business, customer, buyer, andrew, valuation, multiple, risk, revenue, big, understand, company, sales, people, industry, profitability, question, months, clients, deals, survive, Increase your business value using Business Valuation Information
Damon Pistulka, Andrew Cross
Damon Pistulka 00:06
All right, everyone, Welcome once again, to the exit your way Business Roundtable. Thanks for being here today, we are got a lot of fun to talk about. I think anyway, this is something we’re very passionate about, and we help business clients work on a lot is really using the business valuation to help really create valuable business. And that’s what we’re trying to do. Drying to do here today, I am working from one screen today. So if I seem a little bit like this, and that’s that’s what I’m doing, I’m trying to navigate this thing.
So Andrew, keep talking to me if the if the slides aren’t changing, right or something, because I’m actually have to get off of this into PowerPoint as we get going. But first of all, like to welcome everyone. If you’re on LinkedIn, go ahead and drop your comments in the in the live, we’re going to be watching that, if you’re hearing Remo, go ahead and drop your comments there, Andrew will be pulling those things up. What we’re going to do then is we’re going to get rolling through this, we’re probably going to finish about 840 45 we’ll spend some time talking at the tables after that, and we’ll be wrapped up by nine o’clock. So, Andrew, a subject that we talk about a lot.
Andrew Cross 01:26
Yeah, I mean, it’s a really this is the core, the core to exit your way. And, and the core to the business owner and or any entrepreneur, I think is understanding valuation and knowing where you’re at. And it’s a little art and science. You know, combination of both and and I think it’s you know, we love talking about it, because it is one of the it’s also one of the most overlooked things that we come across the business. Entrepreneurs are looking at everything else. And then the last thing to think about is their business. Yeah, this, I think we’re on a mission to maybe change that.
Damon Pistulka 02:13
Exactly. That’s, that’s awesome. Because that’s really what we are, we’re on a mission to help business owners really either change their thinking a little bit or add this to their thinking a little bit. Because what we see, and what every person that helps a business owner at the end either sell or succeed, their business is disappointment in the value disappointment, and they can’t sell and other things like that. And if you look at these things early, you really can make a difference to your business and your exit, whether you’re succeeding to family or something like that, or selling your business. So I’m going to get started on the presentation here, Andrew, and if the slides change, let me know so sure. Did they go ahead and update there is a change? Yeah, okay. Awesome.
Andrew Cross 03:04
You know, well, demon is, you know, he didn’t tell you guys, but he’s important by artists. So that’s why he’s not in his studio. why he’s on one screen? That’s a fake background, because he’s actually sitting on the beach. Yeah,
Damon Pistulka 03:17
yeah. Well, it’s, it is it is something that that the virtual work is allowed us to do is to really explore our opportunities. And and as as business owners, we we, I think we need to do that to keep our sanity and our drive. So yes, yes, I am. It is a little warmer than I’m used to in Seattle. But above we’re dealing with that. So
Andrew Cross 03:42
when we look less, it’s okay, what’s up? I’m not jealous, it’s okay. Yeah,
Damon Pistulka 03:47
you’ve got a foot of snow. So yeah, that’s true. It’s gonna be good skiing. So when we look at the, there’s there’s some key business valuation information that that you get. And really what I wanted to do in this first part of it is really identify some of those things and go through all right, what are some of the key factors that we really should look at?
Because I’m going to tell you, this is where most people stop when they look at their valuation. You agree, Andrew? Yep, absolutely. They go, my business is worth this. And then they think that this is this is the fixed number that if somebody tells them worth, it’s worth $10 million, it’s worth $10 million, I should be able to get $10 million. No, there’s a lot more to it than that. Right? And
Andrew Cross 04:34
that it certainly is. And I think too, it’s a it’s, it is not a static, you know, valuation is one thing to really understand is it changes daily. And we know this, we all know this, and we should know this, but when they have this idea about a number, or a multiple that they’re looking for, this is one of the if you don’t really understand how that value moves from day Today, like I said, we do know this because just look at the stock market. And those are businesses to a lot more information in there about those businesses.
But you know, every day, that’s why we report, you know, you can go into the paper or go on the internet and Google your your stock that you own, and you can see what it’s worth today and what it’s worth trading at tomorrow, they have a much better system for it that the small business owner does, yeah, so you know, but that was one of the, you know, this, this is probably the most valuable information that you need to know. And it’s in order to make the right business decisions, right, knowing where you’re at, and then he can determine where you want to be.
