Streamline your business selling process for IT

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[Music] hi everyone i'm michael ruger i'm the managing partner at greenbush financial group this is going to be a series of videos on the process of selling your business because the process selling your business is fairly detailed and complex we didn't want to cut it short so instead we split it into a series of three and i'm going to be bringing in my partner dave wojewski who specializes in mergers and acquisitions for this video series but in this video which is the first piece we are going to be addressing things business owners should consider before they even think about selling their business the second is the valuation of your business how do you value your business so you know what to ask for from a buyer and then the third is the things you need to think about as you prep your business for sale to potentially command a higher valuation amount from a buyer and later on in the series we will address things like the actual process from start to finish and potential pitfalls that we want business owners to avoid but here's the first one we hope you enjoy [Music] hi i'm mike ruger i'm the managing partner of greenbush financial group but with me this morning is dave wajesky he's my partner in the firm and he also heads up the wajeski and company accounting firm what we're here to talk to you about today is the process of you selling your business and also tips as far as leading up to the sale of the business that might help you increase the valuation of the business when you actually go to sell so the reason why i have dave here this morning is does a lot of this merger acquisition work over on the accounting side typically most deals are between you'd say about five million and a hundred million yeah five five to a hundred probably five to fifty in this area if it's a closely held company it's a sweet spot i mean we've done deals over a billion but you know we're probably most most what you see is probably in the five to 100 range okay so it gives you like an idea of the size and what we want to walk you through today is you know how do you determine the valve of your business number one number two what is actually the selling process look like from start to finish so you know what to expect those little tips to kind of say before you even enter the selling process what are some little things that you could do to potentially increase the valuation of your company and then also we inevitably see some business owners end up in some pitfall situations so we'll highlight some things that you should really try and avoid as you go into the selling process to make sure it hopefully goes as smooth as possible [Music] so the first item we're going to talk about is how do you value your business so i'm thinking about selling i kind of come to you and say hey i want to sell my business and maybe one or two years like what is a buyer going to pay like for my business so what do you usually advise people to actually get an idea of the number well most people generally talk to their friends and they say hey i know it's a multiple of revenue or it's a a multiple of either or multiple of net income you know most people are usually using a revenue target but you know everything comes down to cash flow it's a return on investment right you're going to buy something you're put laying out cash you want to get a return on that investment so even though there's rules of thumb really on what your sales are you you convert that you say hey if i my business sells at one times revenue that really is a rule of thumb because it equates to a return on investment so if you're a certain industry and you do five million dollars in in sales then you're expected to make maybe ten percent which is five hundred thousand dollars return on that on that sales you can then put that into a cash flow model and return what your return is and that's how you get to the multiple of revenue but to just say that hey i do three million dollars in revenue my company is therefore worth three million makes no sense and even intuitively it doesn't because if i'm a real profitable three million and a less profitable three million why would i sell for the same amount it's just an indication of roughly what your business is if you operate in ance with what a standard industry operates but it's really not the way to look at the valuation you know the valuation really comes down to how much money am i making and if somebody pays me for that income stream or for the growth of that income stream then how much is that worth and obviously if it's a strategic buyer they tend to pay a little bit more because if i buy if i buy your company i'm getting whatever you were doing i step into your shoes if i already have a competing company and i buy your company you know i'm eliminating rent i'm eliminating a lot of the administrative overhead accounting you know all that stuff that right is duplicated so you're willing to pay a little bit more so there's it really depends on the scenario that you're selling for but um you know it's if you just look at your net income and how much you're making you can get a multiple of that and determine roughly what the business is worth now there's companies out there that will actually do valuations and they're not cheap right so i'm not going to say hey i'm going to go have this company do a full valuation at what point is that you should be doing that or not doing that is it overkill or like what how do you kind of just because i started you know my company and i'm trying to be somewhat cheap in some of that stuff up front i think you know if you're really thinking about selling first of all you have to be emotionally ready to sell because most of the time people think they're ready to sell and they're really not right because it's been your baby for a long time in a lot of places and when it actually comes to pull the trader you know when it gets towards the finish line you're like uh the deal isn't good enough and it's really not that it's not good enough financially because it's the right number you just weren't ready to sell it yeah so first you you should do some kind of evaluation you could do them relatively cheap you showed a professional director you're not gonna be able to probably figure out yourself but you don't you really need a firm formal report and you're paying for a full valuation oftentimes it's for litigation things that really needs to be buttoned up and the report needs to be looked different than just hey here's roughly what your company is worth yeah because once you know what that number is then you can decide your head would this really make me leave and then you really have to look yourself in the mirror and say if i go down this whole process and someone's writing a check for that now am i really going to go through with selling it and not everyone does because not everyone's ready to sell right and we've been there like about and that kind of like segues over to like when we have these business arms if you do that valuation say let's say it's 5 million bucks and then you run the tax numbers and say well it's 5 million gross but after your taxes you're down to like let's call it 3.5 right then the clients come over to our side which is is that 3.5 million enough for me to retire on so that's what we have to go in and kind of say all right you've got 3.5 million your bank account now