360 Business Valuation Projects
Reveal
Current Value + Future Value
And opportunities for increasing it.
“Experience. Good, common business sense. Instinct. Beyond academic training, Virginia has so many valuable attributes and skills. Whether it is the experience of a family business, years of consulting, or just good-old fashioned horse sense, she looks to see the bigger picture of situations. As an example, when discussing a particular business that Virginia was selling, I noted how the offering’s cash flow barely supported any purchase price at all, regardless of its market, etc. Virginia, who was brokering the deal at the time, actually sold the business for its asking price by providing a strategic perspective, competitive evaluation, and quasi-tactical plan for the new owners to execute. Her actions were creative, conscientiously and ethically prepared for the buyer, and most importantly effective for the seller. Very impressive.”
Robert Bartolacci; Executive Vice President/CFO, Modern Transportation Services; Adjunct Asst. Professor, Mergers & Acquisitions, Carnegie Mellon University
The Golden Egg
Business Attractiveness Rating:
Industry Leader, “The Standard”
Readiness Scores:
- Business Factors: 67%
- Futures Forecast: 86%
- Market Factors: 72%
- Investor Considerations: 88%
A machine shop run by two third generation owners who grew it from small to mid-sized. Books detailed and squeaky clean. Long-standing national and international customers with ongoing custom production orders across three significant industries. High family values: Business managed as 8-hours a day, focused on delivering high quality parts on time at a reasonable price.
When they decided it was time to retire, they hired a business valuator who delivered a standard EBITDA valuation. The owners knew their business was worth more, though they couldn’t articulate why. So they hired The Exit Eagle, now dba Value-Wise Business, to provide a second opinion on the value — the sale price — of their business. Value-Wise calculated the EBITDA value, and arrived at the same fundamental value as the original valuator. However, Value-Wise took a further step — diving into the lovely detailed data available from the thorough bookkeeping and sales and customer records that the owners had built into their business practices.
Let us first note that it is unwise for a business valuator to calculate future revenue; i.e., to make a prediction of how much money may be made in the future from that business. It opens the valuator to legal action if the money is not made as predicted, even though the valuator has no control over how the business is operated. However, it is possible to point out characteristics of the business in such a way that previously hidden opportunities for the current or future business owner to capitalize on become evident. This is an important step in influencing investors to pay for future, as well as past and current, value.
If the owner does not make sure this is done before presenting to investors, that gives the investors opportunities to glean that information for themselves during due diligence. That is sweet for them because then they won’t have to pay for it.
The potential increased future revenue opportunities hidden in the company’s data is often referred to as “Blue Sky Value” and is used to increase the multiplier used in the EBITDA calculation which is used to establish the sale price of the business. It’s the secret blue suits don’t want us to know. If this sounds like gobbledygook to you, it won’t after you have participated in the 360 Business Valuation process with Value-Wise Business.
Again, thanks to the quality of the recordkeeping of the business and long-term customer relations, several current and future value accelerators were uncovered and communicated in a way that potential investors could not miss seeing — and acknowledging. Those values more than doubled the sell price. And while the buyers were a little grumpy that they had to pay for the exposed value, they capitalized on those business characteristics and recovered investment in less than 2 years.
Everybody is happy: Sellers, buyers, employees, customers. Even if we do say it ourselves, it was a job well done.
“It is hard to put into words the appreciation that I have for Virginia Altman and the service that she offers. At the very beginning you were not afraid to tell me the truth about my business and areas that I needed to improve to make it mor attractive to potential buyers. I know that you have many other clients however you somehow were always there for me and I truly thought that I was your only client. You did not know anything about my business but before the second meeting you did you homework and got to know it, for that I will always be grateful. Once the business was listed you gave me regular update of interest and constantly reminded me that it is a process and there is a buyer out there and we are ready for anything. We found a qualified buyer and closed on the business.”
Richard, B2B Service Business
Solid Business with an Almost Niche
Slightly Above Average
- Business Factors: 48%
- Futures Forecast: 67%
- Market Factors: 50%
- Investor Considerations: 67%
Uncovering the Golden Egg Niche in a Commodity Business
Embroidery businesses come a dime a dozen, in all different kinds of forms and shapes: Big ones that offer a myriad of advertising tools; little ones in a corner of a room in a house; and medium ones that employ a few people – either in a basement or a retail space, as the case may be.
Embroidery businesses have very few barriers to entry (fairly straightforward to learn, you can get started with used equipment that brings the price down, and hire help on an as-needed basis). And, because the technology is widespread and profit margins slim, it is difficult to retain customers.
When the couple that owned this business came to talk to us about selling their business, we were a little reluctant to take it on because there was a great chance that it wouldn’t sell. In addition to the concerns listed above, the business was located in their basement; and the owners were basically the business. At first glance, there wasn’t much reason for anyone to buy the business. Why pay multiples of revenue on a business that you can almost as easily start from scratch for much less?