Damon Pistulka 05:42
Yeah, so the number eight obviously, as you said, Andrew, it is very important understanding your number and know where you’re at today, because as we go through this, you’ll be able to see some of the things and why why knowing your numbers important. But also, we’re going to show some of the other things that you really need to consider. And this is the next thing that happened is it really the current value multiple of your business, there’s going to be different things that different multiples, and talk about these, again, real quick, Andrew, that the multiples revenue, multiples of even multiples of cash flow, those kind of things that you’re going to see.
Andrew Cross 06:19
So you know, what multiples, you know, it’s just an indicator that the market uses really to determine the value, it’s really, you know, used a lot by private equity groups. You know, so it’s, you know, to me, I mean, there’s various, you know, rules of thumb on multiples, but you can, you know, this is real data, you can take this anyways, and you can really see what the market is. It’s hard to get that data, but you can look at transactions, transactions, and then, you know, there’s these are companies, you know, what size companies?
Were they what kind of revenue are they generating? What kind of cash flow were they doing, what industry are, they in are all factors on those multiples, but you will see size premium, that’s, that’s how we feel, you know, bigger companies, you know, you know, are more attractive, considered more stable, and therefore, you know, they drive higher multiples. Yeah, and I think you’re seeing here at this scale, but you know, as, for example, a small owner operated business, under a million in revenue, where the owner works in the business is going to be in that lower range.
And in a form of forex, you know, three to 4x range. And you can prove this, because if you look at transactions for companies in that size, or businesses, say restaurants or, you know, for as a good example, you know, that’s where they trade, you know, because we actually look at actual transactions. Yeah. So, so that you can really kind of get a determination of where that market affects that multiple or number. And in then, you know, but there are other factors about that, too, that Yeah, so they can
Damon Pistulka 08:04
Yeah, yeah, and in your business valuation, though, you’re gonna see that there’s different multiples that the person doing the valuation as established for your business based on your industry and everything else and, and considered this and look at those in your valuation, these, these the multiple, I just put an image in there, multiples times four doesn’t mean anything in the value of business.
But you understand your current value multiples of EBITDA of revenue of cash flow, whatever those are, is important as you go forward. And, and then talk about the multiple range, Andrew, because this is something that we use a lot when we’re working with, with clients to really understand what it would do what we could do if they could grow the business.
Andrew Cross 08:56
Yeah, for sure. I mean, we can always go in, you know, using valuation techniques. And, and this is for us, it’s critical path because the first question we get asked by a client, when they come in, say, I want to, I need your help selling the business, the first question they’re gonna ask is, I’m not sure what’s that worth? You know, so we have to, we have to do that. And the multiple range is a good way we know, as we’ve had a fair bit of experience, and we’ve seen a lot of deals and actual transactions, because at the end of the day, that’s, that is the real decider is whoever write that, write that check. That’s the determination of the value but getting in that range is important.
So if you’re between a three and a 4x, you know, you know, you can you can get a pretty good idea of where you are in that range. And then you can look at factors saying, well, other companies in your industry are trading at a five or six acts Well, what’s different about them to get that kind of multiple? Yeah, you know, and then we can start looking at those factors in the business and it’s, you know, and there’s a lot of them and the factors that we look at that can help you get out of that range?
Well, you know, a common one is growth or size. You know, and, you know, if you can, you know, if you’re a $10 million business with, you know, this is very broad The thing with a 2 million in cash flow, which is a 20% return, yeah, annual return your, you know, you can you probably looking at a four to 5x, multiple, you know, this is an example, you know, but if we can get to 20 25 million in revenue on a for, you know, your, your size premium comes into effect, and you might get a six or seven mold. Yeah, it’s just, yeah, yeah. So that’s that guy that has to, you’ve got to really look at that, too. And, and there’s, yeah, we’ve been, we’ve got
Damon Pistulka 10:49
some examples here in the end that we’re going to add later on the real look at but really understanding the multiple range for your industry, because they should be given you some data on this and look at the median. And we’ve shown that before, we’re going to show it again, on an example of where your ranges on multiples because in in your industry, you should be able to say, okay, at the low end, my multiple might be a 1x, or in my high end, it might be a 10x or whatever, and see where you fit in that range to really understand. Mark has a question, how does predictability play into the multiple calculation? That’s a good one? Because it does.
