Helping people sell or buy a business is a gratifying experience.  For most of our clients their business is almost a living thing with unique qualities.  A complex entity they've nurtured almost like a member of the family.  As such, it is a privilege and an honor, frankly, to be part of what may be a life-changing experience.

 

What follows is a pretty accurate recreation of a conversation we had earlier this year with a potential client.

 

     We met Rick for lunch at Rosario's, a great Mexican restaurant here in San Antonio, to discuss his interest in selling his company. We’d spoken briefly at a local Chamber of Commerce mixer several weeks earlier, exchanged business cards and agreed to get together.

 

     Rick’s company specializes in the manufacture of aircraft galley components, specifically for the biz-jet and defense industry. Fifteen years ago, he had purchased a small general machine shop from a family friend and built the company into a thriving niche-based aerospace contract-manufacturer.

 

      "What's my business worth?" Rick asked.  His question didn't surprise me because it's usually the most important piece of the puzzle for the seller. But without a great deal of hard work and analysis, it's like asking 'how high is up?'

      “I hate answering a question with a question,” I replied, “but what do you think it’s worth?”

Rick thought for a moment. “Well, sales have been in the two million range for the last couple of years. So, maybe two or three time that.  I’d like to get five or six million,” He paused, then added, “Business was a bit flat in 2022 and '23, but has been improving. In the last twelve months we’re closer to two and a half million.”

       “Here’s the reality, Rick,” Steve replied. “The value of your business is not a multiple of sales, it’s a multiple of net profit and the current value of the physical assets that will be included with the sale of your business. Anyone who buys your company will probably get a loan, because they’re going to hang on to as much cash as they can for day-to-day operating expenses. The buyer’s bank will look at not only the financial aspects of your business but also the structure and organization. If the buyer is applying for an SBA loan, the overall analysis of your business will be even more thorough.”

       "But we're selling, not applying for a loan. The buyer's the one on the hook."

       "The bank providing the loan to the seller or the SBA is actually the one on the hook. They want to understand what they're lending on and the borrower's ability to cover the payments. No bank wants to foreclose on the borrower. The last thing they want is to get into the machine shop business."

       “Give us an example of one of the things a bank will want to know?” At this point Rick was more interested in what I had to say than his lunch.

       “Well, even before we find a potential buyer, let alone a lender, the first thing we'll look at is EBITDA. Every heard of EBITDA?”

       “Yeah, my accountant has mentioned it, but I haven't taken the time to look into it. Not sure what it means exactly”

       “Earnings Before Interest, Taxes, Depreciation and Amortization. It’s how we determine the profitability of a company. It also tells us about cash-flow and how efficient your company is compared to other, similar businesses. The depreciation part is also important for your type of business because you have expensive capital assets like your CNC machine tools and support equipment as compared to say… a beauty salon, which by definition will have lower asset value."

       At that point, I held up one hand in a casual ‘stop sign’ signal.

       “Before we go much further, Rick, I have an important question. You’re still pretty young and seem to be in good health. Why do you want to sell your business?”

       “Hum…” he mused, still toying with his taco salad. “The truth is, Ken, I’m bored. My foreman pretty much runs the shop and Nancy runs the office and does the bookkeeping. I do sales, which frankly doesn’t come naturally for me, and I make the major decisions.”

       “Any idea what you want to do after you sell your company?”

       “Actually, I want to start a new business.”

       “From scratch?” we asked, Steve and I laughing as we both asked the same question at the same time.

       “Yeah. Think I’ll enjoy the challenge. And, depending on what I get for selling this business, I’ll have some capital to invest in a new venture.”

       “Any ideas for the new business you’d like to start?”

       “One of my good friends from college is an orthopedic surgeon and last year at the twenty-fifth reunion he was picking my brain about manufacturing because he knew I owned a machine shop. Anyway, one thing lead to another, and I’m thinking of starting a medical products company with the first product being my buddy’s innovative surgical instruments.”

       “Well, your timing’s pretty good. The Baby Boomers are all getting to an age where they’re having medical issues, including hip and joint replacements.” I unconsciously rubbed my left knee as I spoke, The pain from a recent procedure to repair a bit of torn cartilage was still bothering me a bit.

But I could see the wheels turning in Rick’s head and a slight smile appear.

       “What do think the time-line is for getting all this info together?” he asked.

       “Frankly," Steve said, "we have a minimum of six months of work. Not just on the financials, but other issues that will probably come up while we find a buyer and get into the due-diligence phase of selling your business.”

       "Six months!" Rick replied, his tone of voice tinged with a mix of doubt and disappointment.

       "Rick, if your business is worth X today and it might, with a few adjustments and your continued increase in sales, be worth one and a half or two times X in six months, would the time spent be worth it to you? Especially if you want to invest the proceeds in your start-up venture."

       "Okay, I get it. But how soon will you be able to tell me what the business is worth now and what you think it might be worth in six months if I make the changes you suggest?"

       “If you can get the the financials in the next week or so, we'll have a good place to start."

       “Well”, Rick said, “looks like we have our work cut out for us."

       “We do indeed,” I replied.

      We agreed to meet on the following Saturday morning at the shop. No one would be around so it would be a quiet and we’d be free to have a private in-depth discussion.

Our goal: an Exit Strategy for Rick.