All business owners want to know, “What’s my business worth?” But different buyers will put different values on your shop:
- Ambitious Rebuilder
- Strategic Buyer
It’s because they want different things. Family, an employee, or a non-employee rebuilder all want to operate and build your business over time. Owning and being involved in growing the business appeals to them. The competitor may also want to own and grow your business, continuing in the current location or closing your location and merging your customers into their shop.
Both the investor and strategic buyer have different interests from the others. The investor and strategic buyer are keenly aware of the value of your current and potential cash flow. The first four probably don’t clearly understand cash flow. The investor is prepared for steady, incremental growth from profitable operations and eventual sale.
The strategic buyer sees some special potential in your operation that few others could take advantage of, but they believe they can achieve it. Maybe it’s the location, reputation, or upcoming neighborhood changes that will suddenly make your shop busier and better.
The strategic buyer may be willing to pay much more than other types of buyers; well beyond the cash flow value. This is why Facebook, Amazon, Apple, and Google pay billions for firms just a few years old that currently lose money but could add dramatic value to their company in the future. Or they may want to keep that new company’s technology away from a competing giant.
If you have an excellent shop, a terrific staff, and experience selling businesses, then strategic or investment buyers could be the best new partners to grow your venture further and then transfer ownership.
If yours isn’t an extraordinary shop, then you should focus building value to fit one, and probably only one, of the other types of buyers: family, employees, an ambitious builder, or a competitor. Each type of buyer requires a different set of preparations and offers different benefits… and risks.
The more strategic you are in your business preparation, the better the result for both you and the buyer. Making your business ideally fit a particular buyer increases the business value to them, making it more appealing and smoother to transfer.
Identifying the best candidate, testing that person, and building the possibility takes time. The first candidate may not work out. It’s a delicate dance, exploring and testing while keeping your risk low and options open should insurmountable problems arise with one candidate or another.
There are two things you should do next: First, increase your commitment and dedication to operating the best damn shop you can by making sure you: a) please customers, b) practice delegating responsibility and authority to employees, and c) strive to make the shop clean, organized, and appealing.
Second, reread Smart Exit — The Best Way Out, in the April, 2017 issue of GEARS. In it, we ask three questions:
- Do you have something to sell?
- Can you prove it’s worth buying?
- Can you find someone who’s interested?
Start with question 3 and make a list of possible candidates for each category: family, employees, rebuilders, and competitors. What do you have to sell that’s especially appealing to each category or candidate (question 1)?
Describe which attributes of your shop are of greatest importance to each category or candidate. From that list, further define those attributes and how you could prove their value. Don’t discount anyone because of some perceived shortcoming.
Don’t let money or the lack of it write anyone off as a possible candidate. You should be able to find workarounds for nearly any shortcomings. For example:
Family — A nephew, niece, or best friend’s relative is a mechanic and his wife is an accountant. Their goal is to end the long commute to the big-company job.
Employee — One or more trusted employee of 5+ years could be trained to operate, manage, and partner with you and then buy you out. You know and respect the employee and his or her family.
Ambitious Rebuilder — You’ve heard about a tech who’s new in town. He talks a good game, has his own tools, and looks like he could have the management experience he’s claiming; he has potential.
Competitor — Distinguish between direct local versus next-city potential competitors. Are they a strong, single store, or a chain with horsepower? Like investors and strategic buyers, they may make a big offer to capture your attention and sweep you off your feet with their promises.
Beware of threats in the offering and selling process. Here are some possible situations:
Shoppers and Due Diligence — Tire kickers who take your time and dig in your mine to discover your gold.
High dollar offers typically have a due diligence clause that, if they discover the value is lower than they originally believed, their payment is significantly reduced until actual sales prove the higher value is valid. You receive this smaller payment upon closing.
These sales are structured such that you can earn the remainder only if they reach certain performance standards. But now they’re operating your business and you’re no longer in control.
Creating Your Toughest Competitor — you get what appears to be a great offer with a high dollar sale. In walks a knowledgeable industry expert (maybe with a team of accountants and analysts) to see behind your curtain and study your customer list, vendor pricing agreements, inventory, and history.
They get a complete picture of your operation, taste your secret sauce, and then invalidate the purchase agreement because of something they find. Not only have you invested a great deal of time focused on them instead of growing your business, but now they have information they can use against you.
Ultimately, your business value will be largely influenced by financial reports substantiated with income tax returns. You’ll augment these with a list of your tangible assets: equipment with their liquidation and replacement values, and inventory (useable current inventory, not obsolete or scrap parts).
These financial reports convert into ratios, such as current assets divided by current liabilities, accounts receivable divided by accounts payable, cash flow, return on equity, and many others.
Your sales, profits, and these ratios enable you and others to compare the value of your shop to others that sold recently or are currently on the market.
There are industry averages and benchmark targets shops strive to achieve. We recommend a certified valuation every three to ten years and then having your business value measured annually to be sure management is going in the right direction.
Valuation is an ongoing process. Determine what your business is worth and find “the best way out” to achieve your smart exit!
John E. Anderson will be speaking at this year’s Expo. John is a longtime business coach who helps business owners evaluate their businesses, adjust their operating practices, build a strategic plan and make a Smart Exit™.
In the coming issues, John will discuss some of the strategies he’s developed. He’ll show you how to turn your business around, so you can answer the three questions, and ultimately, find a smart exit that works for you.
Post your questions and observations on the ATRA Forum. A CEO Circle of shop owners is forming to discuss these topics leading up to the EXPO. Email ATRA for further information firstname.lastname@example.org