Andrew Cross 11:25
Yeah, absolutely. Yeah. Very, very good question. Um, you know, that’s, you know, recurring revenue, you know, that’s most important thing. And, you know, you have to, you know, so if you’re doing actual valuations, you know, we’re going to look back at least five years, sometimes you can do it with three years, but five years of your historical data, and, you know, the, you’ve got to show that predictability there. And that, that supports that. So you know, value goes up and down, depending on how stable that is.
You know, and and also value can go up to, if there’s a growth trend that looks sustainable and repeatable goods. Yeah, and, and, you know, those are factors that we, you know, there’s mathematical things you can do to discount those, you know, and understand mathematically how the numbers work that will discount that predictability, if it is predictable, and, and then there are others, just really just understanding that the customers now the market stability, you know, outside factors like that, well, management
Damon Pistulka 12:30
experience, we’ll go through some of those as well. But you know, when we talk about this, the the current that that, you know, we always start with the number, then we dig into the current value multiples, and then the multiple range, we understand that. And then to go back
Andrew Cross 12:44
to go back to the multiple thing again, too. And I do want to re emphasize this is this kind of scale is only for small privately held businesses, or medium sized businesses. Not this is not publicly traded companies. And it gives somebody an idea about what that is. Currently, in our of our GDP, 51% of our GDP comes from a majority of it comes from small, medium businesses, the lower middle market, whereas 49% is that the big publicly traded companies and their multiples are way higher than these. That’s why everybody wants to go public.
Damon Pistulka 13:27
Yeah, it does. And as we go through the multiple range, and we talk about another key piece of business information, or business valuation information that’s often overlooked are the industry benchmarks and how your company compares to industry benchmarks. So Andrew, how does this really affect your your valuation? And how can you use this to improve your value over time?
Andrew Cross 13:55
Yeah, um, oh, this is great information to add. And one of the, because the information that you get on the actual transactions happening is very difficult to attain. And the benchmarking data is is is something you can get fairly readily big, and mostly because of the banks.
The lenders are compiling this kind of data constantly. And they use it as a risk management tool, you know, whether they give a loan to a person, whether they understand some of their, you know, their assets are in trouble. They look at benchmarks and you can identify that. In the other hand, you can also use benchmarking to see kind of where you land within your peers and see where you’re out of line or where they’re in you know, you can use it to identify opportunities to improve your processes to and some of them are not things you can fix necessarily.
Damon Pistulka 14:53
Yeah, and we’re going to talk about that later and show an example and this is what we’re going through is are the same and then we’re going to show examples of how we’ve helped clients or how you can use it in your business to really start measuring some of these things. And then ultimately, the other piece that I think is really overlooked in the valuation are the business risks that you, you identify as you go through the valuation process. So, Andrew, when you look at that, and we’re talking about business risks, what are some of the the things that, you know, you really think that people overlook in this part of the business valuation?
Andrew Cross 15:37
Yeah, I mean, business risk is everything. And I think that a business owner maybe overlooks this a lot, they’re not thinking about that to you. So they have to put your empathy hat here and really understand what it’s like on the other side of the table, where the buyers coming in, to buy the business is looking at all the risk factors, and whether that all adds up to whether this is a goal or a no goal, and also translates back into, you know, what am I willing to pay for this? Yeah.
And but risk, business owners don’t necessarily think about risk because they’re, they’ve took the risk, they’ve been doing it for so long, they took the risk from day one, you know, so it’s, it’s there, it’s been in the room, it’s not like the elephant in the room, you know, they’ve got all their assets tied up into their, their business, they’ve been doing it for 20 years, they borrowed money from friends and family to build it up. If paid that off, you know, they got competitors coming in all the time. They, you know, they all these, all these things that for them, it’s just standard operating,
Damon Pistulka 16:39
doing just doing business, you’re right, and we looked at the business risks, you know, there’s really the customer risk, you know, that concentration we talked about before, the product or service risks, you know, are you a one trick pony, and I always like this tickle me, Elmo, I remember that came out, you know, as the biggest thing ever, because my kids were small, that shows the age and my kids too.
But you know, if you only have one product, and that product goes out of favor, your business kind of goes to heck, or you have one service, you know, and these are things that people look overlook, because the valuation might say that your business is worth $10 million. But if you have one customer that’s giving you $10 million, or one cert product that’s giving you that $10 million, it’s much different risk profile than than something that’s diversified and has Predictable Revenue, as Mark says.
