Depending on whether you’re Team Al Gore or you believe global warming was created by the Chinese to promote manufacturing like Trump, you may or may agree to this report on Hudson Technologies (NASDAQ:HDSN) (“HT”).
HT is in the business of refrigerants, the chemical used in cooling like in air conditioners and refrigerators. The company provides new, reclaims old, and recycles refrigerants. HT passed the initial screening so am taking a closer look. Let’s see what we can find…
While doing preliminary research on Hudson Technologies, my key initial questions specific to this company are:
Wait, hold on.
Went into the financials. Yikes.
Three-months ending March 31, 2018 was abysmal. Problems:
So, my friends, my analysis of HT ends here. The company’s financial position is way too risky. The acquisition of ARI did not prove to be synergistic. They have to sort out the transition with ARI. And let’s face it, they’re holding on for dear life in a dying industry – classic example of consolidations in a declining industry until last man standing.
Overall, there are too many uncertainties from external factors that affect the company’s performance.
I do believe that the refrigerant industry isn’t going to die off in the seeable future. Until there is a mass introduction and adoption of cooling air with renewable energy without refrigerants, air conditioners and refrigerators are going to exist.
The story doesn’t end here though. I’m going to bookmark HT until their next set of financials that shows an improvement in their operating cost and their debt position; i.e. that they are deleveraging and meeting their covenants. The summer months ahead isn’t going to be a good indicator since their sales will increase naturally due to hot weather anyway, but there might still be some positive changes the management proves such as negotiated decrease in cost of sales, etc.
Too bad, I had high hopes for this company.
DLH Holdings Corp. (NASDAQ:DLHC) is in the business of providing healthcare services military personnel and veterans.
DLH’s services help veterans in some way from the beginning of their military life to the end. This includes setting up military treatment facilities, providing nurses in the hospitals, training the medic, all the way through to providing pharmacists, pharm techs and people who ship out prescriptions to veterans.
100% of DLH’s revenue comes from federal agencies including the Department of Veteran Affairs, the Department of Health and Human Services, and the Department of Defense.
Their revenue streams with these federal agencies as their direct clients are comprised of (as of March 31, 2018):
1. Health solutions for military personnel and veterans – 63% of revenue
2. Human services and solutions – 33% of revenue
3. Public health and life sciences – 4% of revenue
So, this is quite confusing because their core capabilities on their website encompass a lot more than the 3 above. It’s explained in their quarterly report that they are technology-enabled health solution provider by outsourcing the business process. It looks like their core capabilities include the capabilities of their outsourcing.
The obvious question is whether reliance on government agencies is a safe bet for the company in the long-term. Firstly, the have to bid and win contracts and although this gives them visibility into their revenue projection 1-2 years in advance, by the same token, they have to sustain the company with their own capital during that time until the project comes online. It’s crucial to maintain overlap so that they don’t have dip in revenue in any given year.
Secondly, the process of winning contracts means it’s not guaranteed and therefore you can’t really say that their revenue is recurring. I love recurring revenue model, so this concerns me. So one of the analysis questions is around the security of their revenue, which I added to my analysis questions below.
Zachary Parker has been CEO and director since 2010, which is not a long time given the company has been around for more than 2 decades. He has held leadership roles in company divisions dealing directly with the government such as GE Government Services (now Lockheed Martin). He is active in the defense and veterans government associations. I imagine having a strong relationship with the government is critical since 100% of their revenue comes from the government.
The rest of the senior management is a roster of strong background in government programs. Having worked closely in my day job investing in a company that gets the majority of the revenue from federal agencies, the most significant difference I found in government facing companies is that they have to be “cautious” in maintaining their relationship with their customers. They can’t be too aggressive and they have to follow the rules but they also can’t be completely nonchalant and expect the customers to come to them. So their management team seems to be stacked well to face the federal agencies as customers.
