Maximizing The Value Of Your Company
It’s a well known and commonly used business adage that a business is worth what a ready, willing, and able buyer will pay for it. We don’t disagree with that reality. What we do disagree with is the potential connotation from that adage that it is a foregone conclusion that the buyer drives the market and therefore determines the price of your business.
One of the main reasons we are hired by business owners, to sell their companies, is because it is our job to create the market for the sale of their business, to substantiate that indication of value and therefore maximize the value. This is not an easy task and really requires experience and resources. Multiple perspectives must be considered to achieve a holistic view of value (we also hesitate to use the word “value”, and prefer the phrase “indication of Market”. But for this article, the term “value” works best). Several of the different perspectives and considerations we use include 1) tools to maximize adjusted EBITDA, 2) locating large pools of targeted and qualified buyers, 3) using weighted averages for key business fundamentals, 4) sourcing and researching comparable sales, 5) calculating and comparing debt/equity scenarios for coverage purposes, 6) providing and sourcing consulting services for all aspects of running a business more efficiently, and among other things, 7) allowing our intuition to seep into all of these aspects. (With regard to Intuition, we’ve been selling companies for over 22 years, and when determining a market indication for a company, there simply is absolutely no substitute for experience.)
Further, we have to understand what “value” means so we can understand what it means to maximize “value”. Value is subjective. One business owner may find value in a lifestyle company that generates him or her $250,000 - $2,000,000 in net income per year, while another business owner may find more value in the perceived prestige in working hard to grow a company which employs 300 employees. The same can be said for what a particular owner considers to be “value” when they sell their company. Some consider purchase price the key driver, while some consider net proceeds the key driver. Other key drivers in value can include retained ownership, strength of the buyer post sale (equity retention and earn outs), tax events and consequences, minimized training and transition periods, duration of the transaction, simplicity of the deal, consultative opportunities or employment opportunities moving forward, and we could go on.
In this article, however, we are not going to focus on deal structure or subjectivity, but rather we will explore the tools and aspects of maximizing the value from an objective standpoint. Again, the tools we use include: 1) maximize adjusted EBITDA, 2) find large pools of targeted and qualified buyers, 3) use weighted averages for key business fundamentals, 4) research comparable sales, 5) calculate and compare debt/equity scenarios for coverage purposes, 6) provide and source consulting services for all aspects of running a business more efficiently, and among other things, 7) allow our intuition to seep into all of these aspects.
On the surface, a set of financials appears to be straightforward, correct? You have gross sales, maybe net sales depending on industry, Cost of Goods, Gross profit, SG&A expenses, possibly other income or losses, and net income (or some variation). The answer is, financials are never that straight forward, and consequently the actual profitability is not that straight forward. As Merger & Acquisition Master Intermediaries, we are tasked with presenting a uniform picture of every company we represent, and the buyers that look at these types of companies have distinct expectations for that uniformity.
First, one of the main ways we achieve this uniformity is to determine the adjusted EBITDA. EBITDA is usually taken as an approximation for operating cash flow. While EBITDA and cash flow are two completely different accounting terms, and actually serve differing purposes, EBITDA is often used to value companies by applying a multiple (such as 3x -5x TTM EBITDA). Therefore, because EBITDA can drive the valuation of a company, determining all the potential adjustments to reasonably maximize EBITDA is a best practice.
How does The George Ryan Group adjust EBITDA? Below are several items we use to determine an adjusted EBITDA (in no particular order):
We have about 50 other categories we consider for adjusting EBITDA, but we’ll stop here. After all, this is proprietary information, which is one way we separate ourselves from the competition. It bears repeating though, financials are never what they seem, and they are certainly only as good as the intermediary you hire to analyze and adjust them.
Next, when maximizing value, we are able to locate and attract large pools of qualified, motivated buyers. This is such a critical tool, because the same business will almost certainly have a different “value” to each different buyer. We have organically created and grown a database of highly qualified buyers, have access to several quality paid databases, and have current business owners also looking to expand. Our buyers range from private equity, to family offices, to corporate buyers, to high net worth individuals and small businesses. The more qualified buyers, the better, because obviously we can cast a bigger net, and create more demand. The variation in the type of buyer is just as important, as some types of buyers typically pay a lower multiple but much more cash at closing, where another buyer may pay a much higher multiple but the net proceeds at closing may be lower.
