Rules of Thumb Don't Reveal the Whole Picture
Why VR Believes in Completing a Thorough Business Valuation
VR Mergers & Acquisitions customarily use the cost, income and market approaches when valuing a business. But where do less scientific metrics - like industry rules of thumb - fit into the valuation paradigm.
The International Glossary of Business Valuation Terms defines “rule of thumb” as:
“a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.”
Rules of thumb serve as useful sanity checks for controlling interests valued using more technically sound methods. However, VR staunchly believes that they should not be used as the sole method of valuation for several fundamental reasons:
They’re unsupported. Not to be confused with the market approach - which derives valuation multiples from customized empirical data and in-depth statistical analysis - rules of thumb are based largely on folklore or word of mouth.
For instance, suppose an owner hears “through the grapevine” that a competing business sold for 80% of revenues. Although the formula may be worth noting, the firm has no means of verifying the rumor’s accuracy or underlying details. When you have your business valuated by a professional, you will get a complete examination of what you should be selling your business for, where the buyer will know exactly what they’re receiving.
They’re oversimplified. Valuation formulas also fail to account for differences between industry participants, such as non-operating assets, niche markets, management quality, operating risks or geographic location. Simply stated, they don’t consider many of the underlying factors, risks and attributes specific to a business that directly affect its overall value.
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Lining Up Your Financing Early
How It Can Help Strengthen Your Position with Sellers
If you’re in the market to buy a business, consider arranging your financing options well before you’ve identified a target and drafted your letter of intent. Early preparation could help you refine your search by showing how much you’re able to borrow on your own cash flow and assets, and the approximate financial health required in a target acquisition. It also may strengthen your position as a credible buyer with sellers and eliminate the embarrassing possibility of needing to cancel your bid because of a financing problem.
Financing Sources
For a prospective buyer, the four main sources of financing are: 1) banks, 2) private equity firms, 3) an initial public offering (IPO), and 4) seller financing. If you want to retain full control of your business, you probably want to rule out a private equity firm or IPO. While private equity and IPOs offer certain advantages, they require you to transfer equity to outsiders.
Seller financing offers advantages, especially if you can’t find financing elsewhere. But if you have other options and don’t want to depend on seller credit, which might not be available, bank financing is a convenient, cost-effective alternative.
Your existing bank is the best place to start financing discussions. However, if your bank doesn’t understand your business or industry, or doesn’t do much acquisition financing, consider finding another one that’s better suited to your long-term needs. Many banks specialize by industry, so investigate your options and take the time to find a lender that understands your company.
Bank Loans
Once you’ve found a bank that’s interested in working with you, it will look at two aspects of your business and the acquired business:
1. Unsecured assets. These are assets that aren’t already held as collateral for an existing loan and will serve as collateral for the new loan or loans you seek.
2. Cash flow. The most common measure of cash flow is earnings before interest, taxes, depreciation, and amortization (EBITDA). Cash flow is relevant because it will be the source of funds to cover periodic interest and principal payments on any loans.
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Reasons Why Your Business Won't Sell
by Ryan Jorden, VR Business Brokers of Calgary - Managing Partner
You’ve been thinking about selling your business for a while and now you’re finally ready to pursue a sale. But is your business prepared to withstand the scrutiny of a buyer and their professional advisors? If you haven’t been through this process before, then you may be unaware of some issues present in your business that a savvy entrepreneur is looking out for and seeking to avoid. These barriers to selling will undoubtedly show themselves during a buyer’s due diligence and likely derail your deal. So let’s take a look at some of the common issues that arise so you can start working on them in order to maximize your value in a successful sale.
1. You aren’t mentally prepared for the process
You thought you were ready, but now that you’re discussing it in-depth with your trusted broker you realize that you have no plan for your life after the sale. Your identity and self-worth are very closely wrapped up in your business, or perhaps you’ve worked so hard at growing your business that you simply didn’t have much room for a social life or hobbies. What are you going to do with all of that free time? The great unknown looms large and you’re getting cold feet at the prospect of reinventing yourself.
This is an opportunity to draw up some goals and gain a clearer understanding of how your life will change and benefit from the sale of your business. Maybe you desire to spend more quality time with your spouse or grandchildren, finally enjoy some uninterrupted holidays, or pursue a completely different business venture. Write it all down and start filling in the blanks until you feel it becomes tangible. Because it’s crucial that you’re fully committed to the transition both emotionally and mentally.
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How to Make Your Most Valuable Asset Even More Valuable
What is the most valuable asset of your business?