The company’s recent acquisition of Danya International whose capabilities are in the “human services and solutions” coupled with the composition of their management team’s experience suggest that their long-term vision is to solely focus on selling to government agencies.
The company has strong corporate governance with a proper audit committee, management compensation committee and governance committee.
The company’s had a successful growth in its revenue and EBITDA over the past 3 years although the jump in growth in 2017 is attributed to the newly acquired Danya International.
The good news is that the company has a positive cash flow and their interest cost is more than covered by its cash flow. The company has been deleveraging, paying off the debt each year. And with enough cash in the bank as at March 31, 2018 and a revolving credit line of $10 million, they would be able to pay the interest if they had a cash flow shortfall in a given year; i.e. they wouldn’t go belly up if they had a negative cash flow year in an odd year (if they consistently produced negative cash flows, then that would be a different story). Compared to their peers, their debt to equity ratio is slightly below the industry average. The debt is also at a reasonably low interest rate.
The bad news is that compared to its peers (although the peers are much larger), DLH’s margins are lower than the industry average. DLH’s operating cost as a % of gross profit (not as revenue since gross margin for each consulting business in the industry varies) is much higher than the industry average.
All in all, the company’s financial health is in an okay shape. They have positive cash flow, they are deleveraging and have enough access to liquidity to pay off their debt over the next 3 years. But their margins are lower than the industry average. Notably, an EBITDA margin of 5.2% for the most recent 6 months they reported is very low. The 3 year average EBITDA margin has been 4.9% so the profitability of the business is inherently very skinny.
Until the acquisition of Danya in May 2016, DLH’s organic financial statements didn’t look all that great. In 2013 and 2014, the company’s EBITDA were below a million dollars each year with 0.5% and 1.3% EBITDA margin, respectively. In 2015, they increased their revenue and improved their margins significantly and increased EBITDA and EBITDA margin to $3.2 million and 4.9%. I understand now why they needed the acquisition of Danya. This leads me to 2 interpretations:
Hmm, I don’t know about this company anymore.
A discounted cash flow model in this case is not the best to use because of the non-recurring nature of the revenues and because as an illiquid microcap company, the stock isn’t going to hold much weight in reflecting the intrinsic valuation.
So in this case, I used multiples to compare to DLH’s competitors. The competitors were found in DLH’s annual report. They are all much larger than DLH.
Compared to the industry average multiples in the table above, DLH’s share price now at $5.45 is undervalued. The company is better positioned in terms of leverage with a lower debt-to-equity ratio, which would actually be lower had DLH not acquired Danya International in May 2016.
But most of DLH’s competitors have established themselves as large-cap companies and pay a dividend. After the acquisition of Danya International in May 2016, the company’s stock rallied up for a little over a year until October 2017. Then the share price started declining gradually, which I have to think is attributed to the results of the acquisition after a year highlighted in the annual report.
Overall, the share price is undervalued compared to the peers but you have to discount the company’s valuation anyway because of its illiquidity, so I would say it’s fairly valued with that perspective.
According to this chart by Statista, the number of veterans in the US is projected to grow albeit small growth.
The main things to note are that the share price is slightly undervalued but if you take into account the discount for DLH being an illiquid microcap company, then it’s relatively fairly valued.
DLH’s financials looks okay as they have a positive cash flow, they have cash in the bank and they’re deleveraging after having taken out debt to acquire Danya International in May 2016. But since the acquisition, their operating cost has gone up quite a bit relatively speaking, so they need to contain their spending after figuring out the synergies.
They have enough access to liquidity if they have an odd shortfall cashflow year and although they have a high accounts receivable, the good thing is that the counterparty is the government so they have not had bad debts from ageing accounts receivable. But by the same token, the government is the only customer and more than 60% of their revenue comes from 2 departments of the government so there is major concern for customer concentration risk.
The leadership team is very experienced in dealing with the government as clients. But the CEO only owns 1% of the shares of the company and two of their directors have been selling their shares over the last year.