Among other tools, we also use weighted averages attached to various business fundamentals. We’ve developed our own formulas from years of experience, which effectively adjust the determined multiple up or down based on the weighted averages. Without displaying too much detail, we will use a couple of examples. If a business has a high customer concentration and a downward trend the last 3 years, both of those fundamentals will drive the multiple down a certain percentage. Taking it a step further, if the company also has Reviewed Financials (considered a benefit), this will drive the multiple up, but the movement won’t be as drastic as it was with customer concentration, for instance. So, business fundamentals vary in their importance (weighted average) and what it is they are measuring.
Comparable sales are yet another tool we use to accurately maximize the value of a privately held company. Similar to the types of buyers we use, and many other techniques we employ, its important to understand that comparable sales are just one of several tools necessary to maximize value. It is difficult to create or find an exact “apple to apple” comparable. However, it is better to have numerous, similar comparables to use as a starting point versus having no comparables to use. The sources of our comparable sales databases are several, and a handful of those databases are limited access only. We gain that exclusive from submitting comps of deals we have closed. Further, we find these to be the most organic, accurate and useable comparable statistics, because those statistics are derived from intermediaries all over the country who submit the same information and statistics. It should also be said, it’s not just finding comps but how you analyze them to use in an effective manner for your client.
One often-overlooked aspect of value is the ability for the company to cover its debt. We not only consider this, but we also consider scenarios where equity is used to purchase a company. Typically, we see a combination of the two. Each affects a seller in different ways, but it does affect value by differing degrees depending on the structure and the type of business. For a quick example, with straight debt financing, the buyer understands they will be responsible for monthly debt service payments, oftentimes with variable interest rates (which could easily rise based on the historically low rates that exist today). A buyer will be more sensitive to purchasing a business with heavy equipment and high capital expenditures, because they understand that despite a certain historical ebitda that has been achieved, from a cash flow perspective, there will be monthly debt payments of principal and interest, plus some modeled capital expenditures expected based on historical capital expenditures. If the buyer realizes that their cash flow will be greatly eroded, that can drive value down, and/or create a scenario where equity, earn outs, etc. may need to be a portion of the structure. We are able to minimize the effect of a buyer’s purchasing capabilities and structures, because we know ahead of time what they will propose, and we also know what is available on the market, so we can typically take a confident and firm stance in our position of value. In other words, we can leverage our market knowledge and use facts and confidence to represent our sellers.
Another uncommon aspect in maximize value is our ability to provide and source consulting services for all aspects of running a business more efficiently. These include transactional accountants who can work with your current cpa to minimize taxes owed upon sale of the company, transactional attorneys who can help navigate to a closing, commercial insurance companies who can provide extremely competitive rates, exit and estate planning for seller’s experiencing a windfall, etc. We offer roughly 15 auxiliary services to our sellers if they so choose to participate. Many are professionals that we have worked with directly for many years and the balance are professionals that we have been referred to us directly by satisfied customers.
Lastly, we have been representing lower middle market and small cap, privately held companies for 22 years. Over that amount of time, you develop “deal intuition”, which deals with the subtle art of negotiation. This might be the most important aspect as it relates to maximizing value. We are experts in this field. As a seller, you are about to participate in the largest financial transaction of your life, so it’s critical you use an intermediary who has the experience to offer you excellent, competent representation. We are Merger & Acquisition Master Intermediaries with hundreds of successfully completed transactions, and with that, there is no one better to help you maximize the value of your company. Please call Les Wozniak with The George Ryan Group at 214-682-8562 or email les@thegeorgeryangroup.com for a complimentary consultation.
We look forward to hearing from you.
One of the main reasons we are hired by business owners, to sell their companies, is because it is our job to create the market for the sale of their business, to substantiate that indication of value and therefore maximize the value. This is not an easy task and really requires experience and resources. Multiple perspectives must be considered to achieve a holistic view of value (we also hesitate to use the word “value”, and prefer the phrase “indication of Market”. But for this article, the term “value” works best). Several of the different perspectives and considerations we use include 1) tools to maximize adjusted EBITDA, 2) locating large pools of targeted and qualified buyers, 3) using weighted averages for key business fundamentals, 4) sourcing and researching comparable sales, 5) calculating and comparing debt/equity scenarios for coverage purposes, 6) providing and sourcing consulting services for all aspects of running a business more efficiently, and among other things, 7) allowing our intuition to seep into all of these aspects. (With regard to Intuition, we’ve been selling companies for over 22 years, and when determining a market indication for a company, there simply is absolutely no substitute for experience.)
