Oregon Business Broker's Info for Business Buyers

Private-equity firms are using less leverage and paying higher prices

bizsale — Tue, 10 Jan 2012 07:13:54 +0000

According to data in a Wall Street Journal article, “Private-Equity Firms Forced to Evolve” (January 6, 2012), in 2011 private-equity firms used capital structures for acquisitions with far less debt than in 2010: from roughly 58% debt to a little under 49%. The surprise, though, was that despite using less financial leverage and the country still being in a very anemic recovery, private-equity firms, on average, paid a higher multiple of EBITDA for businesses than in 2009 or 2010. While the average EBITDA multiplier paid for businesses isn’t as high as in 2007 or 2008, it is higher than from 2000 to 2006.

So what was the average price in terms of an EBITDA multiplier that private-equity firms paid for businesses in 2011? Just under 9x EBITDA.

Before assuming that this is the price you will achieve for your business if selling or what you should pay for a business if you are a buyer, there are a few things to keep in mind:

1. If you are reading this blog it is likely that you are either looking to buy or you own a small to lower mid-market company. Most of my seller clients have less than $3 million in EBITDA, and the majority have less than $1 million in EBITDA. Very few private-equity firms will consider a business with less than $1 million in EBITDA, and most are looking for significantly larger businesses to acquire. Small firms, in general, are perceived to be riskier and less attractive than larger companies, so many buyers will discount price when considering a small business.

2. I find that many business buyers and sellers confuse Seller Discretionary Earnings with EBITDA. Seller Discretionary Earnings will be a larger number than EBITDA, since it is comprised of EBITDA plus the expensed compensation and benefits of a single owner. Particularly on small businesses, the mistake of confusing the two can dramatically distort estimates of value. So, even if you perceive that the EBITDA multiplier that private equity groups have paid on average for a business, make sure that you are truly using EBITDA as the financial measurement, not Seller Discretionary Earnings. For example, if a business owner is either not not paying herself a salary or is paying herself a salary that is significantly below market for her management labor, then without making an adjustment, EBITDA will be overstated for estimating value.

3. Business value is unique to an individual business according to its risk factors, profitability, competitive environment, opportunities for growth, etc. so while it is nice to look at trends with average multipliers paid, it is not overly meaningful in determining what a particular business should be worth. When Codiligent business brokers assists buyers and sellers, one of the roles it plays in the process is to fully analyze the business taking into consideration both quantitative and qualitative information to estimate value based on the unique characteristics of the business.

For buyers, the increase in multipliers paid by private-equity firms may indicate greater competition for businesses, which may mean not only that higher prices may be required than during the recession, but also that buyers who want to complete a deal may have to act more quickly to avoid losing out to a competitor for the target business.

When valuing a business should you use most recent year financials or 2-3 year average?

bizsale — Fri, 30 Dec 2011 06:28:58 +0000

If you are looking at a business that has had strong growth for the last 3-4 years should you base valuation calculations on the most recent 12 months, a 2-year average, 3-year average, or something else? While this depends on many factors including the unique characteristics of the business, stability of the growth, and the valuation techniques you are using, I’d like to point out why using the most recent 12 months may be more accurate than using a 2-3 year average if you are using a market comparable approach to value:

1. If you are using a market comparable multiplier to value the business, most of the sold business comparable databases develop the revenue, EBITDA, and seller discretionary earnings multipliers using the most recent 12 month financial data before the sale. In fact, most of the sold business comparable databases don’t have more than the past year’s financials. While a very small percentage of small businesses that sell are distressed, the vast majority are businesses that have seen a history of increasing earnings. If they have not exhibited growth than most business owners find it very difficult to attract the interest of buyers, and they won’t sell and thus won’t be included in a sold comparable database. Consequently, if someone is using a multiplier based on the most recent 12 months financials for growing businesses, and applies that to a business being valued using more than the most recent 12-month numbers it will be an apples-to-oranges comparison. For example, assume that for a particular type of business the average Seller Cash Flow was $200,000 and the average Seller Cash Flow multiplier was 2.75, for an average value of $550,000. If those comparable businesses had grown an average of 15% per year for each of the past three years, then their 3-year average Seller Cash Flow would actually be $175,047, and if you divided their average sold price of $550,000 by that 3-year average the Seller Cash Flow multiplier would increase to 3.14.

