How To Sell Your Business Ep 351

Alex from Mosi, owner of acquisition.com, shares his insights on business growth, capital markets, and the intricacies of selling a business. He emphasizes the importance of understanding how to value a company and the various exit strategies available to entrepreneurs. Alex explains that business valuation often hinges on EBITDA multiples, which change depending on the company's earnings. He also delves into the mechanics of private equity deals, illustrating how businesses can be acquired and scaled for substantial returns. Throughout the discussion, Alex unpacks the components of an offer—cash, seller financing, earnouts, and rollover equity—and the implications of each. His expertise is aimed at helping entrepreneurs avoid financial pitfalls and scale their businesses successfully, with a particular focus on those aiming to grow from seven to nine figures.

• Entrepreneurs progress through various revenue milestones, necessitating a shift in control and decision-making frameworks.
• Alex's friend questioned the logic behind a large monetary offer for one of their companies, revealing a lack of understanding of capital markets.
• Entrepreneurs must learn to relinquish control and gain new decision-making frameworks as their businesses grow.

"And what it showed is that he didn't really understand capital markets. And so, as an aside, I think that one of the most important things that happens in the progression of entrepreneurs from zero to 1,000,001 to 1,000,0010 to 30,000,030 to 50, 50 to 100, is that you relinquish control and you gain new decision making, new frameworks to think with."

This quote emphasizes the importance of understanding capital markets and the need for entrepreneurs to adapt their approach to decision-making as their business scales.

• Alex from Mosi owns acquisition.com, a portfolio of companies with $85 million annual revenue.
• The channel's mission is to help viewers avoid financial failure.

"And so for us, if you don't know who I am, is Alex from Mosi. I own acquisition.com. We're a portfolio of companies do about $85 million a year. And the reason I make this channel is because a lot of people are broke, and I do not want you, Mosey Nation, to be one of them."

The quote introduces Alex and his business credentials, as well as the purpose behind creating content: to educate and prevent financial struggles among his audience.

• There are four primary methods to exit a business: selling, closing, giving away, or taking out debt.
• Each method represents a different way of shifting risk away from the entrepreneur.
• Detailed discussion on these methods is reserved for future content.

"And so there are four ways that you can exit a company. But you can sell it, you can close it, you can give it away, or you can take out debt."

This quote lists the four exit strategies for a business, highlighting the various options an entrepreneur has to move on from their company.

• Selling a small business with less than $1 million in profit can be challenging due to perceived risk and unsophisticated parties involved.
• Businesses with over $10 million in sales may attract institutional investors.
• A significant benchmark for business deals is a $5 million profit, which changes the average trading price multiple.
• There are many factors influencing business valuation, with a large variance around the average multiples.
• Only a small percentage of businesses that want to be sold actually complete a sale.

"If you're trying to sell a small business that's doing less than a million dollars a year in profit, it's going to be very difficult to sell that because it's too risky. And you're going to be dealing with mom and pops and unsophisticated investors, and you're an unsophisticated seller. So it's just kind of the blind leading the blind."

This quote explains the difficulties in selling smaller businesses due to risk factors and the lack of sophistication in both buyers and sellers, which can hinder the sales process.

"Now, interestingly enough, kind of the magic number for kind of big money deals is $5 million. And I'm going to use that as a rough thing here, all right? If you're less than $5 million, the average trading price for those types of business is 3.75. If you're over 5 million, the average is 6.75."

Alex provides insights into the valuation metrics for businesses, indicating that a $5 million profit is a pivotal point that significantly affects the trading price multiple.

"But if you sell, and by the way, if you're curious about this, only 20% of companies that want to get purchased actually get purchased. And I think it's 30% of companies ever even enter that process."

The quote reveals the low success rate of businesses that seek to be sold, emphasizing the competitive and selective nature of business acquisitions.

• Alex begins to illustrate a business valuation example with a hypothetical company.
• The example company has a $20 million top line and a $5 million bottom line.
• The discussion is expected to delve into how such a business would be valued and potentially sold.

"So let's dive in. So let's say that we have a sample business here that's doing, let's say, shoot, let's say 20 million top line, and they're doing 5 million bottom line."

This quote sets the stage for a practical example of business valuation, using specific revenue and profit figures to demonstrate the concepts discussed.

• EBITDA stands for earnings before interest, tax, depreciation, and amortization.
• It is a measure often used to approximate a company's profitability, including adjustments.

"EBITDA, which is the fancy accounting term, which is earnings before interest, tax, depreciation, and amortization."

The quote explains what EBITDA represents and its relevance as a financial metric.