Andrew Cross 17:34
Yeah, especially like, this is a real situation, you know, that we deal with all the time is the customer, too, is is also 75 years old, and their golf partners. Yeah, with this customer, and they’re both retired.
Damon Pistulka 17:51
Yes, that’s a great, that’s a great customer risk that that actually we’re talking about a minute, when we start to look at how do we track and improve these things. But that is, uh, that I can’t tell you, you know, how many times we run into that, Andrew, because you’ve got someone that’s been very successful in business and doing business with other people in their age group, and the buyer comes in, or someone comes in and looks at, you know, they’re going to give this business to your kid, they’re going to try to sell it to someone else, and they look at all the customers they go, every one of your relationships are going to be gone in the next five years. And that’s a big deal to them.
So it’s, you know, your, your customer, where’s your relationship? And all these things play in? And then when we look at this, again, the same thing in your management team? Do you have a vibrant team? Do you have a team that’s going to go on to be there? well beyond the the transition?
Andrew Cross 18:47
Well, that this is Yeah, this is legacy. Yeah. You know, this is what people talk about, if you build a legacy, not because you want to do that, because you’re altruistic or everything else, you know, but if you want to sell a business, I mean, it’s obviously attractive, that a company can can run, you know, you build something that can run, anybody can plug and play.
This is the turnkey term that everybody floats out there. It’s a truly turnkey. This is your asset, your management team, the people who do all the work for you, your integrators, your, your leadership teams, you know, and and this is the second you know, the first thing, they’re going to look at financials and, you know, buyer is going to come in and does it make sense financially, mathematically, you know, and then the next step is, you know, let’s look at the people
Damon Pistulka 19:42
yeah, they’re gonna see Yeah, exactly. You got to look at the profitability then it’s gonna be the customers and the team and suppliers and other things like that. And that’s why we’re spending time on the risk because the, these risks, even the industry risks, when I look at the industries, I mean, with us at the you know, being In the Northwest being around aerospace like we are, man, if you were tied up 100% into commercial aerospace, in the end of 2019,
and you hit 2020 there’s some serious industry risks, the oil and gas industry coming in that same timeframe, you know, industry risk, if you’re not, if you’re all concentrated in one industry, it’s very detrimental to your business valuation and the the long term legacy of your business.
Andrew Cross 20:29
Yeah, it’s one of the things is why, you know, in this case, too, because all this really does. So does it make your company have no value? No, not necessarily. I mean, lots of people are making lots and lots of money in the auto industry, which goes up and down or in the oil, the gas, which goes really up and down. But as a buyer, you know, there’s a risk factor that you have to analyze. So you need to need to have, you have to have resources to be able to survive the going down. So you have to bring that going in, which of course, in turn, lowers your value, necessarily, yeah, that’s not a bad thing. It just means this is where you’re at. Yeah, I understand that
Damon Pistulka 21:11
and you make a good point. Andrew, there are deals done every day in volatile industries. And it’s just how good can how good can you be relative to your industry? How good can you survive the downturns and if you can prove that over time any of these risks can be mitigated if you show the performance through the bad times.
So as we’re going forward here, now that you’ve got this information you’ve got evaluation and you what how can you really transfer this information or this knowledge into value and this is where I think it becomes fun because we’re just do what we’re doing here just covering what we’ve what many people know their risk and business but when we look and why we talk about risk so much because it can kill your exit selling or succeeding if there’s too much risk as Andrew said, you’ve been able to build and mitigate that the risk to yourself as an owner over years and years and years the buyer has to come in and assume all that risk and this is often where deals are killed correct Andrew
Andrew Cross 22:20
well yeah and not only that you get this has got to put the empathy had a feel what is it like to be the buyer of this side you know, there you’re you’ve already built equity in the business even even though a lot of business owners don’t necessarily know that they know what cash flows, they know it earns money, but they actually have built equity here but the buyers are coming in levering themselves out so that’s risk they’re taking out a huge amount of risk and they’re not the only ones involved in the purchase the lenders and we know that lenders are very risk averse yeah yep.
And they’re very good at identifying risks yeah it in so what you know and getting them to go on a deal is is a difficult task you bet on this you know, you’re starting less than zero and you got to within a reasonable amount of time you’ve got to continue the business grow it enough enhance it to to you know, pay down that debt service and build equity.
