The Business Transition Blog

Get Your EBITDA Up!

In a recent workshop Perry Phillips, president of ESOP Builders (www.esopbuilders.com) and the co-author of the $10 Trillion Opportunity, shared a very interesting insight. In essence he was saying that generally the higher your EBITDA, the higher your multiple.

EBITDA stands for Earnings Before Income Taxes, Depreciation and Amortization.  While it’s not the only way to value a company, this is a common accounting mechanism, used to assess the value of your business. In very simple terms (because I’m not the technical guy) it means taking your net earnings before income tax, adding your depreciation and amortization costs and coming up with a number. So your earnings might be $400,000 but your EBITDA might be $650,000. This number is then multiplied by a number (multiple) of somewhere between two and seven, depending on many factors.

Obviously you’d like to get a multiple at the high end of that scale!

But here’s why it’s so important to get your EBITDA up: it’s a double win! Increasing the EBITDA also tends to increase the multiple number used to calculate value.

According to Phillips, if you had an EBITDA of $1 million you might get a multiple of 4 times to come up with a valuation of $4 million. But the same company with an EBITDA of $2 million might get a multiple of 6 to arrive at a valuation of $12 million!

So, the message I got from that is that it is well worth your time to get focused on your EBITDA now, and look for ways to drive that number up.

Hmmm, increase your earnings now and get paid more later as well. Seems like a worthy goal! In my book, The Business Transition Crisis, you’ll find 12 factors that you have control over that can increase your EBITDA.

What’s The Difference Between a LOI (Letter of Intent) and a SPA (Share Purchase Agreement)?

I’m not the technical type so I’m not going to suggest I have the answers to this question, but I do have some insights.  And perhaps there are some readers who would like to weigh in.

Here’s the situation. After some preliminary meetings and sharing of information, the broker brings a letter of intent to the seller, indicating a price that was agreeable to the seller, some basic legal speak and an indication that the next step is for the purchaser to do his due diligence.

The list of due diligence requests would choke a horse. Everything from financials, to tax returns, to client lists and contracts, to employee lists and contracts; about 40 items in total. The seller contacts her lawyer (smart lady) and runs this by him. The lawyer says ‘No!’ because the LOI is not a legally binding agreement. If agreed to, allowing the due diligence to proceed, the seller has given the buyer free rein of her most intimate details – with no seriously binding agreement to proceed if the buyer simply changes his mind. Sure the buyer signed a non competition and a confidentiality agreement, but that wouldn’t stop anyone who lacks scruples.

The broker (and one book I consulted) suggests that going straight to due diligence after a LOI is normal and that a SPA is the last document signed which includes all the documentation that came out of the due diligence.

The lawyer (and two books I consulted) disagreed and said the SPA indicates a serious commitment (versus intent) to proceed with the purchase of the company, subject to the due diligence not uncovering any skeletons or surprises that were not already discussed.

I’d be interested in hearing any stories of business owners or lawyers who had their own personal learning experience related to this subject.

Get a Coach and Make $2,777 per Hour

Life is getting more and more complex. There is so much to learn about in areas that seem to be black holes for our time.

If you want to maximize your marketing efforts you now need to know about search engine optimization, social networking, Twitter, interactive websites, text messaging, Facebook and other funny sounding titles – most of which didn’t exist five years ago!

If you want to know about investing your money, you need to know about ETFs, MERs, TFSAs, RRSPs, GICs, RESPs, REITs, and a thousand other iterations of the alphabet.

If you want to know about going green, you need to learn about solar power, wind power, composting, recycling, hybrid cars, fair trade and organically grown chickens.

If want to sell your business, there are also many new ideas for you to learn.

But where can you get the best return on your investment of learning time? Learning about social marketing or learning about preparing your business for sale?

Suppose when your financial advisor asks you what you believe your business is worth so he can consider it as part of your retirement plan, you tell him $2 million. You may or may not be right, but let’s say that you are. If you could increase the value by 25 percent over the next 36 months by learning how to prepare your business for sale, perhaps investing 5-10 hours per month, your value increases to $2.5 million. Not bad!