All in all, I picked this company to analyze because I saw potential. But after a rigorous investment analysis and following my investment checklist, I believe there is a cap on growth for the time being until they figure out how they can scale and there are too many risks that outweigh the potentials, so I’d rather not bet on this company.
I know, I’m bummed too. Days of analysis just to get to the conclusion to NOT invest my money in DLH. Well, at least you know I’m real and I don’t get paid by these companies to promote.
Thanks for reading and see you in the next one!
The first company I am adding to the official microcap.co portfolio is Manhattan Bridge Capital (NASDAQ:LOAN). I have to say that at first glance of their website, I was completely put off. The website looks like a school project. But it passed my initial sniff test, so I decided to look past the unprofessional looking website.
From learning more about the company, the aesthetics match my analysis of the company. It’s a small group, really a one-man band. The business is lean and very simple – a hard money lender (i.e. short-term lending to real estate development investors with real estate as collateral) in the New York metropolitan area. There aren’t layers of complex operations but rather, what you see is what you get which is good because there are only few factors that could go wrong to drive the business into the ground, but on the same token, there isn’t blue sky upside.
So, is Manhattan Bridge Capital stock worth it?
The company was founded by Assaf Ran in his basement in Queens in 1989. Ran started a Jewish yellow pages publication company known as DAG Media. In 2007, the company started a lending operation, allocating $5 million lending to businesses. In 2008, the company reported that its lending operation was the most profitable, so Ran changed the name from DAG Media to Manhattan Bridge Capital and listed on NASDAQ under the symbol LOAN. And so the story really begins in 2008, ironically, a great year to really launch a lending business.
Despite many challenges MBC went through over the years, I appreciate that Ran is a scrappy entrepreneur who wouldn’t let his business fall by the wayside. When the Jewish yellowpages business wasn’t performing as well as it used to, Ran started lending to businesses, and when he saw that this was a more profitable business, Ran pivoted the company completely to lending in the niche of short-term lending to real estate investors in metropolitan New York.
Manhattan Bridge Capital lends typically in the range of $300,000 – $600,000 for 12 months (often with extensions) to real estate investors developing residential or commercial buildings in the New York metropolitan area.
Every loan is secured with a first lien on the building and a personal guarantee from the borrower, which may or may not include the borrower’s equity interest in the real estate project. The company apparently has as rigorous due diligence as the big banks but the approval of the loan is much much quicker at 3 to 10 business days. The loan-to-value is a conservative 75% and 80% for construction costs.
The loan portfolio consists of 3 types:
The loans are currently charged at 11% – 14% interest rate. Currently they have ~120 loans outstanding. Since 2007 when they started lending to real estate investors, the company has closed ~620 loans and *knock on wood* there has not been one default on the loans.
As a microcap analyst, analyzing the financials of the business is not as important. The company might be at the cusp of an explosive growth. The business might not be breaking even yet but have been working on an innovative idea that could disrupt the industry.
More important in my experience of microcap companies are looking at the capability of Management, the idea/product – can it scale and is it innovative, and is the business’s operation robust or are they amateurs without a proper system in place?
This is one of the reasons I truly enjoy analyzing and investing in microcap stocks. It’s a more qualitative process more than anything else. You can approach looking at a microcap stock in any number of different ways and there is no right or wrong. I admire analysts’ work but it gets pretty boring for me looking at blue chip stock analyst reports that follow a certain template. Picking the best microcap stocks involves more about really understanding the underlying operations of the business, not about hype or what the mob thinks. Don’t get me wrong – if you don’t have a disciplined investing philosophy, it could be a disaster.
Anyway, the reason why I like this company particularly is because the business model is simple, which means there isn’t a myriad of factors that could screw up the business. On the flip side, if one of those few factors go wrong, it can be detrimental to the business.
This is how I valued Manhattan Bridge Capital, starting with the most critical questions in Tier 1.