2. Another way to look at this would be what if Business A had a three year average EBITDA of $1 million, where three years ago it was $800,000, two years ago it was $1 million, and last year it was $1.2 million. Compare this to Business B who also had $1 million of EBITDA, but its last three years were $1.4 million three years ago, $1 million two years ago, and $600,000 last year. If the average EBITDA multiplier for similar sold businesses was 5x, and you applied it to both businesses you would deduce that each was worth $5 million. Yet, if Business A and Business B both had flat growth in the coming year then Business A would produce a return on investment of 24% whereas Business B would only produce a return on investment of 12% – which would be odd given that Business B is a declining business and should warrant a higher return on investment to compensate for greater risk. Also, if the risk factors that were inherent in the business and industry indicated that a price that produced a 20% EBITDA return was appropriate, then with flat growth Business A should have commanded a price of $6 million. If Business A continued to grow consistent with past performance, then next year its EBITDA would grow to $1.4 million, and if using a 3-year historical average it would under-value the business by $2 million.

3. The problem with the scenario described in my second point is that the person valuing the business has already modeled the risk into their projections for a growing business. In essence, if a business has grown from $800,000 in EBITDA three years ago, to $1.2 million today, but a $1 million average is utilized for calculating value, the person valuing the business is assuming a decline in EBITDA of $200,000 from the most recent year. If someone wants to model that risk, that’s fine, but that means that a higher multiplier must be used to take into consideration that the risk of decline has already been modeled.

Starbucks financing small businesses

bizsale — Thu, 13 Oct 2011 21:37:53 +0000

Many small business owners view Starbucks as a convenient place to hold away-from-the-office business meetings. What may come as a surprise is that starting on November 1, 2011 Starbucks is going to start raising money and partnering with Opportunity Finance Network in an initiative called Create Jobs for USA in order to provide financing to small businesses. Create Jobs for USA also invites private donations, and claims that for each $5 contributed it will allow for $35 of lending for community businesses.

Roofing Contractor for Sale in Portland Oregon

bizsale — Sun, 11 Sep 2011 18:06:31 +0000

Are you, or someone you know, looking for a quality business to buy? This week Codiligent business brokers started marketing a new business for sale: a roofing company serving the greater Portland, Oregon metro area.

This roofing business has seen strong growth during the recession, at a time when many competitors have struggled financially. There are a number of reasons for this including: 1, a strong focus on quality, which in turn leads to good reviews and referrals; 2, quality systems that lead to efficiency, effectiveness, quality, and good communications internally and externally; 3, a well-trained, highly competent staff; 4, marketing, branding, and advertising activities that have lead to a continual source of quality leads; 5, exceptional customer service at all levels of the organization; and 6, no reliance on any single large client which lowers risk to the business if there are variations in business or problems with any given client (its largest client was responsible for less than 8% of revenue in 2010).

Following is a link to an introduction package on this roofing company.

Roofing Company Introduction Package & NDA

A better elevator pitch

bizsale — Mon, 27 Jun 2011 17:19:31 +0000

Much has been written on the importance of having a good elevator pitch, a short 15-20 second practiced sound-bite to describe what you do. If you are planning on starting or buying a business, this is of particular importance, as you will want to be able to immediately convey what you do to people you meet in a variety of situations and settings. Yet, what makes a good elevator pitch? I came across an excellent video from a marketing consultant, Kathy McAffee, that provides excellent advice see below. Using her suggestion Codiligent’s elevator pitch would be: I help business owners successfully sell their small to mid-size companies, and I’m looking to meet serial entrepreneurs as well as business owners approaching retirement age.

