Monday, April 25, 2011

Feels good to help the small guy (& gal) price their business

Great news: Just heard from a client that they sold their pool maintenance and repair business and the Valuation work I did for them made a big difference!

They owned the business for eight years and made a good living from it along the way. But the really good news to me was that after I did a Valuation for them, they used the price we came up with and found a willing Buyer to pay them that price. They earned over 63% from the price they paid for the business. We can do a simple calculation to see that they earned almost 8% simple interest on their investment per year on the Asset called "the pool service business". And let's not forget that the general economy had gone through a major recession in the same period of time.

In fact, real US GDP (in constant 2000 dollars) as reported by the US Dept. of Commerce was:
Q1 2002: $11.47B
Q4 2010: $13.38B
An increase of $1.91B or 17% growth in real GDP from 2002-2010 (or 2.13% simple interest/yr.)

It would have been so easy as the Seller to just fall into the general sentiment of the times saying, "These are tough economic times", and "We'd just better get what we can and get out!". That would have been a great disservice because in fact it was a very healthy business and they deserved to be compensated by the prospective Buyer for the opportunity they set up for that next person to make money. I think of it as selling a money printing press; all the next person has to do is show up and press "Start" and it makes money for them.

So while the economy flailed a bit, the pool repair business increased in value over 63% in the same period. And, the owners got paid to work in the business along the way. So, what can we draw from this info?

1. The owners bought an undervalued business. (Maybe)
2. The owners increased the value of the business by adding customers and services. (True)
3. The owners were very smart to get a proper Valuation for their business so that they were informed Sellers when they went to market it through a Business Broker. (Absolutely true! And the owners agree.)

As an aside, Business Brokers, while they do provide a good platform for buyers and sellers of small to medium-sized businesses, not all of them offer complete Valuation services. Rather, they often use quickie multiples of Gross or Net Income (3x) across the board when pricing businesses for sale. This might under- or over-value many businesses, often leaving money on the table at selling and negotiation time.

True valuations take time, energy and must include good financial records. If the historical financial and accounting records (Profit & Loss Statements and Balance Sheets) are not in good order (and this is often the case for small and medium-sized businesses) the first job is to clean them up. Only with clean financial statements can the Valuation work be done well. So, a business owner who wants a Valuation done must be ready to potentially pay for two jobs:
1. Financial clean-up; and
2. Valuation.

In the end though it is well worth the expense. The total cost of the clean up and Valuation for this business? $3,000. Money they easily made up in the proper pricing of the business at sale time.

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