March 3, 2011 seminar presented by Jeff Bruss of COLE Publishing Inc at the Pumper & Cleaner Environmental Expo on buying and selling businesses in the wastewater industry.
2. Why?
• Know your reason for selling.
• Health, retirement, new opportunity, family
obligations, etc.
• With no valid reason, most often times it’s assumed
that you have to sell because you’re in trouble.
3. It Takes Time
• The majority of businesses take more than one
year to sell.
• You should be thinking of selling long before you
make the final decision to do so.
4. It may never sell?
• More than 80% of all businesses that are listed for
sale, never sell.
• Portions may sell - like assets and real estate,
but they won’t sell as a business.
• Why?
• No barrier to entry (except license), poor record
keeping, it’s a dirty job, lack of financing
options, price.
5. Okay, We’re Ready to Sell
• Be thinking about selling long before you actually
make the decision.
• Equipment, paperwork, customer lists, record
keeping!
6. It’s all in the Books
• The most important thing you need to do is keep
good accounting records.
• Every dollar that is spent or earned should be recorded.
• Money that is not on the books doesn’t exist in a sale.
• Maintain a minimum of three years of P&L statements,
balance sheets and/or business tax records. Be prepared to
update records on a quarterly basis.
8. No Surprises, No Secrets
• Be prepared to share corporate and accounting
information with potential buyers - the good and
bad.
• Equipment maintenance records, P&L, balance sheets, income
statements, tax returns, licenses, depreciation statements,
equipment inventories, bank notes, etc.
• Document personal or non-operational expenses that impact
the bottom line.
• Personal auto, entertainment, owner’s draws/salary, cell phone, home Internet access, etc.
9. Equipment
• Equipment can only be valued to the extent in
which it can contribute to future profits.
• Equipment that has not been maintained or
updated has little or no value in a sale.
• Your equipment is not as valuable to the buyer as it
is to you - especially in an acquisition to an existing
business.
• Assets are generally appraised at wholesale/auction value for
sale purposes.
10. Customers
• Your customer list is potentially your greatest asset.
• Maintain it. On a computer. Preferably one from
this decade.
• Contract as many customers as possible.
11. So, what’s it worth?
• Every business is different, and pricing involves
many factors.
• Geography, Longevity, Revenue, Expenses, Profitability,
Equipment, Customers, Contracts, Urgency to Sell
12. Geography
• Where you are located can add or subtract value
• Region, state, city
• Texas, Florida, Michigan, California
14. The Magic Formula
• Wholesale Value of Assets + 15-50% percent of
gross revenue = value
• Very similar to EBITDA, SDI valuations
• Priced to provide a 35%-45% ROI for buyers
based on 25% down
• Minimum ROI an “experienced” buyer is
going to want to see would be in the 25% range
15. Example
Equipment (wholesale/auction) $200,000
Annual Gross Revenue $1,000,000
Best Case (50%) $500,000
Middle Case (40%) $400,000
Lower Case (25%) $250,000
Worst Case (15%) $150,000
Basket Case (0%) $0
Best - $200,000 + $500,000 = $700,000
16. $700,000 Valuation
• If asking $700,000 and assuming profit of
$250,000 (25% of gross)
• $175,000 down payment (25%) = $525,000
remaining principle
• Setting aside a manager/owner salary of $40,000
leaves $210,000 to go toward paying off the note
• $525,000 @ 5% for 5 years = $120,000 per year in
payments, leaving a $70,000 profit.
17. The R.O.I.
• ROI = Profit/Investment * (100)
• Calculating ROI on your cash investment (the down payment)
• $70,000 (profit)
• Investment = $175,000 (down payment)
• ($70,000/$175,000) = 40% ROI - Excellent buyer return, should have
excellent buyer interest. Priced correctly.
18. $600,000 Valuation
• If asking $600,000 and assuming profit of
$200,000 (20% of gross)
• $150,000 down payment (25%) = $450,000
remaining principle
• Setting aside a manager/owner salary of $40,000
leaves $160,000 to go toward paying off the note
• $450,000 @ 5% for 5 years = $102,000 per year in
payments, leaving a $58,000 profit.
19. The R.O.I.
• ROI = Profit/Investment * (100)
• Calculating ROI on your cash investment
• $58,000 (profit)
• Investment = $150,000 (down payment)
• ($58,000/$150,000,000) = 39% ROI - Excellent buyer return, should
have very good buyer interest. Priced correctly.
20. $450,000 Valuation
• If asking $450,000 and assuming profit of
$150,000 (15% of gross)
• $112,500 down payment (25%) = $337,500
remaining principle
• Setting aside a manager/owner salary of $40,000
leaves $110,000 to go toward paying off the note
• $337,500 @ 5% for 5 years = $77,000 per year in
payments, leaving a $42,000 profit.