Damon Pistulka 23:17
Yeah, yeah. So how do you really use this information so you’re gonna identify these risks in the business valuation step they’re gonna you know, they’re gonna talk about these if you’re using a good valuation source, you know, there’s lots of sources but using a good valuation source they’re going to talk about these risks are going to talk about your your customer diversity, industry risks are gonna, this is all going to be detailed out a bit in your in your valuation.
So really, it comes down to understand understanding, tracking where you’re at with these things, and improving these risk. So when you look at customer diversity, Andrew, that That, to me, always comes up comes up because it is almost the second question after when people start diligences you know, what’s your, where do your sales come from? Yeah, and
Andrew Cross 24:08
yeah, I think that’s number three on the list. Yeah, start with a look at the numbers. They look at the people you know, they want to talk to the management first and the next one is what what what’s your customers look like? You bet and where are we in the market?
And, and, you know, diversity is important but and this is you know, one of the things that you know, you can change you know, if you understand your numbers, you understand how that affects value. You can you can jump in there and you could add new clients, you can, you know, vertically integrate, get a new product line. You know, these are things that you should be doing anyways, if you understand that you’re trying to build a legacy type business. Yeah.
Damon Pistulka 24:52
So if you look at customer diversity and you’re tracking this a simple way to track it is just to go okay. What What’s my biggest customer and how much my total revenue they have? And that’s that’s a simple to do now Andrew what is a reasonable number for people to look at when you look at that is that you know 30% 50% 70% you know, for your biggest customer what really do you think what they
Andrew Cross 25:19
are going to look at is the buyer is going to look at or evaluators gonna look at a list of your customers and what percentage of your sales are attributed to that customer in the last year.
So if they’re if they’re looking at recent yes you know, this is not over a 10 year period if I repeat it’s really about what’s happening in the past year and if you have one client it’s 40% of your revenue you know what the question is it this is how you determine where your risk is. What if you lose that customer tomorrow? You got a 40 drop Do you even survive? And you know, especially if you just borrow You know, you’re you’re on the you know, on the hook for $10 million that you borrow to buy this business
Damon Pistulka 26:03
Yeah, that’s it that’s a great point and magic just had a question about that how important is it not to have majority of your revenue coming from a large client or two and you just explain what it is from the from the perspective of somebody coming in that and I’m borrowing a bunch of money and I’m investing a bunch of my own money into it into a business Why buy it they really want to see what it’s like if if one or more of those go away and see that your business is going to be able to survive because it can as when we were talking to Thomas Campbell on on buying businesses of a few episodes ago he really explained it well he said it can ruin my life
Andrew Cross 26:43
yeah, it certainly can and it you know I think the way to understand it and identify is what impact will it have on their cash flow if you if you lost customer number one customer or not, you know number two if you lost customer number one and it’s more than 10% of your revenue Can you survive that now and not only that then think about Could I survive it or for the person who’s buying my company survive it so yeah, it’s understanding is that you could probably it’s a body blow you lost that customer
but you already have enough equity in the company you got access to credit to ride it out you may lose for a few more months and you’ll be putting resources into replacing that customer very quickly you know it No but what you should be doing is not waiting till that happens to go and get you know a more diverse customer base if you see that that’s gonna you know if I lose that customer I need to right now I need to be working hard to make him less of my revenue stream
Damon Pistulka 27:45
Yeah, yeah and that’s it’s a great point that you brought up there Andrew and I’m just gonna get a little more detail into this really quickly. The existing owner today can survive that customer going away because they’re not paying the debt the debt payments on on the loan for buying that business. So as you said in there and you said it quickly, but this is really key you have to be able to as the new owner of the business survive losing that major customer and that includes an additional debt payment that you’re probably not doing right now.
Andrew Cross 28:24
Yeah, you don’t think about that right? Those are the hurdles the new buyer you do need to think about that because that’s part of your evaluation yeah when you look at customer diverse yet and you know at the end of day two I mean there’s it this trickles down and more and more devaluation too because if you if you have if you’re too dense in your customer spread then the banks aren’t going to lend you money that leaves you I’ll only be able to sell your business this cash buyer which limits your market and lowers your
Damon Pistulka 29:00
your value Yeah, this just this is one of the biggest ones and and Pete talked about it here in the comments too He said he said something they learned their business that was so important no single customer makes up 10% of the customer company’s revenue now and as right because a lot of companies have you know some have 70 80% and that’s that’s fine as you said Andrew you could survive that maybe as the current owner but when you’re paying a loan off as a buyer of a business or the next generation of the business it’s it could kill it
Andrew Cross 29:35
Yeah, there’s exceptions you know, especially especially in aerospace or you know, if your supplier to a big yet it is like that, which is you know those conglomerates or if you’re a contractor for military or government contractor, government’s the best gun, you know, customer in the world. Yeah. But you know, the banks understand, okay, that’s fine. 90% of my Like clients is to the DLD sales.
