Clearly My Last Post Needs Clarification!#businessadvice#businessacquisition#business valuation#entrepreneurs
My last post was basically a simple method to quickly value a business that you are considering buying.
I think there was a little too much tongue and cheek in that post, and especially a lack of properly educating people on the terms I was using! Sometimes I assume too much. I got a lot of people asking me to explain things in more detail.
Hey, I am glad to do it. That's one of the reasons I'm here. Also, look for my upcoming podcasts on iTunes. I believe the 1st one will be live next Tuesday. I'll keep you posted.
OK. So, what is EBITDA? When you look at a company's financial records there are 2 main things.
1) The all important Balance Sheet. Now here is a tip for some of you who are not as financially knowledgeable as others.
RULE #1 All the value on the Balance Sheet is on the Left side of the ledger! That is where you should focus at first. One more tip, NEVER EVER buy a business with a stock transaction!!
Always buy their Assets. The reason is; if you buy the stock you are responsible for the right side(I call it the DARK SIDE) of the current Balance Sheet. This means you owe all of the debt the previous owner has compiled! So remember only buy through an Asset Based Sale!
2) The Profit & Loss Statement.
Now when you are looking at this, you should obviously be looking at Annual sales, if sales trend during different times of the year(indicating seasonal swings), the gross margin, and all the expenses.
After that, there will be a number(line item) that says Net Income or Earnings Before Interest, Taxes, Depreciation and Amortization. That is the explanation of EBITDA!
That is the real number you should focus on because the other baloney are accounting vehicles basically. So I hope I cleared this up.
Also, when valuing the business you should back out the owner's salary & expenses that he directly takes from the company, and add that number to the EBITDA number. Obviously this is only applicable if the owner isn't staying on, which in 95% of the transactions I have been involved with is the case.
The other very important thing is to make sure the business you are buying has a diverse customer base. What I mean by that is, avoid, unless you are intentionally buying the business to acquire or get more of a major customer's business. You generally want to avoid company's that "have all their eggs in one basket", the rule of thumb for me has always been 10-12%.
That means no one customer is responsible for more than 10-12% of the company's annual sales. The reason for this is pretty clear, if you buy a business and 1 customer is say 25% or 35% of your entire annual sales, if you don't retain the relationship, you could suffer a devastating blow! So be very careful.
Also, make sure the financials have been fully Audited by an accredited Accounting firm. Not just reviewed or compiled by a firm! Many small businesses that are privately held get an annual review or compilation by a firm or sole proprietor, CPA. The reason is simple. It is WAAAAY cheaper.
Also, the accountant is not liable for discrepancies of any kind in these types of reporting. The are however fully responsible for the numbers issued through a Full Audit! So pay attention to the disclosure statements that the accountants issued with the financial records. These are very revealing in most cases!!
I hope that gives everyone a better understanding of the things to look at when tyou are going to purchase a company!
As always, your comments and suggestions are always welcome!
I am always available to help you in any way with your business needs. Contact me if you need advice, suggestions or help with your business. I am confident I can help you!!
1 more thing. I am changing my company's name in 2 weeks. It was just simply, Joe Leary Consulting LLC. Not much pizzaz there. So here is my new name and logo is being worked on as we speak.
KYC Marketing & Consulting LLC
Pronounced kick, as in KICK YOUR COMPETITION, or even Kill Your Competition.
Either way, if you aim to do either of those things? Get in touch with me!! That's what you should be doing!!!
Until Next Time!