We did, however, agree to do the business valuation because we admired the owners’ chutzpah and really wanted them to succeed. And, while we couldn’t put our finger on it, it just seemed as though there was something there. So we started the valuation process by digging into the financial data to see if we could find any patterns that would reveal a uniqueness that someone would want to buy. And here is what we discovered.
- Their largest category of customers, Businesses (38% of customer base) generated only 30% of their revenue.
- 66% of Business revenue was a one-time order from a service company that had just changed its logo, so they had to buy new uniforms, coats, etc., for their staff. That was a rare event.
- Sports/ Outdoor Teams had the highest percent of revenues and second highest volume of customers. But loyalty was unreliable; as parents in charge of ordering uniforms, etc., cycled out, incoming ones usually brought their own provider in.
- Individuals rarely had any repeat business.
- Nonprofits in general were a highly competitive environment to sell into.
Pinpointing a Unique Value Proposition
- Private schools were only 10% of their customer base but were 20% of their revenue stream.
- Once you have a school, they are very loyal. It’s hard to lose them.
- This company had a proprietary, hands-on, in-the-school service, bringing the store to the students and parents at the school. This was not only good marketing for the company, but also a great way to build relationship between the school and the parents.
- Their primary competitor was a large, nationwide, highly impersonal service, offering only on-line sales.
Considerations
- Were there enough private schools locally to make this a niche-worthy sector? What would the positioning be?
- The majority of schools were within a reasonable driving radius.
- The target market, public schools, and specifically, private schools, were struggling with an ever more competitive environment. Our client’s personalized service also provided a relationship benefit for retaining current customers, as well as attracting new: Busy parents don’t have time to make special trips to an embroidery store, or to deal with deliveries and returns.
Our Recommendation
The following steps were recommended to the owners:
- To increase the Business Factors readiness, hire an Operations Manager. Retain the business for an additional year to train the OM and allow him/her to develop relationships with the customers. Then move the business out of the home to a more commercial location.
- To Increase Futures Forecast and Investor Considerations readiness, Systematize the Unique Value Proposition and acquire 2 additional private school customers and apply the model to them. This will both increase the ease with which new owners can acquire even more private school customers to solidify the niche and lay them a platform for expanding the footprint of the Unique Value Proposition.
Results
The owners initially did not want to take the recommended steps above. We brought a dozen or so buyers to the table, who were not willing to invest even the EBITDA value into the business, with most commenting they could use that money instead to set up their own operation.
After a year of marketing the business, the owners decided to follow our Recommendations. One year later, at a greater price than originally marketed.
The fruits of our labors are sweetest when they are the result of a well executed plan.
Sole Proprietor with a Unique Niche and Valuable Customers
Slightly Above Average
- Business Factors: 43%
- Futures Forecast: 42%
- Market Factors: 87%
- Investor Considerations: 75%
A sole proprietor who employed one on-call worker wanted to sell his business to move to Florida. The owner had developed an extremely specialized niche market repairing a certain type of critical plug; in fact, there were only a handful of people in the United States who could provide the service he provided, primarily to municipalities and secondarily to manufacturing companies.
As far as small businesses go, this one a lot of the right stuff:
- A customer base that included customers that “big guy” prospective buyers had been trying to get into for years
- An exclusive service offering and a national reputation for being THE ONE to turn to for problems with a wide range of ancient, old and new plug designs and their systems.
- A generous profit margin.
- A cool name with great, nationwide recognition.
But there were several problems:
- The owner didn’t really want to sell the business, but he did want to move to Florida.
- He had reached the point where the wear and tear on his body had really reached a critical point; he couldn’t really continue to do the work much longer.
- The business lacked any documentation of troubleshooting knowledge and processes, nor did it have any retainable skilled employees. Therefore, the buyer’s success was dependent on the owner training their employees to do the troubleshooting. What if he didn’t follow through?
- While the profit margin was good, the tax returns showed minimal profit.
The Solution
The Exit Eagle created a plan for developing videos that captured the owner’s expertise that would be sold by subscription on-line via a redesigned website. In addition, companies who sold the plugs and/ or downstream services would be offered training packages that included live on-site training. Finally, technical training and troubleshooting documentation would be created from the videos; and consulting services would also be offered to clientele. This business would be run from Florida, with his girlfriend managing the business component.
The owner moved to Florida and executed the plan.
“I spent the most important day in my life with you — the day I sold my business! You never gave up, you always encouraged me, and we got a better price than I hoped for! I’ll always appreciate what all you did for me.”