Believe it or not, it’s not your real estate or your equipment, although those items cost you plenty. The most valuable assets of your business are the people you employ. The individuals you trust each day to produce quality work and service your customers are not only important to you but also are critical to a prospective buyer.
Having sold more than 60 collision repair shops generating almost $200 million in annual revenue, our M&A team is keenly aware that one of the first questions a buyer is going to ask us about your business is, “What does the team look like? Is there someone ready and able to replace you, Mr. Owner? Do your managers understand your financial statements? Are they part of the budgeting process? How are they compensated? What types of benefits are they offered?”
I know some business owners are really reluctant to share highly sensitive information with their employees. I get it – it’s like giving away the keys to your kingdom and not knowing if you are going to be robbed in the middle of the night, or more likely in this case, the employee leaves you. Many fear that the employee will begin expecting a higher salary once they see all the money you are making.
However, what generally happens is that the employee will get a greater appreciation for all the expenses associated with running the business that they never considered. It’s OK for you to make money, in their opinion; if you are doing well, they should expect to do well also. Teach them how to read the financial statements, talk to them about the equipment purchases and OEM certifications you are considering, why you are considering them, and what they will cost the business both in the short term and the long term. This can be one of the greatest ways to show your employees how much you respect them and value their contributions.
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Acquisition Opportunity: 41 Unit- 45 Bed Assisted Living with Dementia Care, Southern Area, MN
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VR Business Brokers, Mergers, and Acquisitions is pleased to introduce a 41 Unit, 45 Bed Assisted Living with Memory Care Facility in Southern Minnesota with real property included.
Since its inception, the community is stabilized and grown its occupancy and revenue steadily, despite a slight slowdown during COVID. The community has been serving southern MN for less than five years, but with its experienced operating background has grown year-over-year, as seen in its financial performance shown below.
INDUSTRY TRENDS
- Projected Strong Growth in Demand. Over the next two decades, the population of adults over 85 will more than double to exceed 14.4 million people. Depending on when the bulk of the elderly population enters the skilled nursing care system, the swell in demand could exceed space available.
- Sales for the US nursing homes and assisted living companies industry are forecast to grow at a 5.06% compounded annual rate from 2019 to 2025. The growth rate is faster than the growth of the overall economy, at 3.6%.
- Federal Funding Proposed for Home, Community-based Care. President Biden has made a proposal to spend $400 billion over eight years on home and community-based services as part of his $2 trillion infrastructure plan
- Business Exit Rate much lower than US Average for all businesses. For assisted living and nursing homes, the rating is 1.5, while the national average for all industries is 9 which indicates a SOUND investment.
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VR Located in Raleigh, NC Sold a Regional Garden Shop for $3,670,000.
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This sale enabled the founders of a two-decade-old multi-location garden shop brand to retire and spend time with the family who needed them. Transaction activity included a professional valuation, book creation, buyer screening, buyer/owner meetings, negotiations, due diligence, bank financing, the assignment of three leases and the creation of two new leases, the consolidation of two business entities into one, a complex closing across two cities, and more.
According to the founding business owners, the acquiring party that VR isolated, a group of corporate refugees from a large institution in the agricultural sector, was the perfect fit to take their brand to the next level.
Congratulations to Neal Isaac for your successful closing.
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Thinking of selling your business or looking for an established
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Tripping Over Purpose
The question of purpose has become topical once again in business management with increasing noise over the need to have one and the choices available. The point that seems to be missed is that every business already has a purpose. However, leadership may not be actively aware that they have set a purpose for their business. And in many cases, that purpose may be draining performance rather than energizing it.
Active knowledge questions:
Can you state the purpose for which your business exists and whether it uplifts performance or weakens it?
A founder’s purpose
Purpose is misunderstood by many business leaders and is often interchanged with vision, mission, and the profit motive. It is, however, one of the most powerful tools that a business leader can use to muster commitment, passion, and the focus of all the people working within and with their business.
If crafted correctly, it is also the window through which endless opportunities for growth may be discovered.
Purpose is born in the creation of a business, the seeding of the original idea that launched that business. Yet it is often forgotten as the founder’s influence wanes or discounted as new leadership is appointed.
Make the reason for your business’s existence ‘righteous’. In other words, something that everyone working for the business can relate to, take pride in, and feel good about. This then becomes the focus that you constantly speak to. When you talk about direction and seek to muster everyone’s energy, it is the language of purpose that you must use.
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VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
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Have You Ever Considered Selling Businesses?
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