Increase the value of your company

I met with a customer about two weeks ago to discuss the shop’s transition goals. Jeff is a second generation owner and his wife Kathy is a retired teacher not involved in the business. Her son has worked in the business and her daughter has just returned to her small town to join the business. Jeff and Kathy want to keep the business in the family and community, and while Jeff has no definite plans to leave anytime soon, he would like the option within the next five to seven years.

Click here to read more

What are the assets?

So our next step in this process was to identify what assets are available to them to allow them freedom while maintaining their lifestyle. Jeff currently takes in about $175,000 in salary and payouts, and Kathy has her teacher’s pension. They have about $1 million in personal wealth, so assuming a 4% safe payout ratio using retirement income planning strategies, they would have $40,000 of Jeff’s income that we could replace.

In my previous article, “Planning a Buyout,” I mentioned the term “asset gap.” This is the difference between the value of the financial resources business owners need at their exits to meet their post-exit income goals and the value of their current financial resources, which include the net proceeds from the businesses’ sales. I had to address that with Jeff and Kathy.

Me: “So, Jeff and Kathy, we need to figure out how to raise the additional $135,000 in Jeff’s income so you can maintain your lifestyle. Have you determined how much the deal is worth?”

Jeff: “Oh, I have a good idea.”

Me: “What is that?”

Jeff: “I’ve been told I can do five to ten times that.”

Me: “Multiples of what? Revenue? Ebitda? And what can you get, five or ten times?”

Jeff: “I’m not sure.”

Jeff fell into the trap many shopkeepers do – estimating the value of the business based on incomplete or inaccurate information. And more often than not, they overestimate their companies, which can make them feel overly confident about their future.

company valuation

In order to properly assess their position, we need to conduct a company valuation to get a more accurate idea of ​​what the company is worth. Many shop owners hesitate because they know the cost of a certified opinion value can be high. However, this is not required until an owner either wishes to sell to a third party or requires reduced value for sale to a child. There are also cheaper options such as B. A valuation by a company broker or software-generated valuations that give you a fairly accurate estimate of the value of the company.

So we decided to do a software valuation and found that the company was worth about $5 million. Jeff was excited!

Jeff: “If we use your 4% payout rate, that would give me $200,000 in extra income!”

Me: “Well, if that’s what we get from a sale, yes. However, taxes still apply. You have to pay 20% on capital gains. That leaves us with $4 million.”

Jeff: “Okay, but at your 4%, that still makes us $160,000 a year.”

Me: “Yes, but if you sell to third parties there will be additional fees such as B. Brokerage fees, attorney fees and other transaction fees. And even if you sell to your kids you still have your royalties – plus you’re selling to them at a reduced value so we can probably expect another 15% to 30% off. That’s now at best $3.4 million net. Then we have to take into account the personal expenses you incur through the business that we have not included in your personal income. We have a deficit.”

Needless to say, Jeff and Kathy felt a little down after this conversation. However, since they are taking their time, there are many things we can do to add value to the company and narrow their wealth gap. These are called “value drivers” and can add value to a third-party buyer or cash flow that can be used to help the children buy the business. While there are many value drivers that can be determined based on the particular market your business is in, I want to highlight a few that are specific to the collision industry.

Stable and motivated management

Having a top notch management team is the surest way to become a top notch shop. Skilled management is what buyers want when owners sell their business, or what your children need to pass the business on to the next generation. So if you put together the best possible management team, you will be more likely to get the best for your business. Both technical and commercial training are essential. Also, financial incentives to stay, such as “stay bonuses” or “golden handcuffs” plans, reward them for staying and give them something to lose if they leave. In many cases, we’ve set performance standards for company-generated flow that don’t come out of your pocket.

operating systems

Establishing and documenting standard procedures and systems demonstrates to a buyer that a business can remain profitable after the sale. These include staff recruitment; human resources management; new customer identification; application and acquisition; inventory and fixed asset controls; defined price structures; Customer, supplier and employee communication; and business performance reporting, to name a few. As part of our team, we employ some of the best industry consultants to help our customers improve these systems.

Sustainable Revenue

Buyers are looking for recurring revenue streams that will last despite economic fluctuations. Luckily, for the accident industry at least, people will continue to demolish cars, but as more repair shops move away from direct repair programs (DRPs), it’s important to create streams that are resistant to competition on price alone. Again, there are great industry experts you can consult to help you with this.

A competitive advantage

A competitive advantage is the service you provide that either performs better or cheaper than a competitor over time. That’s why customers go to a particular store and not its competitors. In today’s collision industry it is imperative that businesses look for ways to differentiate themselves and this increases the likelihood that buyers will pay top dollar for your business or that your insiders or children will want to continue your legacy.

Proven growth strategy

Even if you anticipate selling, retiring, or transforming your business tomorrow, it makes sense to create a plan that describes future growth and how that growth will be achieved based on industry dynamics: labor costs , increased demand for your business’ services, differentiation, being in a highly standardized industry, growth through acquisition, etc. Buyers will give more credence to a current growth plan if your business has met the goals set in previous plans.

Financial perspective and controls

Effective financial forecasting and controls help answer the questions, “How is the store performing?” and “What is the store’s future perspective?” Questions like these provide the financial foundation for developing a plan to grow the business at the pace necessary to enable you to opt out on your terms.

Successful acquisition strategy

Where appropriate, a demonstrated and successful strategy of acquiring competitors or “add-on” businesses can go a long way in demonstrating a company’s commitment to growth.

Good cash flow

Ultimately, all value drivers contribute to increasing cash flow. Businesses with a history of increasing cash flow are significantly more valuable than those with stagnant or declining cash flow. Cash flow is usually the primary determinant of a buyer’s bid or the basis for an insider or child to begin purchasing property.

summary

Value drivers are mechanisms that you use to create the greatest possible increase in your company’s value. The things I mentioned above are just some of the value drivers you can use to add value to the business. Each shop will have different drivers depending on their goals, markets, and overall goals, but what is certain is this: increasing the value of your business will narrow the wealth gap you may have and put you in a better position to achieve the one you want lifestyle to live .

Of course, unexpected events and threats can always arise, but we’ll save that discussion for later. In the meantime, feel free to contact us at highliftfinancial.com to explore for yourself.



source

Leave a Reply

Your email address will not be published. Required fields are marked *