Mark, B2C Business Owner
Brilliant Strategy with a Broken Foundation
Best-In-Class
- Business Factors: 59%
- Futures Forecast: 50%
- Market Factors: 90%
- Investor Considerations: 92%
Buyer Wants Financials Cleaned Up before Paying for the Business
The owner had quite unexpectedly become the owner of his father’s business. He left his dream job on Wall Street to assume the role of owner of the 40+ year-old oil delivery business whose primary customers were New Yorkers with second homes in the area. His father had created a way to calculate when a home needed more oil delivered before there was software to help – so the absentee owners wouldn’t have to worry about the house freezing up. His customers were more than willing to pay for the service.
As the new owner, the son decided to expand the strategy: he bought an HVAC company and a plumbing service, so he could offer total year-round, automated home maintenance plus on-demand house openings and repairs. His dad’s clients loved it, and signed up nearly 100%.
The Problem
The business model was so attractive to one of the high wealth banker clients that he decided to acquire the business. And the son was more than ready to sale. There was just one problem: The past due Receivables bordered on 40% in an industry where the average is 10-15%; and many of the bills were more than two years past due. The potential buyer told the son that the Past Dues must be cleared up before the transaction could be completed.
The Solution
The son hired Altman Business Solutions to fix the problem. Obviously, the customers (for example, Henry Kissinger!) could afford to pay the bills. And the company’s Collections employee and company had been calling the delinquent accounts, but were in awe of the clients and didn’t really push for payment. The first nut to crack was, why were these high-wealth, loyal customers NOT paying their full bills?
- The clients were faithfully paying the recurring oil bills; they were not, however, paying the repair bills. Why one and not the other?
- The collections/ Receivables problems didn’t start until the plumbing business was added, and accelerated after the HVAC acquisition.
- The three divisions of the business – oil delivery, plumbing, and HVAC — didn’t talk to each other.
It only made sense to call the customers and ask: “What can we do that would make you want to pay this bill?” And the answer consistently was: “Finish the job.”
Indeed, it was true, there were loads of repair jobs that had not been finished. The person ordering the parts had served several years as the Scheduler for the oil business. Now, she was down in the basement, ordering repair parts, and putting them on a shelf when they came in. And there the process ended.
Altman brought this to the attention of the owner, who laughed about it (strategy was his thing, not execution). So the Service Manager and Altman got together to create a process for tracking repair processes and part deliveries so the managers of the departments knew (1) when a job was not finished and was reminded of it until completed, and (2) how to track delivery of parts so they didn’t just sit on a shelf until, for some reason, they finished a job.
The Result
As jobs were finished, clients paid, and Receivables dropped to a healthy 4%. And then, the high-wealth banker bought the company at an accelerated price. The business model is being implemented in high wealth communities across the country today.
“We were about to lose our buyer when I met you. We had too much much money owed to us and the deal was contingent on our collecting that money. I had already brought three people in to do the job, but they all failed. The buyer had already waited two years; they weren’t going to wait much longer.
“When you said you could solve the problem, I laughed to myself. But I thought, what the [*], let her try. Within a month, you had some money coming in from customers that I had personally tried to collect from. When I asked what you were doing, you said you had asked the customers why they weren’t paying, and they said they’d pay when the job was finished. So you got the guys to finish the job. Within a year, we had almost all the money collected and made a few changes in how we tracked service calls. We ended up with a better deal than we had started with.”
Peter, B2C Businesses
The Son that Couldn’t
Now he can
Business Attractiveness Rating:
Above Average
Readiness Scores:
- Business Factors: 65%
- Futures Forecast: 54%
- Market Factors: 57%
- Investor Considerations: 54%
“I had no idea how I was going to use my business to help my son be successful. It took some digging, but you found a way to make it work. I can’t tell you how grateful I am for that.
“The best part was the marketing plan and materials. They’re the best we ever had. The website is so professional. The whole thing really fits my son.”
Eric, B2B Construction Company
High Profit, Neglected Business — Decimated Value
A multi-million dollar in a high value industry. Lots of profit. Excellent financials. Mostly absent third generation owner, enjoying European vacations and cruises. Real estate loaded with oil deposits that would cost millions to recover. Frankensteinish high voltage test equipment and production equipment decades old… that would cost millions to replace.
Only a land-hungry Chinese company would buy it for a shockingly low price.
Businesses Run by Scoundrels — Negative Value
The owner of a highly profitable M&A business serving the high net worth community attracted excellent buyers for its clients — until the law suits were uncovered, and all the employees quit.
The owner missed out on a $750,000 pay-out, when the law suits and quit employees were admitted to at the time of signing the Buy/Sell agreement and check.
High value disgrace.
Businesses with Bank Statements as P&Ls — Pointless Value
A specialty bullet casting company with national brand recognition and highly profitable high volume business — if you believe what he tells you. Only “money under the bed” and personal bank statements and boxes of order forms to back it up.
Value shot to bits.