• Companies are often valued based on a multiple of their earnings or EBITDA.
• A multiple is applied to the earnings figure to determine the enterprise value.
• For example, a 5x multiple on a company with $5 million EBITDA results in a $25 million enterprise value.

"So let's say that this company gets an offer for five x, okay? So that would be a $25 million enterprise value."

This quote illustrates how a multiple is used to calculate the enterprise value of a business based on its earnings.

• Founders may not disclose their company's sale price due to poor financials.
• Non-Disclosure Agreements (NDAs) can also prevent sharing of sale details.
• Announcing a sale can sometimes materially affect the business.

"And most of the time, people don't want to share their numbers because most times it's because they're not good. And I want to kind of demystify this process for you."

The quote suggests that founders often keep sale figures private, potentially due to unimpressive financials.

• A business sale can include cash, seller financing, earnouts, and rollover equity.
• Cash is the immediate payment made to the seller.
• Seller financing is when the seller receives a debt note, to be paid from future business cash flows.
• Earnouts are additional payments based on future performance.
• Rollover equity is retaining a portion of the business to ensure a smooth transition.

"So there are four things that someone can do in breaking down this number. Alright, the first is you're going to have a component of cash, which is what everyone wants to talk about."

This quote introduces the different components that can make up a business sale agreement.

• An example of a real offer: $17 million in cash, $3 million in seller financing, $5 million in earnouts.
• Offers can change during negotiations, such as removing the need for seller financing.
• Offers are made to businesses that fit a financial institution's investment criteria.

"It was a $17 million cash offer with $3 million in seller financing, which is, if you're breaking down the percentages here, there was a $5 million earnout."

This quote provides a specific example of how a business sale offer might be structured.

• Financial institutions actively seek to place money and make deals.
• They approach businesses that are a good fit for their investment portfolio.
• Outbound methods are used to find businesses to acquire.

"They get paid to place money, they get paid to make deals. And so they actively reach out."

The quote explains that financial institutions have a vested interest in finding and acquiring businesses.

• Each component of a business sale (cash, seller financing, earnouts, rollover equity) has its pros and cons.
• The structure of the deal reflects the seller's confidence in the business's future.
• A larger rollover equity percentage may indicate strong belief in the company's potential.

"Now, the reason this is important is that it's worth understanding. Now, if you have something like this, right, and we're looking at a deal, there's obviously pros and cons to either of these things."

This quote emphasizes the importance of understanding the implications of different deal structures.

• Rollover equities and earn outs are considered when selling a business.
• The seller may continue to be involved post-sale, depending on the deal's structure.
• The level of involvement required from the seller can vary, impacting the attractiveness of the offer.
• Transition periods are common, allowing for a gradual change of control.

"It also assumes that you are confident in the person who's buying it, that they can perform the way that you would be performing."

This quote highlights the importance of trust in the buyer's ability to manage the business successfully post-acquisition.

"So, for example, if someone says, hey, I want to buy this, but you have to retain all the things that you're doing right now, then it's like, well, that's not nearly as interesting as someone who's saying, you don't have to do anything, you walk away tomorrow."

This quote contrasts different types of post-sale involvement for the seller, with some buyers requiring the seller to maintain their role, while others allow for a complete exit.

• The structure of a business deal affects the buyer's investment and potential return.
• A buyer's financial commitment can be lessened through rollover equity, earn outs, and seller financing.
• The actual cash required from the buyer can be a fraction of the business's selling price.

"Note that this rollover equity, they don't have to pay anything for. And this earn out. They don't have to pay anything for either. And the seller financing, there's no money that's coming out. So really the only thing they have to procure is the $17 million of cash."

This quote details how rollover equity, earn outs, and seller financing do not require immediate cash outlay, focusing the financial requirement on procuring a smaller portion of the purchase price in cash.

• Debt can be utilized to finance a significant portion of the acquisition cost.
• The buyer may only need to provide a portion of the purchase price in actual cash.

"Now, let's say that they get debt for two thirds debt, right. So that means that they're going to get $11 million of debt, which means they're going to take a loan, and then they're going to put roughly $6 million in cash."

This quote explains the use of debt financing, where two-thirds of the acquisition cost might be covered by debt, reducing the cash required from the buyer.

• The growth trajectory of a company affects the potential return on investment.
• Private equity firms typically hold investments for a period of five to seven years.

"So let's just say that's the growth of the company over year 12345. And typical private equity hold periods are five periods, five to seven, because it depends on how long it takes them to do a transaction, et cetera."

This quote outlines the expected growth of a company over a five-year period and the typical hold period for private equity investments.