21. The R.O.I.
• ROI = Profit/Investment * (100)
• Calculating ROI on your cash investment
• $42,000 (profit)
• Investment = $112,500 (down payment)
• ($42,000/$112,500,000) = 37% ROI - Excellent buyer return, should
have very good buyer interest. Priced correctly.
22. $350,000 Valuation
• If asking $350,000 and assuming profit of $100,000
(10% of gross)
• $87,500 down payment (25%) = $262,500 remaining
principle
• Setting aside a manager/owner salary of $40,000 leaves
$60,000 to go toward paying off the note
• $262,500 @ 5% for 5 years = $60,000 per year in
payments, leaving $0 profit.
• In other words - You just bought a $40,000/year job, not
a business. But...
24. No More Money
• Obtaining financing is nearly impossible.
• Be prepared to owner finance.
25. The Buyer
• Inexperienced buyers will pay more than
experienced buyers.
• This goes for both buying experience and
industry experience.
26. Three Wise Men or Women
• You will most likely require three professionals to
assist during the sale.
• Accountant - Broker - Attorney
27. Accountant
• Understand the tax implications in advance of
selling - both personal and professional.
• Prepare necessary paperwork and reports.
28. Broker
• Less than 5% of people who inquire on a business
will develop into a serious buyer. Are you prepared
to deal with the other 95%?
• Is confidentiality important? NDA
• Can you determine the difference between a
qualified buyer and non-qualified? Serious or tire-
kicker? Do you have the time?
29. Attorney
• When an agreement is reached, there will be
paperwork.
• Letter of Interest
• Offer to Purchase
• Non-Compete Agreement
30. Don’t Sell Your Job
• Your business needs to make enough profit to pay
for itself upon a sale AND create a salary for the
buyer or a manager
• If it can’t, you’re not selling a business, you’re only
selling your your job.
• Most buyers aren’t looking to purchase a job.
31. Contact Information
• Jeff Bruss
COLE Publishing, Inc./B2 Business Brokers
800-994-7990
jeffb@colepublishing.com
Notas del editor
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We had three businesses sell this year. We had more than 20 listed at one time or another. 2 of the 3 sales were asset sales only, never sold as a business.\n
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Every dollar not recorded can be considered $3-$5 lost in a sale price.\n
We make a profit of $100,000, but take no pay. The new owner now has $100,000 per year to pay for the business? WRONG! The new owner won’t work for free, nor will they typically want to wait more than 5 years to see a full return on the investment.\n
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A 1979 2,000 gallon pump truck has NO value in a sale. A 2003 International or Mack or whatever with a 4,000 gallon tank in great shape might be worth $75,000 full retail, trade-in is probably $60-$65,000, while auction value is probably $50-$55,000. A full 35% less than retail value. Restrooms less than 5 years old are valued at $100-$150 per unit. Restrooms 5-10 years old $50 per unit. Restrooms over 10 years old, no value. Office equipment, no value.\n
Contracts can be worth 10-20% of the contracted value in asking price. Customers, especially those that are maintained, are worth anywhere from $1-$3 per name depending one what information you have associated with them and if they are current or not - when you last provided service or business to them.\n
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Greater population, generally speaking, means greater value. Geography - living where other people want to live, provides greater value. Distance between routes, number of routes performed per day, week, month can add value.\n
20 year plus businesses are worth far more than those less than 5, even 10 years old. The most difficult business to sell is one with less than 5 years of history. Unless numbers and growth are truly significant.\n
Seller’s discretionary income usually 5x, EBITDA usually 2.5 times. Note EXPERIENCED buyer.\n
Example one (Best Case), everything is perfect, highest possible appraised price (showing $250,000 25% in gross profit), Middle - 20% profit, Lower - 15% profit, Worst - 10% profit. Acceptable profit margins can change based on gross revenue numbers.\n
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Perfect storm examples.\n
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Tax advantages, make more than the sale price through interest, risk is yours. Sometimes it’s the only way if a business is valued at less than a local/personal bank will guarantee - less than $250,000 or less than investment firms will look at $5 million and up. Seller terms are usually 5 years. \n\nOffering seller financing upfront will speed up a sale.\nSeller financing is like a performance bond - it acts as your guarantee that the business can perform to the level of the payments required to pay for it.\nYour performance bond can be personal guarantees against private collateral and assets. This would be executed by buyer and spouse saying if they fail you are entitled to all assets necessary to satisfy the debt.\nStock pledge - buyer forms a corporation and you serve as voting member - replace management if necessary. Understanding this threat is there is usually enough to make sure the buyer is serious about running the business.\nInsure it with insurance - a term policy in the amount of the sale until satisfied.\n\n\n\n