if you were making 500 000 through the company each year and you were used to that lifestyle how long is that 3.5 gonna last you so we've been in that situation where we kind of say you almost can't sell yet because you need that half a million dollars in revenue a little bit longer and then you can sell in a few years so what you were saying about you know financially is it even going to work before you go through the headache process of a sale is doing that financial planning process to say this does this mean what i'm going to need financially long term yeah i think the most the most common conversation i have and that people don't realize till they kind of go down the process a little bit is you know somebody's buying your business they're buying a return right and they're they don't want a five percent return because they're putting effort into it they have a good return they want fifteen twenty percent okay so you tell the business owner hey we're gonna sell your company for let's say it's five million dollars and you're making a million dollars a year right that means somebody's paying you 5 million they're going to make 20 of their money they're gonna make a million dollars a year it's a good return the owner then says and that's probably a relatively fair value maybe you can get a little bit more but relatively fair the owner then says why would i sell for five million when i can make a million dollars a year for the next five years and i'll be in the same place which is 100 true right and that'll always be true like almost always is it better for you to hold on to the business if you have a good return business because your alternative of making 20 is not as easy right right right but you have to work in your business and at some point you have to sell it right right yeah so there's a lot more that goes into it than just the financial model it's you know why are you selling it does it make sense to sell whether it's timing you want to do something else like you can get a little bit more for it i'm a big believer is you always have a value in on your business and if you can get substantially more than it probably is worth and there's times that that happens you sell you always sell when you have an asset that's worth more than it probably should be right and that happens you see it in the market all the time right right yeah [Music] now that you've gotten the valuation and you realize yep i'm willing to sell for that valuation and that's enough for me to sustain me financially the next is you start to prep your business for the sale and you want to command the highest valuation possible so often you're counseling clients saying hey if you're going down this road and we got a year or two to work with here are the things you should really be doing within the business you can command a higher valuation a year or two from now so what are kind of some of those things you cancel well make more money right taking those items out that your business is going to operate although you can get rid of less profitable things you're doing and hopefully concentrate it more profitable and you know you can do those business things that you should be doing anyway so i don't see those as seen and say hey you're gonna sell your business operate it better you should be operating it better anyway but optics is big right so buyers come in they don't know you they don't trust you because they think you're trying to get the highest price which you are right and you don't trust them because you think they're trying to get the lowest price but the optics of just how you run your business like how involved is other people beside yourself the management do you have a team so that they're buying something that can exist in the future and not just one person and then also just from an accounting standpoint you know looking really organized that your numbers are consistent you're not you know if you're it's closely held companies most of the companies we're dealing with they're closing out so you know they're they're running stuff through the business that may not be 100 business or they wouldn't do if it was if they didn't own the business they wouldn't have some discretion that they do so knowing what those items are and and it's better if they don't if they're not even in there for the three years before you sell because then you're not worried about arguing about well you know that truck i really wasn't used 100 for business right if they're in there if you're putting stuff through there then you have to be able to segregate it out pull it out and say you won't incur this because i probably didn't have to incur this well that's an argument you're probably going to win a little bit of that but you're not going to win 100 of it so it's better if it's not there a lot of businesses if you're a larger size business you know most businesses don't get financial statements or audits or reviewed statements even unless they're required by the bank and i don't usually push to get them done either i don't think they're necessary but they do make an impression so if it's a larger company or you're going to sell to a larger company we kind of recommend two or three years of an audit beforehand it's expensive you know so you got to know but you automatically meet the credibility of your numbers being right so now a buyer is saying wow this is a really well organized company i can trust their numbers i don't have to spend all the money on due diligence i normally would spend and you're a leg up on whatever competition you have from selling a business standpoint so all those things that have to do with just optics are and then if you're looking at valuation and how your company is you would look at at that point what is the drivers for your industry are they really looking for growth in revenue are they looking for a certain you know level of margin not so much sales because they can provide the sales like and then drive your company towards where you think that is working capital is always a big thing and the deals right there's most deals are hey i'm going to buy your company and i expect to walk in and be able to just operate it it means yeah i'm not going to expect you have cash there but i expect you have enough receivables so that i'm collecting things and to keep the money coming in and the payables are normal and so it is oftentimes a sticking point a deal and i like to kind of address that up front in deals is to know what that is know what that working capital peg it's called is is is going to be set at and then drive to that drive that down a little bit before the deal because any excess networking capital is really additional sale price and a shortfall is less of a sales price so you really got to know you know what your balance sheet looks like versus your competitors and versus what it's been historically um so i think preparing you know optics on what you're doing making it look like a well well oiled machine make it look organized know your numbers be consistent in your numbers and then looking at what what they're buying and making sure that's where it should be yeah makes sense so this marks the end of the first video in the series if you'd like to move on to the second video of the series the link is located directly below in the description of this video and we're going to cover the sales process in detail as well as if you plan to sell to the next generation some special things to consider thank you [Music]