Business For Sale: Relocatable Web Development Firm With IP

bizsale — Thu, 02 Jun 2011 19:11:44 +0000

Codiligent business brokers has just listed a new business for sale: a relocatable web development firm serving well-branded businesses throughout the Pacific Northwest. This business has significant unregistered Intellectual Property. Following is a link to an introduction package. Please provide this information to any business buyers you know for whom this may be an appropriate acquisition.

Introduction Package for Listing 1000008116

Web-based capital sources for starting or buying a business

bizsale — Mon, 16 May 2011 17:06:20 +0000

In this mornings Wall Street Journal there was information on three websites that may help business owners raise capital, whether they are buying a business or starting one. I can’t vouch for how well they work and one of them (Peerbackers.com) is used for raising very low levels of equity capital (<$20k). In the event they are of interest, I’ll share them:

CapitalMatchPoint.com This site connects entrepreneurs in search of funding with investors that meet the SEC’s requirements for being a qualified investor under Regulation D.

Peerbackers.com This site helps entrepreneurs raise small amounts of capital from investors.

Lendio.com This site helps entrepreneurs navigate the process of applying for a commercial small-business loan, then tries to match a borrower with the most appropriate type of loan.

The right age to start or buy a business?

bizsale — Tue, 19 Apr 2011 15:01:00 +0000

What’s the best age to buy or start a business? The age when you are passionate about it!

Here’s a link to a blog post about a custom build bicycle wheel business that was started eight years ago by Bill Mould when he was 59:

Building a Business One Bike Wheel at a Time

Perhaps you have worked all your life for someone else, and now you want to make your own distinct mark on the world. Starting a business may sound appealing, but perhaps you are reluctant to spend the time necessary to put the basic systems in place and get the business to cash flow positive. If so, maybe buying a business would be a good solution. If you buy a well-performing business in an industry that you are interested in, there is no reason you can’t modify it going forward to launch the new product or service you have in mind, but the benefit is that you will have a proven business model with cash flow and basic systems in place to support your new product/service.

A significant advantage of buying a business vs. starting one is customers

bizsale — Mon, 11 Apr 2011 20:40:50 +0000

On April 11, 2011 there was a blog post written by James Altucher on Forbes.com titled “The Easiest Way To Succeed as an Entrepreneur“, in which he says that the most important rule for entrepreneurial success is to have a customer before you start your business. The article is a worthwhile read. I’d like to suggest that one of the easiest ways to have customers for a business venture is rather than starting a business, contact a business broker or investment banker and buy one. If you have a great innovative idea, what’s wrong with buying a business that already has a significant customer base for a complementary product or service? Cross selling a new product or service to customers that a business has already developed trust with will often be far easier than organically growing a customer base.

Considering buying a business? Wait too long and it may cost you more.

bizsale — Tue, 29 Mar 2011 00:09:18 +0000

As the Fed has pursued quantitative easing, many economists are worried that if not reigned in at the right time it may usher in inflation. Already there are signs of food price inflation. One of the methods of controlling inflation will be for the Fed to increase the federal fund interest rate. If you were considering buying a $2 million business and you were going to get a loan for 70% of the price, for a $1.4 million loan with a seven year amortization and term, if you wait and interest rates increase by 2% it will cost you about $1,400 more per month, $16,800 more per year, and $117,600 more over the life of the loan.

While many businesses have struggled over the past few years’ recession, many that I’ve been talking with during the fourth quarter of 2010 and the first quarter of 2011 have shown strong performance as of late, and I know many who performed pretty well during the entire recession. If you are able to find a business that is attractive to you, survived the down turn, and is performing well, it may be a great time to buy. While nobody knows exactly what will happen with interest rates and when (if they did they could make a lot of money off being right!), who doesn’t think the probability is that they will be higher 1-2 years from now?