But you know, because they’ve got that they’ll they’ll they don’t get they don’t have high margin, but they get paid. They’re good customers, and they don’t generally, you know, remove their, their supply base. So yeah, well, so it’s a little less there. But man, those companies who and I’ve worked with them directly and David and I both have it, especially in aerospace where that we were specifically working with these companies to help them diversify away from, you know, Boeing worker, those big primes, and it’s a very difficult thing to do.
Damon Pistulka 30:36
Yep. And Pete’s got another, he’s looking at an acquisition right now, where, where competitors got 60 cents percent of their business with one customer. And yeah, you’re not going to be able to pay much of a multiple for that, or sometimes even we’ve seen that we go in is that part of the business is carved out from the rest of the business. And that’s paid more on how much of that business remains over time.
And the value is tied to that there’s lots of different ways, but it sure hamstrings the person trying to sell or succeed the business, that cut if that customer diversity is not there. So I’m gonna run through these other things quick, because each one of these things just like the customer diversity, come up with a measure in your business for it.
Understand that and understand how you’re improving these just the same thing with products and services, diversify revenue from products and services, or channels of sales as much as you can. And looking at your management team, really understand is that management team ready for the next next 10 years? And are they doing the appropriate things, but come up with the measures really to understand, am I making the changes to make my these things, these risks go better? Because in the end, as you improve these risks, you improve the scalability of your company and the value of your company overall.
Andrew Cross 32:03
Yeah, well, I think one of the things too, is you can increase your value just by acknowledging that you have a problem. Yeah. Right. So if you do have a diversity, customer diversity problem, that’s fine. You know, that’s what it is. But the other thing is, is to have a strategy behind that to mitigate that risk. If you can, you present that to a valuation or to a buyer. And, you know, let, for example, this is a pretty simple fix, we just need to add two more clients, and then all that that customer mix will flatten out. And here’s our sales team, here’s our sales strategy, you know, all that’s got to be on paper, it’s processed, and there’s people working on it.
And these are people who are good at experienced at doing this. You can pull your even without eliminating the diversity problem, customer diversity problem, you could probably get a buyer to go, that’s acceptable, you know, because I can see, they know they have problem and they’re working on it. And then I believe in the team that’s in the strategy, they’re going to get it done. Yeah. So yeah, that little step will help. So again, is this adding a couple customers?
Damon Pistulka 33:15
Yeah. And again, this, these risks can kill your exit, and you gotta gotta be able to mitigate them, and show that you understand them. And you’re working on them. For that, to make that successful.
Andrew Cross 33:29
And I think one of the things is to is, you know, maybe this sounds hard. But you know, if my experiences when I go into companies like this to where everybody’s looking for what’s happened most currently, in the last 12 months, this is really important to understand. And so if you get to work on that, now, you want to sell your business in the next couple of years, you can, if you if you can accomplish some of these goals on the strategy, you’re going to help your value a lot. I mean, it can really jump up and and help the business gets sold.
Damon Pistulka 34:02
Andrew Cross 34:06
But I think I worked with a company before there was about the, you know, three or 4 billion range right after 911 happened. And the owner, you know, doubled down in a recession. And he was smart about it. He’s putting money into sales and marketing, and grew that company up and it one of the things I’ve learned from that experience was, you know, that size company, it doesn’t really take that much.
It’s just elbow grease. Yeah, we don’t really go in and because if we really put our mind to it, you know, we can have a big effect because we’re not that big a company. Yeah, we can go to three to 10 million with a couple different customers, and he was at 10 to 15 million in top line revenue in a matter of 15 months. Yeah, that’s what you can do. It’s harder to do that in a big company. But
Damon Pistulka 34:49
yeah, and that’s and that’s why honestly that the the the majority of the privately owned companies are rare. This is very much in their control and Their ability to do this.
And so when we look at the other factors in this, and we talked plenty about risk, and you need to understand and we need to be mitigating, but when it comes down to really tracking, improving value, there’s one thing that I think that you got the valuation and using this valuation information, one of the things that that we really discovered is add the enterprise value line to your financials, if you if you start to do this, and this is just an excerpt from one of the one of the client things that we’ve worked with before is you look at this is a rolling 12 month adjusted and we can people want to talk about details on this, but this is a month a given month.