Further, we have to understand what “value” means so we can understand what it means to maximize “value”. Value is subjective. One business owner may find value in a lifestyle company that generates him or her $250,000 - $2,000,000 in net income per year, while another business owner may find more value in the perceived prestige in working hard to grow a company which employs 300 employees. The same can be said for what a particular owner considers to be “value” when they sell their company. Some consider purchase price the key driver, while some consider net proceeds the key driver. Other key drivers in value can include retained ownership, strength of the buyer post sale (equity retention and earn outs), tax events and consequences, minimized training and transition periods, duration of the transaction, simplicity of the deal, consultative opportunities or employment opportunities moving forward, and we could go on.
In this article, however, we are not going to focus on deal structure or subjectivity, but rather we will explore the tools and aspects of maximizing the value from an objective standpoint. Again, the tools we use include: 1) maximize adjusted EBITDA, 2) find large pools of targeted and qualified buyers, 3) use weighted averages for key business fundamentals, 4) research comparable sales, 5) calculate and compare debt/equity scenarios for coverage purposes, 6) provide and source consulting services for all aspects of running a business more efficiently, and among other things, 7) allow our intuition to seep into all of these aspects.
On the surface, a set of financials appears to be straightforward, correct? You have gross sales, maybe net sales depending on industry, Cost of Goods, Gross profit, SG&A expenses, possibly other income or losses, and net income (or some variation). The answer is, financials are never that straight forward, and consequently the actual profitability is not that straight forward. As Merger & Acquisition Master Intermediaries, we are tasked with presenting a uniform picture of every company we represent, and the buyers that look at these types of companies have distinct expectations for that uniformity.
First, one of the main ways we achieve this uniformity is to determine the adjusted EBITDA. EBITDA is usually taken as an approximation for operating cash flow. While EBITDA and cash flow are two completely different accounting terms, and actually serve differing purposes, EBITDA is often used to value companies by applying a multiple (such as 3x -5x TTM EBITDA). Therefore, because EBITDA can drive the valuation of a company, determining all the potential adjustments to reasonably maximize EBITDA is a best practice.
How does The George Ryan Group adjust EBITDA? Below are several items we use to determine an adjusted EBITDA (in no particular order):
- Owner’s Salary and Payroll Tax – Depending on the size of the company, and what type of buyer we procure, we typically add back the owner’s salary and payroll tax in its entirety. If the owner is paying himself or herself a salary and does not work at the business, we add back that salary regardless of the buyer. If the owner is an owner/operator, and we have a buyer that will be replacing that owner, we also add back the entire salary (and payroll tax). If the buyer is a private equity group, they will quite often expect a normalized ebitda, which would include reducing the adjusted EBITDA by the amount of salary they would pay for a CEO they hired to run the Newco. In most cases, where an owner is paying himself say $500,000 per year, a strong case can be made that a market salary reduction may be more in the $200,000 range for that position.
- Family Provisions – This refers to companies who may have family on payroll that work part time, but get paid full time salaries for instance, work full time and get over paid, etc. It also refers to perks that the owner and family member enjoy from the company (think insurance, phones, cars, gas, trips, entertainment, meals, etc.)
- Operational Provisions – A simple example would be a business owner who has owned and managed his company for 30 years and never changed suppliers. We would determine the fair market value of those cost of goods as a check and balance, and quite often, that owner has been over paying for goods for years. The delta between what the owner is paying and should be paying is a potential positive adjustment.
- Misplaced Costs – Oftentimes, sellers may place capital expenditures (for example) in their P&L. This is a balance sheet item and would be removed from the expenses (and re-appropriated to the balance sheet, it’s rightful home) therefore increasing profitability.
- Facilities – Do you own or rent your facility? Does the owner rent the facility, but rent it from himself. Depending on the buyer, we often times can add back rent expense if the seller or an entity of the seller’s owns the facility.
We have about 50 other categories we consider for adjusting EBITDA, but we’ll stop here. After all, this is proprietary information, which is one way we separate ourselves from the competition. It bears repeating though, financials are never what they seem, and they are certainly only as good as the intermediary you hire to analyze and adjust them.