They’re earning 11% – 14% interest on 1 year short-term loans. Plus, if the borrower can’t pay the principal in a year when it’s due, the company will often extend the loan at a premium.
The cost of equity – which is critical for MBC since they’ve been raising equity financing every year – is probably 6% – 8%. The company’s cost of debt is 6%.
So, the company’s spread on the interest earned and their cost of capital is 3% – 8%. If the company’s operating cost; i.e. CEO compensation, staff salary, office cost, is reasonable, then that’s a chunky spread. Since 2014, the company has been registered as a REIT, so 90% of their earnings is passed through to the investors, which means there’s more meat on the bones for the investors because there’s no corporation tax and 90% has to be paid as dividends.
So that brings me to the next question of whether the operating expense is reasonable. 2017 G&A was $1.227m which is a 22% increase from 2016 G&A of $1.006m. Their annual report says that the increase is “primarily attributable to bonuses to officers and increases in payroll, board compensation, travel and meal expenses.” That is a pretty hefty operating cost considering the company consists of 2 officers, 3 operations personnel and 3 board members excluding the CEO. But the company’s net income and dividends paid did increase by the same amount of $600,000, so the company isn’t cutting their bonus check from what the investors “earned”. This indicates to me that the business is still a “family” business run very close to heart of the CEO so he will take what he thinks he deserves first and foremost but more importantly, he won’t take more than what is on the table to the detriment of the investors. A good sign of a CEO’s character.
The company states that their due diligence process is as rigorous as the banks but their approval time is much much quicker at 3 to 10 business days. In their annual report, they discuss the due diligence process as:
“In terms of the property, we require an assessment report and evaluation. We also order title, lien and judgment searches. In most cases, we will also make an on-site visit to evaluate not only the property but the neighborhood in which it is located. Finally, we analyze and assess financial and operational data provided by the borrower relating to its operation and maintenance of the property. In terms of the borrower and its principals, we usually obtain third party credit reports from one of the major credit reporting services as well as personal financial information provided by the borrower and its principals. We analyze all this information carefully prior to making a final determination. Ultimately, our decision is based on our conclusions regarding the value of the property, which takes into account factors such as the neighborhood in which the property is located, the current use and potential alternative use of the property, current and potential net income from the property, the local market, sales information of comparable properties, existing zoning regulations, the creditworthiness of the borrower and its principles and their experience in real estate ownership, construction, development and management. In conducting our due diligence we rely, in part, on third party professionals and experts including appraisers, engineers, title insurers and attorneys. Before a loan commitment is issued, the loan must be reviewed and approved by our Chief Executive Officer. Our loan commitments are generally issued subject to receipt by us of title documentation and title report, in a form satisfactory to us, for the underlying property. We require a personal guarantee from the principal or principals of the borrower.”
Assaf Ran, the CEO and founder of the company started the business in 1989 as a Jewish yellowpages business. Slowly and steadily, he grew the business. He saw an opportunity to lend to small businesses and when the lending arm became more profitable and the yellowpages was declining as expected from switch to technology, he made the decision to pivot the company completely to a real estate lending business. He didn’t start out as a real estate lender but being in this business since 2007 has earned him the stripes.
Here what I’m looking for is where they originate their deals from. How much of their revenue is recurring and is there a risk that the number of borrower approaching them declines? According to their 10K, the company relies “on our relationships with existing and former borrowers, real estate investors, real estate brokers, loan initiators, and mortgage brokers to originate loans. Many of our borrowers are “repeat customers.””
Great news as long as the New York metropolitan market continues to rise. But if there comes a day when the market is no longer attractive or the market is saturated and the real estate demand (whether residential or commercial) starts to decline, they’ll be in trouble. I don’t see that happening in the short term or medium term, for that matter.
MBC doesn’t have any capex or taxes since it’s a pass-through. So looking at net income is a good proxy for free cash flow. MBC has been reporting an overall trend in increased and positive EPS for the last 5 years.