And you you get the multiple that you’ve got on EBIT up from your valuation and you go Okay, my rolling 12 months is x. Now this is my I get my multiple from my valuation. This is my my approximate enterprise value. So Andrew, how does this really help to focus people and keep the attention on on the the terminal exit of the business?
Andrew Cross 36:17
Yeah, and I think this is one of the first things we put in place, when we start working with a client. And again, this is a monthly measure every month, you’re looking at what did I do now and what I do for the last 12 months, and the reason we do this is how did we perform over you know, this 12 month period? Because that’s because this is what the buyers look at, you know, you don’t in this is this value, if you start tracking it, you’re going to be surprised how much it changes up and down over time. And you really want to see what that trend is right? As the buyers are going to come in and go, I’m looking at your trailing 12 months.
Okay, why are they looking at that I’ve been making, you know, a million dollars in EBITDA for 10 years in a row. They don’t care about what you did 10 years in a row. It’s what have you done for me lately, and and it’s this is the central part of our talk and negotiation, we start dealing with getting an actual offer on businesses that 12 month period and good or bad. And you know, it takes time to sell a business, you know, so you’re talking, you know, four or five, six months with diligence and everything that needs to be done. And you’re able to can drop, you’re rolling 12 months, but from one month to another if it drops, deals debt.
Damon Pistulka 37:35
Yeah, that’s that’s really, really a great a great point there, Andrew. And and this is where you want to start doing this early and get used to it and get under the under the get used to making sure that that value, that value continues to inch this way upward as as aggressively as possible. And Mark’s got a good question. He said, What’s the seller going to probe to determine if an upward trajectory in sales, or EBITDA in the past 12 months is sustainable or repeatable? It’s an awesome question mark.
And this is going to be one of the future things that we’re going to go over. Because when you go from the history, you go forward, and we really have to look. And this is where Andrew gets really excited. And I do too, because if we’ve taken the time to lay out an annual budget, and where we’re going to get to those sales, not just putting numbers on a piece of paper, but go to the level of our sales are going to increase in this product, or this service in this channel. And then we’re tracking that throughout the 12 minute throughout the the periods as we go forward.
What we’ve given is we’ve laid the foundation in historical data showing that we said we’re going to sell a million dollars to to this place, and and we have, and then you turn around and you go, okay, we’ve shown that we’re going to do what we said in the past, and this is where we’re going in the future. And then Andrew, how does that help in the sale of a business when you have that information as Mark saying?
Andrew Cross 39:14
Yeah, and I think you know, one of the things that, you know, we say in this business is, you know, the forward you to look forward to you say you were gonna that’s potential, we’re going to you know, we’re sitting at 6 million in trailing 12 month revenue right now. And by the year end, we’re going to be at at 10 million buyers will buy a business for potential, but they don’t pay for it. However, if you have, you can flip that paradigm.
The buyers are going to value the business today where it’s valued today and try to lock in that number. Like I said, just time goes on that can go up or down. But if you have a rock if you have a really well written strategy and have people behind it, the discipline haunted by the historical data going forward. And you’re actually tracking it monthly performance. Basically, you’re proving it out. Yeah.
And if a buyer sees that growth trend, your strategy that’s it’s locked and disciplined being proven livering on it, then we can start to say value is in the projections, not in what you did today. And that’s the key to and then your multiple men, you know, where it was a three to 4x to become a six to 7x. This is a, this is a quantum jump. This is adding zeros. Yeah, yeah, it was by Fred Brad Smith likes to say, yeah, so we have a short period of time. That’s within months.
Damon Pistulka 40:43
Yeah. Yeah, it is. It is. And Pete’s got another good question. Are we finding that COVID related revenue drops is reasonable for potential buyers? Especially if the company is showing a rebound? And I think, yeah, we we have a couple clients that had severe COVID rebounds, or, you know, drops and then rebounds because they had basically shattered shut things down and start again. And correct me if I’m wrong, Andrew, but buyers and everybody else is looked at those, like a blip like a one time thing, and we don’t consider it and
Andrew Cross 41:15
it depends, you know, there are factors and COVID is an event that happened, but you’ll notice on here we call rolling 12 months adjusted. Yeah, the adjustment part is, you know, we ever, you know, there’s two things that happen, you either had a good year through COVID, or you had a bad year. You know, the only question on it is we adjust that out, we don’t we go with more about what are our performance was on that, but over the last few years, so we may adjust out the negative impacts that that COVID had on your business, because we consider it an anomaly. Okay.
