are market comparison methods where we look at the subject business and compare it to other similar businesses of a similar size in the same industry. There is the capitalization method where we actually look at what rate of return are we looking for from an investment in this particular company. Then there is the asset accumulation method which are simply looking at what material things are part of this company.
If we are looking at setting a price on a business that has no profit, then obviously we can't use these methods at all (capitalization) because we have no profit for which to apply our mathematical formula, we can't capitalize zero. Within market comparison there are two different methodologies of how we compare one company to others we've already sold. One method is a multiple of the cash flow or sellers discretionary earnings. The other method is what these businesses sell for as a percentage of sales.
If we have a business that doesn't earn a profit, then that also means that we can't multiply the sellers discretionary earnings or if we can, maybe it's a figure that's actually below the firm market wage of what a manager would earn? So, it wouldn't give any kind of accurate result. So this method then is off limits to us as well. What we are left with is comparing the subject company that doesn't make any money to other companies that have sold and looking at what those other companies sold for as a percentage of sale. That's one method we can do. We can also do the asset method.
So, a business that doesn't earn any money or has no profit. What exactly do you have to sell? Well, you got stuff, your tangibles; inventory, machinery, equipment etc. But you also do have sales. There are customers that come and they buy things from you. The problem is, either there aren't enough of those customers or your business is not being managed in a proper fashion so that it produces a profit. That could be because of some structural problem, maybe you have twice as much space as you should have for this type of business and so you got an overly burdensome overhead for example. It could simply be that employees are stealing or there is some other problem in the way that the business is being run.
When I was a business broker, putting businesses up for sale, if I had a business that didn't have a profit, what I would do is I would use the market comparison method and use the percentage of sales, let's say for example that give me a figure of $100,000 and then we would do an estimate of the asset accumulation; add up the value of all the things in the business, and let's say that gives me 80,000. What I would do, is suggest a asking price that kind of averages the two. So let's say we are going to ask 90,000.
here is the other problem though. A business that has no profit can't demonstrate to a banker that it's going to be able to service any debt, right. So whenever I have a seller that has a business like this, I always have to give them an explanation as to what kind of offer they were going to be receiving. In all likelihood, they were going to be getting an offer that
didn't involve any institutional or bank financing. So for example this $90,000, maybe a buyer will come and say, I'll give you $40,000 down and I will give you payment over five years adding up to another $50,000 for example.
This price would certainly be negotiated downward from the asking price and the terms would always have to be flexible for the buyer because the buyers would all know that the only alternative the seller would have would be to close the business and liquidate the assets, send them to an auction for example.
What I often say to many of my seller was, get any offer you can where your cash down payment from the buyer is likely going to exceed what you could hope to get in an auction scenario. If an auctioneer might get you $20,000 for the asset and you can find a buyer willing to give you $25,000 down and then you hold a note overtime for the balance; then that's a great deal for you. The employees get to keep their job, the customers get to keep doing business with the business. It's better for everyone all around, but it's going to require a lot of flexibility on the part of the seller and if there are debts in the business that aren't be serviced or can't be serviced and the debts exceed the likely amount that we are able to get out of it, then that's a really bad situation.
Unfortunately, I have had people who have run businesses down to the point where they weren't making any money, they weren't able to service debt. They sold them for what they could and then they had to go to their banker and say, look, this situation is bad, I am not going to be able to pay you anyway, this is an opportunity I have to get out of this situation, and this is the kind of money I am able to bring to you. Can we work out a deal? They have been able to do something with their bankers to try to work themselves out of that debt, or in a really bad situation, they end up having to declare bankruptcy and stuff like that.
Anyway I hope that answers your question, how do we put an asking price on a business that doesn't have any profit? Basically what we look at is what is the worth of the sales and the tangible assets and we figure out how can we make it possible for someone to buy this business when in all likelihood, no bank or any other institution is going to finance a business who doesn't have any cash flow.
Thanks and don't forget to sign up for my e-mail, newsletter that comes out every week. We'll talk with you later. Bye.
Hey, you made it to the end of the video. That's great. Don't forget to visit www.investlocalbook.com. Sign up for my e-mail list. It's right down here under the welcome video.
Thanks and we will see you next time.
are bankruptcy and stuff like that.
