Welcome to CFF-U Business Series!
Welcome to the next chapter. Is there really going to be a pot of gold at the end of the rainbow for you? In other words, are you going to be able to sell your business to someone?
Does The Exit Always Happen For Businesses?
There’s a bad piece of data from the association of business brokers that says 90% of businesses that are put up for sale, never find a buyer. So as business owners, we always think that someone is going to want to buy this thing that we call our business from us. And unfortunately the data tells us that’s really not true. In fact, many businesses never have a pot of gold at the end of the rainbow.
It’s because the Owner is the business. It’s that concept of Superman or superwoman that we talked about earlier on in CFF. You eventually you have to have a money machine that someone is willing to pay you for because they can get the same money from it and eventually turn it into theirs. So let’s talk about how an exit actually happens.
Finding Someone Who Wants Your Business
Number one, Many exits and transportation happen from a strategic buyer. It means that someone has a very strong presence on the east coast, and they want a strong presence in the Southeast, a stronger presence in the Southeast. And so they buy the best transportation company who dominates the Southeast. How do they even find out about you if you’re that company through your market leader, content, through your positioning, through your branding, through the fact that you are the best flatbed hauler of steel pipe in the Southeast for manufacturing companies that have 50 million and revenue and below the market knows about you.
The company in the Northeast or the east coast wants that presence and they buy you, what do they look for when they buy you? Number one, they want guaranteed revenue. They want to know what your contracts look like. Remember we talked about in a previous chapter about recurring revenue.
What’s Your Revenue?
They want to know how much of that revenue was guaranteed. What do the contracts look like? How long will the contracts be in place? They want to know what is the upside? What foundation have you built? That if they bring more money into more people, better technology, more equipment, better contacts that it can grow, right? They want to know what your management team looks like. Who runs the business. If you get hit by a bus, because if you think they’re going to just buy you, they might, but they won’t cash you out without you there. However, they might cash you out. If your management team has been in place doing a great job and your involvement is not in every nook and cranny, the business buyers want to buy a proven money machine. And the more proof you can give to them the better. How are your contracts?
How Are The Financial Statements?
How do your financial statements look? What is the management team look like? What is the culture look like? What niche do you own and dominate? How profitable are you? How much free cashflow do you have? What is the average age of your equipment? What buying discounts do you have that they may not have? Just to give you an idea. There are two methods for valuation of a company. The first is a multiple of EBITDA that’s earnings before interest taxes, depreciation and amortization for our customers and transportation. EBITDA is the right number because we have interest. We have a depreciation because we are capital intensive and we have to buy equipment. And so EBITDA is a number that needs to be determined in transportation. If you’re got, if you have good contracts and you’ve got a good brand and recurring revenue, you could expect somewhere between a three and a seven multiple for EBITDA.
The EBITDA
That means if your EBITDA is a million dollars, your business could sell between three and 7 million. I know that’s a range, but the first thing you need to get to is a million dollars in EBITDA was $100,000. The odds are pretty slim that you’re even going to be able to sell your business. It just doesn’t create enough income stream for the buyer. It also exit doesn’t produce enough revenue for you or, or profit for you to ride off into the sunset. If you, you want to sell your business, you have to be concerned about EBITDA and how do we grow profitability and EBITDA. It should be a key factor that you’re looking at. It’s one of the key metrics is that we talked about on managing your business and your financial metrics is EBITDA and is EBITDA growing. We would argue that if you don’t have EBITDA, at least a million dollars, there’s a pretty good chance.
Get Your EBITDA Up
You might not even have a buyer. So a goal is to get your EBITDA to say a million or 2 million or 3 million. And then as part of the end game exercise that we taught in chapter three, you begin to see what it could look like. If you have a $3 million EBITDA and you’ve got a five X multiple to it, that is a $15 million possible exit for you. It’s pretty good. Now we’re talking some real money, right? The second valuation model off of EBITDA is simply revenue. There is an argument that many companies trade at one times revenue. So if you have a $10 million company, there is a possibility that your company could be worth $10 million key factors that increase the multiple that a buyer would be willing to pay for you. Is, are you dominating a niche or are you just a generalist? Do you have a management team or are you in charge of everything? Do you have recurring revenue from good contracts or are you just on load boards every day and some months you win and some months you lose, do you have a piece of technology that makes the friction point with your customers less? Is it easier for a customer to do business with you?
Do You Specialize or Have Proprietary Elements To Your Business
Do you have some, um, unique Proprietary, the Element to your business? Do you have specialized equipment that is super expensive to get built? And you went ahead and did the expensiveness and bought the type of equipment and the other company, the strategic buyer just doesn’t want to spend for that, but they can take you out and they get it right. Take a minute. And just ask yourself when you do the end game, do I want to sell it? And if so, and I now know, because we’re teaching you this, that there’s two ways to get a valuation on your company. It’s off of EBITDA or it’s off of revenue. Is my revenue growing or is my EBITDA growing or are both growing? That’d be great. And then apply a 3, 5, 6 multiple to it. And it will start to give you an idea of what your company might be worth to a buyer remembering that I’m going to argue that EBITDA has to be a million bucks.
Cash Upfront and The Earnout
If you really want to be able to be able to get a real multiple from a company that can pay you, there will most likely be two factors to your buyout. The first will be a cash portion upfront, and the second will be an earnout. You probably will not ride off into the sunset. You will most likely get a check for a portion of your business. And the remainder could be, you know, you might get a 60, 40, 60% of your money comes up front and 40% of your money comes in. The earn-out. The earnout could be anywhere from one to five years. In other words, the buyer says, I want you to stay. I want your management team to stay. I want your salespeople to stay, and I want you to continue to do what you’re doing on the growth trajectory that you’re on.
And if so, we will pay you the remaining balance of the agreed upon purchase price. It’s very rare that someone rides off into the sunset when they sell their business, most sales have two components to it. The first is the cash payout. And the second is the earn-out. So just keep that in your mind when you’re building out your end game and you’re looking at, what does it look like to exit your business? And, and remember that it’s rarely going to be one big fat check that you think, and you’re going to go away. Okay.
Selling A Business Is Complicated – Recap
Selling a business is a complicated process. It’s difficult if you don’t have all the boxes checked, but if you have boxes checked and time and circumstance hits to the right buyer, they may pay up for you. So think about this exit process and what it might look like for you by just doing a little of the math. How much revenue are we growing? What’s my EBITDA. Are we growing? What piece of tech do I have? How strong is my management team? Am I Superman or superwoman in my business? And remember the valuation somewhere between three and five in EBITDA or one times revenue. And we’ll see in the next chapter.
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