Exit Planning Tools for Business Owners

sales management

EBITDAC : What is Your Business Worth Now?

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Several friends have sent me a picture of an EBITDAC coffee mug this week. As it states, EBITDAC stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus. Will this be the new measure of cash flow for valuing your business?

EBITDACA bleak joke, but one that is on the minds of many business owners, especially Baby Boomers in their late 50s and 60s. Many were postponing their exit planning because business has been so good. As one client told me, “In March we had the best year in the history of my company. It looks like April might be the worst.”

Downturns aren’t new, and recent history has more “Black Swan” downturns than most. Boomer owners have lived through the dot-com crash, 9-11, and the financial/housing bust. Even the Great Recession, however, was when most Boomers were in their mid-40s to early 60s. Most had ample time to recover, and to resume their business-building activities.

This downturn hits 4,000,000 Boomer owners when the youngest is at least 55 years old. The recovery time is uncertain, and regulatory restrictions on their businesses may be reimposed, perhaps more than once.

Factoring the Coronavirus in Valuations

Most Main Street acquisitions (under $3,000,000) rely on financial results over the previous five years for valuation. Those years have generally been good. In the middle market, professional buyers’ due diligence requests often seek results from 2008-2009 as an indicator of a business’s resilience in a contracting economy.

I think we can safely assume that both Main Street and mid-market acquirers will be carefully looking at the sustainability of your business through COVID-19. How much it affects your company’s valuation will depend largely on what type of business you own, and how you reacted to both any shutdown and the period immediately following.

One issue will be how buyers perceive the impact of Paycheck Protection Program loans and their forgiveness. It appears at the moment that the PPP loans will not be considered taxable income when forgiven. There are IRS rules for non-taxable loan forgiveness, but it will likely still appear as additional margin on your books. (The expenses it paid will still be deductible.)

You can be certain that buyers will be backing out the PPP loan forgiveness when valuing your business. They won’t be very interested in paying multiples of a one-time “free money” event.

EBITDAC : Short and Long Term Impact

Some businesses will see an immediate effect on their selling prices. Others may have a lingering change in how buyers look at their worth.

First, buyers will look at the scope of the coronavirus’ impact. Restaurants, caterers, event support, transportation (airlines, rental cars, party buses) and other hospitality related industries will be the worst. Not only are they the most affected, but they face the possibility that they resume with limitations on their business (social distancing in restaurants or limited passengers in vehicles, for example.) Any buyer would have to anticipate another period where they can’t generate substantial, or any, revenue.

If a business like those survives the shutdown, finding a buyer will be challenging. Third-party lenders will shy away from any involvement. Cash flow will remain tight, and credit will be harder to find.

The good news for those businesses is that the virus will end. When it is no longer a threat (presumably either because we find a vaccine, or we build herd immunity after a couple of seasons,) valuations should return to something more normal.

Other businesses will see valuations change over a longer period of time, and for different  reasons. They will be judged either by their ability to recover quickly, or by how their model changes to take advantage of life after the virus.

Regardless of the impact, some owners will use the pandemic as an excuse for years to come. Others will adjust and move forward. (See my description of an owner who was still blaming the Great Recession a decade later here.)

Planning for Your Comeback

Whether your business is essential and working much like before the pandemic, or non-essential but functioning pretty well remotely. this virus is going to change your strategy.

For an obvious example, lets take video conferencing. How are you preparing your sales team for the return to normal? Will they be more efficient? Are they able to cold call? Should their expense accounts be lower? Or are they (and you) just waiting to go back to what they did before?

If you are a manufacturer or a contractor, perhaps your business has been very healthy during this lock-down. What will happen afterwards? Will new competitors push into your market to replace business that they lost? Might some customers fade away, while others discover a newfound need for your offerings?

If you are surviving, how can you thrive? Do you expect landlords with empty space to negotiate cheaper rents? Will some skilled employees be looking for new jobs? Should others become pricier because of increased demand for their skills? Can the automation you implemented for remote work be extended to new efficiencies or new opportunities?

EBITDAC and Post-Coronavirus Exit Planning

If you were anticipating retirement before the pandemic, are you accelerating your plans or putting them on hold for a while longer?