Anyway I hope that answers your question, how do we put an asking price on a business that doesn't have any profit? Basically what we look at is what is the worth of the sales and the tangible assets and we figure out how can we make it possible for someone to buy this business when in all likelihood, no bank or any other institution is going to finance a business who doesn't have any cash flow.
Thanks and don't forget to sign up for my e-mail, newsletter that comes out every week. We'll talk with you later. Bye.
Hey, you made it to the end of the video. That's great. Don't forget to visit www.investlocalbook.com. Sign up for my e-mail list. It's right down here under the welcome video.
Thanks and we will see you next time.
The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback. Sign up for my mailing list and don't miss a thing! [CLICK NOW]
Wednesday, December 16, 2015
[VIEWER QUESTION] How can I maximize the value of my business over a give period of time?
A viewer who is or is planning to be a business owner wrote to me asking what steps he could take to maximize the value of his business over a given period of time. Here are my thoughts:
Transcript:
Hey there everyone, It's David Barnett once again and this week I've got a fantastic question from a viewer who asked, what steps should I take to maximize the value of my business over a given period of time, for example ten years? This is fantastic because so often, when I had my business brokerage office, I would have people come in wanting to sell their business basically motivated at the last minute by personal events in their life.
They had to come in and try figure out how they are going to sell their business. They had never before that moment being thinking about selling the business. As a business owner, what I believe you should consider is that the business is an asset like many of the other investments in your life and that you should always be thinking about the day you are going to sell it, because you should always be ready to sell in case some personal catastrophe were to come along and force you to liquidate that asset.
There are basically four different categories of things that I am going to recommend someone do as business owner who wants to think about maximizing the value of their business to be sold over a given time frame.
The number one thing is profits. Businesses are sold on multiples of profits, so you should always be doing things to maximize your profit. Now, many small business owners do things to minimize taxes which means they diminish profits on purpose, maybe they put some personal expenses into the business. That kind of thing can be explained to a buyer. You can say look, my daughter's cell phone is being paid for by the business, it's not a real business expense, we do that through a process we call recasting
What is more difficult is when you have opportunities to close sale and you don't do it because you are feeling lazy one day. Many people who get older in years up in their 50s and 60s, they don't have bank loans anymore. They don't feel the pressure of having to work as hard as they can all the time. So they ease back, they fall back on their efforts and that in turn cause sales to go down, it causes profits to go down and if we see a trend, year after year of sales and profits going down, then what a buyer is going to do is assume that that trend is going to continue and make you an offer based on declining sales and declining profits, so we want to maximize profit at all times and work our business just like we have a slave driving boss pushing us every day to make that sale, to deliver that product to make the customer happy.
I just mentioned trends. Trends are the number two things that I want to talk about today because if you have a business which year after year have consistent increases in sales and profit, that is also going to be one thing that will maximize the value of your business upon sale. Then it becomes easy to convince buyers that they should weigh their decision about valuation either entirely on the last year because it goes up every year, or even to consider the increase that you are working on in your year to date financials.
It shows that there is a trend of growth and that if they buy the business they are going to have increased profit in the future so the trend is certainly your friend if you can make it go up every year. If your sales and profit oscillate; up and down, up and down, year after year then buyers are going to want to use an average - value over a period of time - or if the last two years were declining, they are going to want to put all of their weight on the lowest year, that final year, which is not going to bode well for you; trying to sell.
The third category of things you need to watch out for is the type of business. The person who asked this question, likely is already in business, but if you are planning to buy a business and you want to maximize its’ value over the course of time in preparation for a sale; you may also want to consider the type of business that you are buying.
Businesses that are industries with a lot of competition, low barrier entries, tend to sell for lower multiples of earnings. Think restaurants or bars. High risk businesses sell for low multiples. If you can get into a business that is less risky, where there is less competition or there is significant barriers to entry like patents or protection like trade secrets, or copyright for instance, think about a manufacturing company for example. Then you are going to get a higher multiple.
If you can be in a business where you have recurring contracted revenues, your multiple can get even higher. Think about businesses like insurance brokerages. So, while restaurants typically sell for less than half of what their annual sales are, an insurance brokerage can actually sell for two or three times what their annual sales are because it's that regular contracted revenue that comes in every year. As long as you manage those customers well, you are going to be able to carry that business forward into the future and those revenues.