However, you just have to be able to prove that Yeah. Yeah. You know, is it really an anomaly? Are you still is your belief so strong enough to suggest it? Is things going to get back to normal? Yeah, you know, evaluator will determine that right? So if they feel like, you know, this company ended and you look at the get the projections, yep, see where you’re gonna be, but not a big impact on today’s valuation. Again, like I said, moving target. Yeah.
Damon Pistulka 42:20
And, and one more thing that we do often is as we’re working with clients, add those industry benchmarks to your financials, because no unwary compared to the industry really helps to, it helps us substantiate value it also gives makes you when you’re looking at the medians and where values tend, if you’re written using the right industry benchmarks, it can help you demand a higher value than the average for your for your business.
Now, last but not least, and we’re going to run through this one fairly quickly, is there are value curves, right, there’s value curves, like with everything, and as your profitability goes up, as you move to the right, your value multiple goes up. And there’s some where the steep part of the curve is, is typically where if you can get into that steep part of the curve, as you go, left to right from that first red line to the right a little bit, the value multiple can change a lot.
This is where you get what Andrew talked about is the the double effect of that is my profitability goes up but also my multiple might go from 3x by total ability to 4x my total profitability, or five or six in a very short amount of profitability increase. And that’s, that’s where knowing where you’re at, and where your value multiple is, that is key in really planning your exit, because you don’t want to be up here past the second red line, because the buyer of your business is not going to be able to realize that as well. They want some of this value increased So get yourself up this a ways, but leave them plenty of room as well.
Andrew Cross 44:05
Yeah, this is, um, this is the beauty of being in a small, medium, lower middle market business because you know, this curve does shoot up like that, and you can do something about it. This is not impossible. Yeah. You have that kind of effect. The other the other thing to think about, too is we talked a lot about this about organic growth. And, you know, the other thing is, you know, just because you’re a small business doesn’t mean you can’t operate it like it’s a big business. Yeah.
And, and learn from what the big boys do, but grow through acquisition isn’t probably something that, you know, a $10 million business, you know, a top line with 20 employees is thinking about but you know, a smart owner can pick up maybe an alien competitor or, you know, somebody who’s in a synergistic business in and actually you know, if you understand that and the financial side of it, you’re paying for that and You know, just being able to cover the debt service.
Yeah, you know, adding that revenue line to your top diversifying your customer base, eliminating all those risks, cherry picking some of their management team, you know, you could, you could have a major impact on that career. At that point, you can do that relatively quickly, within less than a year.
Damon Pistulka 45:22
And I’m going to wrap up with this is this is an example that we’ve shown before, you know, if you look at the median is three point something x on the EBITDA, it up to 10.3x. And it starts from something that’s a million dollars in revenue, up to 16 million in revenue.
So you know, someone in here that can go, say they combine some companies and get this thing into an eight to $10 million revenue, they could potentially go from, you know, three to 5x, into the seven to 8x. where, you know, you’re talking to three multiples of profitability on that, that revenue. And if that’s a few million dollars, that’s a significant increase in your overall value without adding any additional profitability. And I mean, growing sales, it’s really, as you’re talking about combining companies together to increase the value just gives you that that multiple ball.
Andrew Cross 46:16
Yeah, yeah, as you can see here, too, these are actual This is a table with the actual transactions. Yes. So let people know that. That’s nine transactions, that’s nine companies got sold on those sales dates between that time period. That’s the size of the company. And you can see that there’s court quarters up for the 10th percentile up to the 90th percentile. And watching how those multiples move into the percentiles again, we talked about that that’s that’s actual real data that to me, the real is the baseline for valuation is right there. Because this is actual money changing hands for businesses. Yeah.
Damon Pistulka 46:53
Yep. So wrapping up, we’re going to this is that actually, that was the last slide in the presentation. So we did this pretty well. It took us a couple minutes longer than we want it. But thanks so much for being here, everyone. We appreciate your time, we’re going to drop back off, we’re going to drop off the live broadcast we’re going to go back to to the stream yard. I want to just say JD Thanks for the question. I will get back to that question on to you individually on that on on LinkedIn live there. And we’re gonna go back to remote here for a moment and say goodbye to everyone and go from there. So thanks so much.