In either case, you’ll need to understand the impact of the virus on your company’s value. EBITDAC 2It may be dramatic and immediate, or it may be only obvious afterwards when your performance is matched against that of your peers.

The definition of a Black Swan is “An unpredictable or unforeseen event, typically one with extreme consequences.” COVID-19 certainly fits the definition. It already has extreme consequences, but many of those are yet to come.

It’s not hard to figure out. Those who plan for a different world will do better than those who are taken by surprise. In either case, the impact of the “C” in EBITDAC will greatly influence any value generated by your transition from your business.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

The Nimble Small Business

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Almost since time began, the nimble small business has been axiomatic. Large corporations are like big ships, the common knowledge goes. They take a long time to change direction.

That is a comforting thought to business owners who choose to see their one-person strategic planning team as a competitive advantage. Like the small furry mammals that survived as the dinosaurs died out, they are adaptable. The nimble small business can react to changes in the market faster, with less bureaucracy, and with greater attention to the customer’s needs.

There is one problem. That “common knowledge” is no longer true. In fact, a new definition of nimble is rapidly becoming the proprietary playing field of giant corporations. Privately held companies, already under increasing competitive pressure, are being squeezed out of their traditional role as innovators.

The Competition for Data

The new player in the big/small competition is data. Companies are in an arms race to understand the buying habits of their customers. It is a race that, by nature, goes to the player who has the most customer contact.

Amazon is the most obvious example. Their prices on any item change on a minute to minute basis. They are adjusted depending on the individual customer’s buying history, time of day, and current sales volume of the product.

I’m guessing that they might also be impacted by geographic area of the buyer, weather in that area, and purchases by family members. If that isn’t the case now, it soon will be.

A friend bought a couple of gas cans for his ranch. The next time he went on the web, he was fed an ad for a gas can holder made specifically to hold those two cans. He bought it, although as he said “It ticks me off to have them know that I want a product before I do.”

That is one less visit to his local farm and ranch store. They’ve been good vendors for years. They let his contractors pick up supplies for the ranch and he pays the next time he comes in. He likes them, but they don’t know what he wants before he does.

Not Just Internet

This capability isn’t limited to Amazon and Facebook. In 2016 General Motors invested $500 million in Lyft. In a recent article, GM’s CEO said that they were preparing for the day when ride sharing reduced new vehicle volume.

They hope to make up at least some of the missing revenue with data sales. If they know where people are going and when, they have a valuable commodity to sell.

Grocery stores are climbing on the data bandwagon. Who knows better what you like or avoid? They can tell suppliers (those who can afford to buy the data) where to direct advertising dollars for the greatest impact.

Netflix now has over 50,000,000 active subscribers. A fortune awaits anyone who can correlate viewing habits with buying patterns. If they don’t have the capability already, I’m sure someone is working on it.

Nimble Small Business

What does this have to do with exiting your business? A lot. Whether you are planning to sell to employees, family or a third party, the buyers are almost by definition younger than you. They understand the value of data.

When they ask how well you know your customers, what will your response be? If you have their names, addresses and emails, that’s a start. If you regularly reach out to them with content that is opened and read, that’s another level up. If you can target them by past purchases, age, location or income, that’s beginning to be nimble.

If you think that greeting them by their first name when they walk in is enough, you are nearing the end of the Cretaceous Period. You want to be with the mammals, not the dinosaurs.

 

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It is ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

 

 

 

 

Good Customers Can Be Bad

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When can good customers be bad? What could be wrong with a customer who buys a lot, pays promptly, and never has a service problem?

They might be buying too much. No matter how strong or comfortable a sales relationship is, it could end. You may be confident that the customer is yours for life, but therein lies the problem. Someone who buys the business doesn’t have the same level of confidence that the customer will be around for a whole new ownership lifetime.

Many mid-market companies rode one horse to success. There were bringing in a few million dollars in revenue when the landed “the big one.” Perhaps they had to scramble to add capacity and ramp up talent, but the seized the opportunity and met the challenge.

As these companies grow, the owners always say the same thing. “I know that it’s bad to have my eggs in one basket. I’m going to find other customers to even things out.”

big and little businessmenBut the good customer keeps buying more. They are twenty times your size, and an increase of 2% for them translates into 40% more for you. Businesses in this situation aren’t necessarily complacent. They are just scrambling to keep up.