Next, when maximizing value, we are able to locate and attract large pools of qualified, motivated buyers. This is such a critical tool, because the same business will almost certainly have a different “value” to each different buyer. We have organically created and grown a database of highly qualified buyers, have access to several quality paid databases, and have current business owners also looking to expand. Our buyers range from private equity, to family offices, to corporate buyers, to high net worth individuals and small businesses. The more qualified buyers, the better, because obviously we can cast a bigger net, and create more demand. The variation in the type of buyer is just as important, as some types of buyers typically pay a lower multiple but much more cash at closing, where another buyer may pay a much higher multiple but the net proceeds at closing may be lower.
Among other tools, we also use weighted averages attached to various business fundamentals. We’ve developed our own formulas from years of experience, which effectively adjust the determined multiple up or down based on the weighted averages. Without displaying too much detail, we will use a couple of examples. If a business has a high customer concentration and a downward trend the last 3 years, both of those fundamentals will drive the multiple down a certain percentage. Taking it a step further, if the company also has Reviewed Financials (considered a benefit), this will drive the multiple up, but the movement won’t be as drastic as it was with customer concentration, for instance. So, business fundamentals vary in their importance (weighted average) and what it is they are measuring.
Comparable sales are yet another tool we use to accurately maximize the value of a privately held company. Similar to the types of buyers we use, and many other techniques we employ, its important to understand that comparable sales are just one of several tools necessary to maximize value. It is difficult to create or find an exact “apple to apple” comparable. However, it is better to have numerous, similar comparables to use as a starting point versus having no comparables to use. The sources of our comparable sales databases are several, and a handful of those databases are limited access only. We gain that exclusive from submitting comps of deals we have closed. Further, we find these to be the most organic, accurate and useable comparable statistics, because those statistics are derived from intermediaries all over the country who submit the same information and statistics. It should also be said, it’s not just finding comps but how you analyze them to use in an effective manner for your client.
One often-overlooked aspect of value is the ability for the company to cover its debt. We not only consider this, but we also consider scenarios where equity is used to purchase a company. Typically, we see a combination of the two. Each affects a seller in different ways, but it does affect value by differing degrees depending on the structure and the type of business. For a quick example, with straight debt financing, the buyer understands they will be responsible for monthly debt service payments, oftentimes with variable interest rates (which could easily rise based on the historically low rates that exist today). A buyer will be more sensitive to purchasing a business with heavy equipment and high capital expenditures, because they understand that despite a certain historical ebitda that has been achieved, from a cash flow perspective, there will be monthly debt payments of principal and interest, plus some modeled capital expenditures expected based on historical capital expenditures. If the buyer realizes that their cash flow will be greatly eroded, that can drive value down, and/or create a scenario where equity, earn outs, etc. may need to be a portion of the structure. We are able to minimize the effect of a buyer’s purchasing capabilities and structures, because we know ahead of time what they will propose, and we also know what is available on the market, so we can typically take a confident and firm stance in our position of value. In other words, we can leverage our market knowledge and use facts and confidence to represent our sellers.
Another uncommon aspect in maximize value is our ability to provide and source consulting services for all aspects of running a business more efficiently. These include transactional accountants who can work with your current cpa to minimize taxes owed upon sale of the company, transactional attorneys who can help navigate to a closing, commercial insurance companies who can provide extremely competitive rates, exit and estate planning for seller’s experiencing a windfall, etc. We offer roughly 15 auxiliary services to our sellers if they so choose to participate. Many are professionals that we have worked with directly for many years and the balance are professionals that we have been referred to us directly by satisfied customers.
Lastly, we have been representing lower middle market and small cap, privately held companies for 22 years. Over that amount of time, you develop “deal intuition”, which deals with the subtle art of negotiation. This might be the most important aspect as it relates to maximizing value. We are experts in this field. As a seller, you are about to participate in the largest financial transaction of your life, so it’s critical you use an intermediary who has the experience to offer you excellent, competent representation. We are Merger & Acquisition Master Intermediaries with hundreds of successfully completed transactions, and with that, there is no one better to help you maximize the value of your company. Please call Les Wozniak with The George Ryan Group at 214-682-8562 or email les@thegeorgeryangroup.com for a complimentary consultation.
We look forward to hearing from you.