In other words, is MBC’s growth attributed solely to injecting fresh capital or is the underlying business’s organic growth fueling the growth? And Public offerings have been at higher stock price each time, i.e. organically increasing retained earnings from the business and the business isn’t growing just from fresh capital
For a financial asset company, I figured P/E and EV/EBITDA multiples and Discounted Cash Flow Method aren’t really going to work. For MBC, I looked at the Price to Book Value (or Net Asset Value in this case). My go-to place to look up general current trading multiples by industry is Professor Damodaran’s page. The closest industries’ P/BV multiples are:
There is no multiple for the exact niche we’re looking for; i.e. hard money lending business, but looking at the proxy industries above, the average P/BV that we should be comparing MBC’s valuation to is about 2.0x.
So, looking at the latest quarterly report ending March 31, 2018, its net asset value/book value is:
Net Asset Value $23.230m
The company is currently trading at a market cap of $60m. So, the P/NAV (or P/BV) is 2.58x, which is a lot richer than the average industry comparables for P/BV; i.e. MBC’s stock price is quite overpriced at the moment.
The stock could be trading higher as investors are expecting a higher earning and growth in its June quarterly report that’s coming out soon (since today is June 27th, 2018) and a bit of rallying to this point. Also, investors may be buying to meet the shareholder record date in order to meet the ex-dividend date. You must own by July 10, 2018 to be paid on July 16, 2018. The stock price may decline after the ex-dividend date, but I’m greedy and I want a piece of the dividend pie.
Three things to look for to detect any sign of pump & dump for a microcap stock is 1) is there a lot of hype around the company? And the answer is no, I haven’t found it online; 2) does the company keep changing names and the direction? And the answer here is no; and 3) are there periods of stock momentum for no reason? There has been an instance of this but really, the company has been reporting higher earnings every quarter, so I would expect it to be attributed to that rather than a pump & dump.
Normally, I don’t like debt but for a hard money lender whose assets are money, using leverage to lend rather than issuing new capital at a high cost of equity is effective as long as the cost of debt is lower. At an average of 6% cost of debt, it’s not too risky to hold debt on its balance sheet.
A simple business as a hard money lender. Focuses on the New York metropolitan area which is a hot market and will be for a long time. The CEO and founder has 30% of the stock and he has been with the company through thick and thin since founding it almost 30 years ago. The CEO is scrappy; pivoted the business when he saw a more profitable opportunity. Board members have been with the company for over a decade on average.
The stock is overvalued but on the flip side, is seeing momentum because of consistently reporting higher earnings and growth. The stock also pays a dividend that’s been increasing steadily every quarter, so it’s a nice income stream and diversification to your portfolio. I wrote this post on June 27th at night so am buying on June 28th at a slightly higher price. Damn it.
It turns out a PR firm isn’t always beneficial to your business. The biggest lesson is that you need to craft your own story about your business. You know more than anyone else. It’s also very expensive, so if you can learn to do some of it on your own, like hiring a freelance writer to help you write a story and then you pitch it to journalists, then that will save you a heck of a lot of money. Another disadvantage is that they do their job of booking media coverage, but that doesn’t necessarily mean you’ll get more customer as a result.
Having said that, there are certain instances when hiring a PR firm is beneficial. Read on to help you decide:
I hope the reading the above has helped you determine whether hiring a PR firm is right for you at this stage of your business. If you decide that it’s not the right time for you now, there are 40+ other ways to increase customers.
If you’re a PR specialist, I would love to hear from you!
Hiring a motivated, driven, likeable, and experienced salesperson who is the right fit is not an easy task. Follow the steps below to find the right salesperson for your business.
The best place to find people with those traits? Your immediate network.”
“There is a common misconception that the output of the hiring process is the identification of a great salesperson. It’s not. The output is a salesperson with the potential to be great in a specific sales role for the company. That potential is only recognized when a bridge program is put in place that connects the salesperson’s knowledge and skills with proficiency in the role.