However, if three years from now you haven’t done anything differently, and you had to sell because of a disability that prevented you from running it any more, or your market goes in the toilet, or you have a new competitor with deep pockets, your business may very well lose 25 percent or more in value, dropping it to $1.5 million.

So the difference isn’t just 25 percent, it’s an easy 50 percent. On a $2 million company, the planning and actions you take over the next three years could be worth $1 million! One million dollars divided into 36 months or 360 hours of effort is $2,777 per hour or $27,777 per month. Can you think of any more profitable way to spend your time?

So get started. Start educating yourself about how to increase the value of your business. Knowledge and understanding lead to confidence and action.  Better to go into this knowing what you’re doing than to delegate it to people who may or may not have your best interests in mind.

To start, read The Business Transition Crisis and then I’ll be recommending other books in future blogs that can help you get a better grasp of your opportunities and threats.

Playing Poker

I got a phone call from a business broker.

I’ve had calls from brokers in the past and they usually say they have prospective buyers and investors who are looking to buy businesses and you know they are just fishing for leads. They want to get you on their mailing list and capture you as a prospective seller before someone else does, but they probably don’t have anyone who is actually interested in your business specifically.

This call was different. He had done his research, asked me a couple pointed questions and suggested that he had a specific  buyer interested in my call centre business. Was I interested in selling?

My immediate answer was, “Not really.” I had just gone through a turnaround situation in which we had done some serious damage control  because of someone trying to defraud me while I was away on a sabbatical. We had restructured the management team, done some serious training and development, coached for success and were now back on track to make some healthy profits.

“What if the price was right?” he asked.

“Then, I’d be foolish not to look at it,” I replied.

Through the process, we went through the financials, established the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and came up with a price that was worth discussing further. The prospective buyer did a preliminary check and decided they would like to meet.

I can go into other details about the process later, but what I want to comment on is that I am now like a poker player with a good hand, but not a great hand. If I wait a few more years, I could have a great hand, or as we all know, I might end up going backwards – through no fault of my own, because of external causes over which I have no control. The economy, higher interest rates, new laws restricting business, major clients going  bankrupt – the list is endless.

It reminds me of the Kenny Rogers song – “You’ve got to know when to hold them, know when to fold them, know when to walk away and know when to run.”

Falling Sales Leads Business Owner to Panic

A client called me recently.

“I think I want to sell my business. Can you help?”

This was the same client who eight months earlier had given me a tour through his relatively new facility, said he was pleasantly surprised at how well he was weathering the recession and couldn’t see himself ever retiring.

Then his company hit a wall. Sales stopped abruptly. They were still making sales calls, still getting interest, still quoting, but no one was buying. The tap was turned off completely. And he panicked.

“If I could have pulled the plug and got out, I would have,” he said. Emotionally, mentally and physically he became a wreck. “I’ve never been through anything like this before. Rationally I knew it wasn’t as horrible as it seemed, but I experienced feelings I’ve never had before.”

We had coffee and talked. He seemed to feel better after that and he decided not to react by putting his business up for sale. After all, he only had a bad quarter. His banker told him he was ok. His accountant told him he was ok and his partner was concerned but not unusually stressed out. And I knew enough about his business to be able to confidently say that things weren’t as bad as they seemed.

So he decided to take a deep breath and try to relax.

The solution to his immediate problem wasn’t to sell the company, it was to get better information and data so he could really understand his situation and make good business decisions. He needed to evaluate their current status – separate from the recent P&L and decide what they wanted to do going forward.

To make a major decision like selling your business, you need to be sure you are acting upon accurate and complete information, not an emotional reaction to a couple months of bad sales. I recommended he read and utilize CEO Tools by Kraig Kramers. (Find it at: http://www.theachievementcentre.com/section/view/?fnode=98 ) It’s a great, straightforward look at what tools you need to be an effective CEO and what to track.

That said, you need to respond quickly to your sales figures and forecasts by managing your payroll and expenses so that you don’t lose your shirt.

Focus on the things you can control and look forward and plan for bigger changes if required.