In This Episode
If you’ve been in business long enough, chances are you’ve received some unsolicited interest in your business. By “interest” we mean someone is expressing an interest in perhaps buying your business. It likely came in the form of a letter that was either physically mailed or emailed or from a phone call. These letters and phone calls often come from intermediaries so the actual person who might be interested in buying your company has their identity hidden. Do you welcome these solicitations with open arms? Do you avoid them like the plague…or COVID? Likely you’re somewhere in between.
Now imagine you’re on the other side. Instead of the one receiving the unsolicited interest, you’re the one sending those interests out. So exactly how do you know what your competitor’s business is worth? Should I worry about offending the business owner with my offer? How do I know the other owner is telling me the truth? What if they gave you the business, would you take it?
During the show today we spent some time talking about valuation and how outsiders are likely to look at your company and the opportunity. One of the first things a potential buyer should do is figure out what’s often referred to as Owner’s Discretionary Cash Flow (“ODCF”). This number basically shows all the cash available to the owner on an annual basis. To calculate ODCF usually includes adding back things such as “personal” items that are being expensed by the business (e.g. cell phone for your spouse who doesn’t work in the business). Depending on the size and growth of the ODCF, the potential purchaser will usually apply a multiple to that ODCF figure to come up with their offer.
For example, let’s say your target business has $100,000 in ODCF that has been growing steadily over the past five years. A potential purchaser might apply a 3-4x multiple to that ODCF figure of $100,000 to arrive at a valuation of between $300,000-$400,000 for the business. Other buyers might focus more on sales and fixed assets (e.g. equipment, property, vehicles) to get a sense for the worth of the business.
You will also want to consider if there is a lot of consolidating going on in your industry because that means there is likely a lot of competition out looking for deals which tends to drive the price up. In any case, whether you’re the one receiving or sending those unsolicited contacts to business owners, you will want to be ready to answer the question of how you are going to value the business before you set foot in that business.
People, Companies and Resources We Mentioned in the Show
- Desi Arnaz (https://en.wikipedia.org/wiki/Desi_Arnaz)
- Lucille Ball (https://en.wikipedia.org/wiki/Lucille_Ball)
Join Us Next Time
Join us next week when we chat about one of everyone’s favorite topics, cash! More specifically, how do I know I won’t run out of money?