Most executives begin the sales onboarding development project by inviting a bunch of colleagues to a meeting where the discussion focuses on one question: “What are we going to include in the program?” In other words, they start the initiative by considering curriculum. The two issues with that approach are: 1) Curriculum can be added for an eternity; and 2)There’s no way to gauge if the program serves its purpose.
The best place to start is at the finish line – by identifying expectations. Imagine you had a salesperson who is described as having successfully completed the onboarding program. What are those expectations?
Searching databases for new sales leads is better suited for business-to-business (B2B). The benefit of searching a database to identify and pursue potential customers is that you’re not putting word out there about your company and just waiting. You know exactly who you’re going after and who you have to talk to in order to win accounts, even if cold calling sucks.
But at least cold calling gives you the advantage of building rapport with your potential customer, which opens up the pathway for a future deal or you learn what similar customers you’re targeting are truly looking for which you can use to tweak your sales pitch and offerings to other potential customers.
Since cold calling potential customers is a numbers game and therefore is a long and arduous process, the one thing you don’t want to waste time on is going through pages and pages of google search results to look for potential customers; not to mention, the hard part is knowing the keywords to search on google in the first place. This is when leveraging a database can save you time and more importantly, help you find customers that have more likelihood of saying yes to your sales pitch.
What you need to know:
Let’s explore each question.
Make sure that the database you subscribe to specializes in your industry. I talked to a few database customer representatives while assessing which database suited my line of work, and unfortunately, what they advertise is not 100% accurate.
Look at the cost for each database listed below and choose the one that fits your budget.
Next, call or live chat the database and ask which industries they specialize in. Describe the industry and type of customer you’re looking for and find out how many leads they have in their database that match that profile.
Below is a list of all the reputable and sizeable databases to consider for your business and how much each costs:
The first thing to do after you sign up for a database is to look on the website for a guided tour/video of how to use it. If you can’t locate it, call their customer representative and ask to walk you through how to use it.
That’s the easy part.
You don’t want to spend all your time prospecting leads. You should know exactly the profile of your target customers. Your customer profile should include the following characteristics:
Example 1) Steel OEM manufacturing company that revenues $10 million/year on the West Coast of North America that would need specialty paint from my company.
Example 2) A company of realtors that specialize in first time home buyers in downtown San Diego that make a total pooled revenue of $3 million/year that need an online CRM tool that my company offers.
Once you have the customer profile, use this to screen for your leads.
Once you have your prospects’ contact details, begin cold calling. Remember that it’s okay to sound like an idiot. You only get better by trying over and over again. Know that going in you’ll have a lot of No’s before you hear a Yes, but the ones that separate the successful entrepreneurs from the rest are that they keep trying and don’t stop until they see their vision come to life.
So, I’ve curated the following posts that are punchy and to the point but have substance that can teach you a thing or two about crafting the sales pitch and how to cold call effectively:
If you need to read more, then by all means, search for them yourself. But I’d suggest at this point, enough reading and preparing, start calling!
If your company has an account, better yet, if your company’s financials get audited every year, then what you need to gather to prepare for the sale of your business should be easy. If your company has unorganized financials, then it’ll be a bit more work, which will be covered in a future post. If your business is profitable but your financial statements are unorganized, this alone will bring down the value of your company, which will cost you in the transaction price. I’ve provided the spreadsheet you can download to organize your company’s financials. Remember that you also need to provide supporting material such as the monthly/quarterly/annual financial statements or management accounts that you prepared each period.
Listed below are key financial statement items that the potential buyer and their broker will ask for:
Now I’ll get into key traits for each item above that will value your company higher.
Scroll to the bottom to download the spreadsheet that you can use to organize your company’s financials.