The last category of things that I am going to give you is food for thought to think about is transferability. How easy is it going to be for a buyer to take over and run your business. If you have a business where none of the systems or processes are written down, where everything happens in your own head and in order for somebody to take over your business you are going to have to spend six months with them basically mentoring them or would them being your apprentice so to speak, it's going to have an impact on value. Whereas, if some buyer walks into your business and he sees that everything is systematized, everything is written down. There is an operational manual, there is check-list for the employees, there are flow charts showing, what jobs are done and in which order, there is job description, there is an organization chart and everything is set up and followed and everyone knows what they are responsible for and if there is a piece of litter on the floor, you can say the clean-up of the floor is the responsibility of the receiver at the back door, it's in his job description, so the fact that there is litter here, is that guy's fault.
That kind of systematization that you find in large businesses and in particular in franchise operation is going to make it easier for a buyer to see that they are going to be able to take over your operation and basically carry the ball, they are going to be able to run with it. They are not going to have to reinvent the wheel and they are not going to rely upon employees or your corporation for the sale because everything is documented and written down.
I hope that gives you some great things to work on if you are already in business or if you are planning to buy a business. Thoughts always have to be put in to your exit. I have met far too many business owners who ran businesses for decades and their succession plan was simply to live forever because folks, that just doesn't happen.
Anyway, thank you so much for watching my videos and if you like what you have seen, please take a moment and subscribe to my e-mail list. I send an e-mail every week and if you ever become dis-satisfied, it's easy to get yourself off that list because I use mail chimp.
Sign up today, subscribe to my you-tube channel, follow me on twitter. Thank you, have a great day and we'll talk to you later.
Hey! You made it to the end of the video, that's great. Don't forget, visit www.investlocalbook.com. Sign up for my e-mal list. It's right down here under the welcome video. Thanks and we see you next time.
The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback. Sign up for my mailing list and don't miss a thing! [CLICK NOW]
Hey there everyone, It's David Barnett once again and this week I've got a fantastic question from a viewer who asked, what steps should I take to maximize the value of my business over a given period of time, for example ten years? This is fantastic because so often, when I had my business brokerage office, I would have people come in wanting to sell their business basically motivated at the last minute by personal events in their life.
They had to come in and try figure out how they are going to sell their business. They had never before that moment being thinking about selling the business. As a business owner, what I believe you should consider is that the business is an asset like many of the other investments in your life and that you should always be thinking about the day you are going to sell it, because you should always be ready to sell in case some personal catastrophe were to come along and force you to liquidate that asset.
There are basically four different categories of things that I am going to recommend someone do as business owner who wants to think about maximizing the value of their business to be sold over a given time frame.
The number one thing is profits. Businesses are sold on multiples of profits, so you should always be doing things to maximize your profit. Now, many small business owners do things to minimize taxes which means they diminish profits on purpose, maybe they put some personal expenses into the business. That kind of thing can be explained to a buyer. You can say look, my daughter's cell phone is being paid for by the business, it's not a real business expense, we do that through a process we call recasting
What is more difficult is when you have opportunities to close sale and you don't do it because you are feeling lazy one day. Many people who get older in years up in their 50s and 60s, they don't have bank loans anymore. They don't feel the pressure of having to work as hard as they can all the time. So they ease back, they fall back on their efforts and that in turn cause sales to go down, it causes profits to go down and if we see a trend, year after year of sales and profits going down, then what a buyer is going to do is assume that that trend is going to continue and make you an offer based on declining sales and declining profits, so we want to maximize profit at all times and work our business just like we have a slave driving boss pushing us every day to make that sale, to deliver that product to make the customer happy.
I just mentioned trends. Trends are the number two things that I want to talk about today because if you have a business which year after year have consistent increases in sales and profit, that is also going to be one thing that will maximize the value of your business upon sale. Then it becomes easy to convince buyers that they should weigh their decision about valuation either entirely on the last year because it goes up every year, or even to consider the increase that you are working on in your year to date financials.
It shows that there is a trend of growth and that if they buy the business they are going to have increased profit in the future so the trend is certainly your friend if you can make it go up every year. If your sales and profit oscillate; up and down, up and down, year after year then buyers are going to want to use an average - value over a period of time - or if the last two years were declining, they are going to want to put all of their weight on the lowest year, that final year, which is not going to bode well for you; trying to sell.
The third category of things you need to watch out for is the type of business. The person who asked this question, likely is already in business, but if you are planning to buy a business and you want to maximize its’ value over the course of time in preparation for a sale; you may also want to consider the type of business that you are buying.