This good customer brings many other benefits along with its dollars. They ask for plans and budgets, so you develop capabilities to meet their requirements. They coordinate packaging a shipping, so you learn more about logistics. They ask for detailed reporting, so you upgrade your tracking systems.

Your company’s increased capabilities translates into more business with large customers. You can show your ISO certification or online reporting. You deliver specifications or scope of work statements as professional as those of much larger competitors.

But you never quite catch up. You are like the dog that caught the pickup truck. You don’t have any control, but you can’t let go, either.

There is an obvious risk of good customers having a change in management or strategy, but for the most part the relationship is favorable. The problem arises when it is time to exit your business.

This issue is specific to mid-market companies. In a Main Street sized business, an entrepreneurial buyer (one who is purchasing a job) will often look at the steady income from a large account favorably. If you’ve grown large enough to attract a professional buyer, however, the “Quality of Earnings” audit will bite you.

Quality of earnings analyses are done by larger accounting firms for mid-market buyers, particularly private equity groups. Those firms typically charge between $20,000 and $60,000 for the audit. Not surprisingly, the client wants a return on that investment. That comes by way of discounting profitability associated with the “risky” business.

If the letter of intent is offering five time earnings, the price reduction is of course on a 5:1 ratio to the profits. Not to belabor the math, but if a $40 million company had $4 million in profits, and 40% came from one account, a 35% discount for that account alone would be $2,800,000 off the purchase price.

That’s when good customers can be bad.

Do you know an owner who would enjoy Awake at 2 o’clock? Please share!

Small Business can Sell in a Recession

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This was an article I had published in the San Antonio Express News yesterday.

Guest Voices: Small businesses can sell in recession

Many business owners think that the current recession has ruined their exit strategy. While the climate may be more daunting for budding entrepreneurs, there are still plenty of buyers around for small businesses.

For Main Street businesses (those selling for less than $3 million), buyers chiefly are driven by personal economics. They are seeking a business as a way to make a living. Their main objective is cash flow, the amount of discretionary income the business generates to cover bank debt and an owner’s salary.

In a recession, the most common economic buyer is an executive who has lost his or her corporate job. These buyers usually have good management skills and substantial savings, along with enough net worth to make a lender comfortable.

Be aware, however, that former corporate executives are also very cautious shoppers. The concept of going it alone can be terrifying enough in the best of times. As a buyer gets closer and closer to closing, the idea of working without a safety net looms larger.

In a giant organization, missing your budget means a poor performance review. In a small business, it could mean closing the doors. Executive buyers need extra assurance that they will succeed. If you are an entrepreneur who has risked it all for years, their concerns may generate little sympathy, but they are a fact you have to deal with.

Harsh economic times also bring out the bottom feeders. These are buyers who shop incessantly for companies that can be bought at bargain basement prices. They frequently will use the economy as an excuse to make a low-ball offer, claiming that your business will not be able to sustain its historical profitability going forward.

Unless you’re actually seeing a decline in revenues and profits, there is no reason to entertain an unfairly low offer for your company. Most small businesses have a minuscule market share and can thrive in any economy if they are careful and aggressive. Unless you are focused in an industry that is especially hard hit by the current downturn, there is no reason to think that general economic conditions will have a proportionate effect on your company.

Of course, your expectations of what constitutes a reasonable price are critical. When buyers are already nervous about financing and the future, an inflated price can scare them away quickly and permanently.

Many business owners price their companies beyond achievable expectations based upon multiples for public companies, industry rumors, their own financial needs or simple misunderstanding of the profitability measurements used in mergers and acquisitions.
There are several national databases that show actual sale prices of small businesses in relation to the profits and size of the company. Though the opinions of your accountant or attorney may be helpful, they may vary widely from the actual pricing that is being achieved in the marketplace.

Just because times are challenging, that is no reason to put your life plan on hold. Like every other aspect of owning a business, the sale of the company will be much more successful if you start with good information, plan carefully and have realistic expectations about the outcome.

John F. Dini is president of MPN Inc. He also operates the nation’s largest franchise of The Alternative Board. He can be contacted at jdini@mpninc.com.