Each company’s P&L will look different because of line items that are relevant to one company that are not relevant to another. But the basic items of a P&L (or aka income statement) are:
If your company’s financial statements fiscal year is from April 1 – March 31 and the period you’re valuing the company is August, then you need to show the last twelve months or the year-to-date P&L. This is to show that you’re not selling the company now because you suffered serious losses this past year or had some unknown adverse circumstance affect your business, such as the largest key account leaving you for a competitor.
If that is the case for why you’re selling, then you should reconsider and try to build the business back up before you sell or accept that you will receive a much lower price for your business than you originally anticipated.
Unlike a P&L, a balance sheet shows numbers in accounts and ledgers at a point in time, not for a period of time. So it may not make sense to show historical 5 years worth of balance sheet, but actually, analyzing historical balance sheet over the last 5 years shows a lot of useful information. A general grouped items on a balance sheet looks like this:
Now this is the exciting part. This is where you get to show how awesome your business is going to be in the future based on what you’ve built up to now. And these numbers are the crutch of what the valuation will be based on. But a forecast is only as good as the assumptions, and the assumptions are built off the historical numbers. So, you can’t bullsh#% these numbers.
The forecast needs to have legitimacy by showing evidence from the historicals, new sales contracts, evidence of improvement in operation efficiency, etc. A forecast model will look like this:
The more supporting evidence you have for your assumptions the better. If your financial statements historically and forecasts are organized, it shows that you know your business inside out and that your business is in good shape. Moreover, you need to show that your top line has been growing because it proves that once taken over by the buyers, the business will continue to generate healthy and growing level of sales. Margins also have to show enough profitability that the buyer can benefit from the profit from the first year. How the buyer improves the efficiency of the business to increase the margins is up to them, but the business needs to have a good foundation to start with.
There are many ways to generate new leads, get more customers, increase customer base, however you want to put it. Some methods will work better for your business than others depending on the customer profile you’re targeting and the value that your business provides. For instance, if your company is a local food delivery service on a college campus accessed via an app, then you’d want to employ online advertising on websites and social media groups where local college kids hang out. If your business sells coffins, you might do traditional advertising via direct mail in neighborhoods with an aging population or build relationships with senior homes in your area.
Below is a list of 36 ways you can increase customers, either offline or online. If there are methods missing in the list, please comment below or send me a message and I will add them to the list.
Missing something above? I would be grateful if you let me know so I can add it to the list.
You’ve built your business from the ground up, putting in sweat equity like no one else will understand and appreciate. For that reason, it’s hard to let go of your baby because you think it’s worth more than what others are willing to pay for it and you can’t trust anyone to run it like you. These are all considerations in finding the right buyer for your business, but trust that if you put in the right preparation, you can find the right person to sell it to that will leave you feeling glad and relieved that you made the right decision.
Part of exit planning is to know who the potential buyers are. The more interested buyers of your business there are, the more competitive and higher your selling price will be and you’ll be in a position to choose who will run the legacy of your business after you. The top mistake business owners make is that they don’t do their homework, so they end up exiting too early at a low selling price or they go with the first broker on their google search whose goals aren’t exactly aligned with yours. Avoid regret by following the steps below to identify the right buyer.
More on each below.
Finding a broker might be the easiest and hardest method. It’s easy because you can google local business brokers and you’ll get hundreds of hits. It’s hard because you have to then sift through the list and vet the right one to work with. If you don’t consider yourself financially savvy and would rather not hustle your way to finding a buyer, it’s most prudent to go with a broker.
Do remember that brokers can be expensive. They will usually charge a retainer fee of between $15,000 – $30,000 for a business under $5m and a retainer fee of between $30,000 – $80,000 for a business over $5m plus somewhere between 3% – 8% of the transaction fee, depending on the size of your business. For example, if your business has $10m in revenue, $2m in EBITDA and sells for $8m, then you will pay the broker ~$400,000, so you will actually receive $7.6m from the buyer after broker fees. Note that fees vary regionally and by industry, so these numbers are not the standard for every business.