Businesses that are industries with a lot of competition, low barrier entries, tend to sell for lower multiples of earnings. Think restaurants or bars. High risk businesses sell for low multiples. If you can get into a business that is less risky, where there is less competition or there is significant barriers to entry like patents or protection like trade secrets, or copyright for instance, think about a manufacturing company for example. Then you are going to get a higher multiple.
If you can be in a business where you have recurring contracted revenues, your multiple can get even higher. Think about businesses like insurance brokerages. So, while restaurants typically sell for less than half of what their annual sales are, an insurance brokerage can actually sell for two or three times what their annual sales are because it's that regular contracted revenue that comes in every year. As long as you manage those customers well, you are going to be able to carry that business forward into the future and those revenues.
The last category of things that I am going to give you is food for thought to think about is transferability. How easy is it going to be for a buyer to take over and run your business. If you have a business where none of the systems or processes are written down, where everything happens in your own head and in order for somebody to take over your business you are going to have to spend six months with them basically mentoring them or would them being your apprentice so to speak, it's going to have an impact on value. Whereas, if some buyer walks into your business and he sees that everything is systematized, everything is written down. There is an operational manual, there is check-list for the employees, there are flow charts showing, what jobs are done and in which order, there is job description, there is an organization chart and everything is set up and followed and everyone knows what they are responsible for and if there is a piece of litter on the floor, you can say the clean-up of the floor is the responsibility of the receiver at the back door, it's in his job description, so the fact that there is litter here, is that guy's fault.
That kind of systematization that you find in large businesses and in particular in franchise operation is going to make it easier for a buyer to see that they are going to be able to take over your operation and basically carry the ball, they are going to be able to run with it. They are not going to have to reinvent the wheel and they are not going to rely upon employees or your corporation for the sale because everything is documented and written down.
I hope that gives you some great things to work on if you are already in business or if you are planning to buy a business. Thoughts always have to be put in to your exit. I have met far too many business owners who ran businesses for decades and their succession plan was simply to live forever because folks, that just doesn't happen.
Anyway, thank you so much for watching my videos and if you like what you have seen, please take a moment and subscribe to my e-mail list. I send an e-mail every week and if you ever become dis-satisfied, it's easy to get yourself off that list because I use mail chimp.
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Hey! You made it to the end of the video, that's great. Don't forget, visit www.investlocalbook.com. Sign up for my e-mal list. It's right down here under the welcome video. Thanks and we see you next time.
The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback. Sign up for my mailing list and don't miss a thing! [CLICK NOW]
Monday, December 7, 2015
[VIEWER QUESTION] How can I boost the yield on a private loan note without changing the interest rate?
This week's video is about how to boost yield on a private note while keeping the same 'face rate' of interest. Watch:
Then after I realized that I had made an error, I recorded this video...
Then after I realized that I had made an error, I recorded this video...
The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback. Sign up for my mailing list and don't miss a thing! [CLICK NOW]
Thursday, December 3, 2015
[RADIO] I was recently on Revenue Chat with Tony D'Urso. Listen
I had the pleasure of being on Tony D'Urso's Revenue Chat program the other day.
The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback. Sign up for my mailing list and don't miss a thing! [CLICK NOW]
Wednesday, December 2, 2015
Another jurisdiction moves forward on equity crowdfunding.. this time Colorado
Denver Business Journal is reporting a story about the state's first equity crowdfunding site getting up and going.
Purchasing a minority share interest in a small local business can be fun and give you a sense of contributing to the community.
I hesitate to call this 'investing' however because the net income (the place where dividends come from) is controlled by the spending decisions of management (normally the majority shareholder.)
To learn more about why sound small business investments are made via loans and leases and not equity, read my book Invest Local. Available at www.InvestLocalBook.com or from Amazon as a paperback or Kindle e-book.
Purchasing a minority share interest in a small local business can be fun and give you a sense of contributing to the community.
I hesitate to call this 'investing' however because the net income (the place where dividends come from) is controlled by the spending decisions of management (normally the majority shareholder.)
To learn more about why sound small business investments are made via loans and leases and not equity, read my book Invest Local. Available at www.InvestLocalBook.com or from Amazon as a paperback or Kindle e-book.
First Colorado equity crowdfunding website up and running
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