• The return on investment is calculated by considering the business's growth and the potential increase in selling price.
• Private equity firms may increase the value of a business by improving its structure and profitability.

"So they're going to make 31 and a half million during this period of time. All right, but wait, there's more."

This quote begins the calculation of the total return over the investment period, highlighting that there are additional factors to consider.

"So if you add this plus this, and that would be maybe Cash on the balance Sheet, they would now have an $87 million business."

This quote concludes the calculation, showing how the initial investment and business improvements can significantly increase the business's value.

• Leveraged buyouts allow investors to maximize returns while minimizing initial cash outlay.
• The increase in business value can result in substantial profits when the business is sold.

"But they really paid because we now know $17 million for the business. Here's what's cool about this. Now, they actually only put $6 million up for the business and they turn that 6 million into 87 million."

This quote summarizes the essence of a leveraged buyout, where a small initial investment is turned into a much larger sum through the strategic use of debt and business growth.

• Private equity deals involve buying and selling companies for profit.
• The process includes subtracting debt and interest from the total selling price to calculate net profit.
• Private equity firms aim for high returns to compensate for the high risk and active management involved.
• Returns are generated through business growth and improved multiples over time.
• Private equity investments are not passive; they require active operation and expertise.

"So we got to subtract out that debt that they owe. Plus whatever interest fees that they might have accrued on that. So let's just say that's another $2 million in interest. That would be really aggressive. But let's just say that's what it was."

This quote explains the necessity of accounting for debt and interest when calculating the net profit from a private equity deal.

"And now their net that they got on this was $74 million of profit. Now we look at this six and now you realize that you just got like a 13 x, whatever it is, 13 x return ish. Twelve and a half. Pretty good deal, right? So that is how the private equity world actually works."

This quote illustrates an example where a private equity deal yields a significant return on investment, highlighting the profitability potential in private equity.

"And so they didn't really do anything crazy here. And what's going to happen next, right? You're like, well, how would somebody buy this for 87 million? I'll show you. They're going to take it from eight and let's say they get it to twelve."

This quote suggests that private equity firms can achieve returns through strategic growth, rather than extraordinary measures.

• Business growth is measured in yearly increments, affecting the company's valuation.
• Growth can lead to an increase in the company's multiples, which boosts the overall value.
• The example given demonstrates growth from eight to twelve over a five-year period.

"And during this period of time, let's say they go 910. 1111.5. Actually, I don't need to add that one. Let's say those are the yearly growth for this business. Okay. In terms of, again, year 12345."

This quote provides a hypothetical scenario of how a business might grow annually, which is important for understanding the valuation process in private equity.

• Private equity deals often involve a mix of equity and debt financing.
• The example discusses an investment where $25 million in equity is put into a deal with $62 million in debt.
• The cash flow generated during the business's operation is used to calculate the enterprise value.
• Debt and debt service are subtracted from the enterprise value to determine the final profit.

"So 62 million in debt, which they're going to have 120,000,000. The amount of cash that's going to add up here is going to be ten. So that's going to be 50 million in cash that they will have collected throughout the course of the business."

This quote breaks down the financing structure of a deal and the cash flow generated, which contributes to calculating the enterprise value and eventual profit.

• There are two main types of private equity buyers: financial buyers and strategic buyers.
• Financial buyers are typically uninvolved and interested in the financial aspects of a deal.
• Strategic buyers have expertise in the industry and can integrate the acquired company into their own, potentially gaining synergistic benefits.

"Many times there's two real types of buyers. I would say you have financial buyers which are completely uninvolved. They want to get a good deal, and then you've got strategic buyers who are usually in the space and will pay better multiples because they can immediately roll that company into their company and then increase their own valuation by a disproportionate amount compared to what they bought it for."

This quote distinguishes between the two types of private equity buyers and their motivations, which is crucial for understanding the dynamics of private equity deals.

• Understanding mergers and acquisitions (M&A) is key to surpassing $100 million in business.
• The speaker shares their personal experience with selling companies to various types of buyers.
• The aim of the video is to educate viewers on complex financial topics beyond typical influencer content.

"And so I actually think it's one of the key things to getting past 100 million is understanding the m and a side."

This quote emphasizes the importance of M&A knowledge for significant financial success in business.

"And so I made this video because I love you all and I don't want you to be broke. And hopefully this is not the kind of stuff that your normal make money influencer, youtuber, et cetera, is talking about."

This quote reflects the speaker's intent to provide valuable and unique financial insights to the audience, contrasting with the often superficial content of make-money influencers.