Considering that brokers are expensive, you need to make sure to pick the right one. A good broker will possess the following:
Googling the brokers may take forever. I would advise starting here (International Business Brokers Association): https://www.ibba.org/find-a-business-broker/
If your business is in a specialized industry, google “[your industry] businesses for sale in [your city]” and look at where people who are looking to buy or sell businesses in your industry are gathering.
If your business is in a broad industry, you’ll have to rely on big market places that have a lot of traffic – not just where sellers are going to list, but where a lot of serious prospective buyers are going. The most well-known online marketplace to list your business is bizbuysell.com.
Sounds daunting and is a huge task at hand, but this could provide the most payoff with respect to:
The payoff from this approach comes from targeting and selling to buyers who strategically need your business. No matter how dedicated your business broker is, they won’t put in as much devotion as you will to find the best potential buyer.
The challenges are that:
If you’re ready to take on this challenge to reap high reward, the first step is to make a list of potential buyers. These are the types of buyers you want to search for in your industry and your region:
This method of identifying potential buyers and cold calling them is not for the faint of heart. You need thick skin, you need drive, motivation, and a kick-ass hustle mentality. You also need to have your business groomed in terms of historical financials, supporting basis for growth in your forecasts, supporting build-up of revenue, costs and operating expenses, and other areas of improving your business to the highest value.
What stage are you in your business? Are you ready to sell now or do you have some flexibility to improve your business, educate yourself in whom you can sell to and which of the above method you want to go with?
Describe your business below or contact us to get an assessment of where you are in the business cycle and what areas you need to improve in order to prepare your business for a successful sale.
If you want to sell your business, there are several technical valuation methods to determine the right selling price. You can hire a business valuator and spend thousands of dollars to publish a report IF you need a qualified valuator’s stamp of approval. But you may not need that and it’s good to educate yourself on how to calculate the selling price of a small business yourself first.
So, before you go onto any more steps and spend money on hiring a business valuator, follow these steps:
This strategy works for real estate, so why not for selling your business? For example, you may first get an estimate of how much houses on your block are sold for. Then you invest $80,000 to renovate your house or condo. That raises the value of your house by $150,000, so ultimately, the selling price goes up. Same method can be applied for selling your business.
The rough ballpark of your business’s selling price is to multiply your company’s EBITDA by 4. (EBITDA = earnings before interest, tax, depreciation & amortization)
For example, let’s say your business’s financials look something like this:
Revenue $3.5 million
Cost of Goods Sold $1.0 million
Gross Profit $2.5 million
Operating Cost $1.8 million
EBITDA $0.7 million
Multiply $0.7m by 4x. Therefore, a reasonable expectation of how much you can receive for your business is $2.8 million. Again, this is just a rough estimate of the selling price, but you need to know this as a starting point.
In reality, the number that you multiply to your EBITDA is typically somewhere between 2 and 6, which means that you can sell a small, private business that has been steady and stable for the past 5 years for somewhere between $1.4 million and $4.2 million.
That’s a big range, so how do you get the selling price closer to $4.2 million? Now that you know the starting point, let’s go through the factors that will get you to the highest selling price.
Maximizing the selling price depends on a multitude of factors, some with higher weighting than others.
The most important base factors your business should possess before you decide to sell your business are:
Other factors that affect the selling price are listed below. Scroll down to download the calculator.
At this point in your business where you’re considering selling your business but you aren’t in a rush, the most prudent way is to find out what the rough selling price would be for your business and grow your business’s valuation by targeting improvement in certain areas of your business. The list can go on but the truth is, there’s no such thing as the perfect selling price. In my days working for a fund, we followed 8-factor investment criteria that the companies had to meet in order for us to consider investing in. Some people rely on a “gut” feeling and others will do a full-blown 100-page research & analysis report.
Scroll down for the link to download the spreadsheet to find out how much you can sell your business for.
Once you’ve successfully improved your company’s performance to maximize the selling price, the following are the technical valuation methods that your business valuation report should include: