1. Appraising Your Business in 60 Minutes! A Seminar for Small Business Owners and Business Buyers Glen J. Cooper Business Broker / Business Coach

2. 2 Appraising Your Business in 60 Minutes! A Seminar for Small Business Owners and Potential Buyers Glen J. Cooper Business Broker / Business Coach GlenCooperColorado.com ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ How Can We Do It? Learn & Review Basic Concepts Consider Using Rules of Thumb & Understand the Exceptions Look for Comparable Sales Think About What Buyers Want ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ Basic Concepts of Value: Cost Approach What it costs to duplicate Market Approach What it costs to buy a substitute Income Approach Whats reasonable to pay based upon potential risks and profits ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ 3. 3 Basic Concepts of Valuing a Going Business: Rules of Thumb Are Dumb! Only Future Benefits Create Value. Nobody Really Knows What a Business is Worth. Strategy: You Control the Process! ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ Basic Concepts of Valuing a Going Business: Rules of Thumb Are Dumb! 3x net profit means nothing if we dont know how to define net profit. 3 months gross sales means nothing if we dont know about profitability. Rules of thumb are, indeed, dumb, but we use them anyway! ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ Basic Concepts of Valuing a Going Business: Only Future Benefits Create Value. ROI Return on Investment (Down payment, debt assumed and money needed for working capital and/or capital investment) ROL Return on Labor ( Buying a job) Market Share Gain All the Other Things that Count Besides Profits ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ 4. 4 Basic Concepts of Valuing a Going Business: Nobody Really Knows What Its Worth Takes in-depth knowledge of the business Takes in-depth study of potential markets Takes several long talks with the current owner Takes a lot of numbers crunching and analysis by you! ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ Basic Concepts of Valuing a Going Business: Strategy: You Control the Process! Whoever understands the concepts and formulates the assumptions controls the process Decide what ROI is right for the situation Know your positions on What Else Counts ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What are the Rules of Thumb? Two Types: Earnings Multiples (x times annual earnings) - most reliable of the two - the one well use today Sales Multiples (x percent of annual sales) - most commonly used for comparisons of identical businesses - can be used for a sanity check ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ 5. 5 What are the Rules of Thumb? ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What are the Rules of Thumb? EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization - annual earnings before the subtraction of - interest expense - income taxes - tax-allowed depreciation & amortization expenses ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What are the Rules of Thumb? Owners Salary: Single owner/operator salary - If multiple owners or family members in business, then salaries and benefits of other owners must be left in the expenses and are not added back ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ 6. 6 What are the Rules of Thumb? SDE (Sellers Discretionary Earnings): EBITDA + Owners Salary = SDE a.k.a. Owners Cash Flow - The cash generated by the business after operating expenses but before payments to the owner for a salary, before interest expenses on long-term debt, before income taxes and before tax-allowed non-cash expenses like depreciation and amortization. ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What are the Rules of Thumb? Why do I use a 3 multiple? Its a high-end mid-point between 1.5 and 3.5 - long-term average in databases is actually about 2.3 - seller financing easily boosts this to a 3 It comes from EVERY data base out there - Pratts Stats, BizComps, IBA, BizBuySell.com - data is consistent over 30 years! ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What are the Rules of Thumb? Biz Value: All tangible and intangible assets necessary to achieve expected biz profits Tangible & Intangible Assets - furniture, fixtures & equipment (FFE) - website, CRM database, business name - trademarks, copyrights, trade secrets & processes - goodwill, non-compete agreements and consulting ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ 7. 7 What are the Rules of Thumb? What About Inventory? May or may not be included in value - usually included if its a small amount - usually included if inventory turns are low - often not included when its floor-planned - often not included if inventory turns are high Always valued at less of cost or wholesale ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What are the Rules of Thumb? What About Real Estate? Not included or sold separately most of the time - expenses of business must include fair rent and other occupancy costs - if included, value of real estate is separate When included, changes rule of thumb a lot! - hospitality (hotels, etc.), golf courses, campgrounds, marinas, amusement parks, ski resorts, etc. ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What are the Rules of Thumb? What Are the Data Sources? Pratts Stats is the single best database - over 20,000 sales of privately-held businesses - BVMarketData.com is the site to go to 2013 Business Reference Guide - small business sales Rules of Thumb - BusinessBrokeragePress.com ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ 8. 8 What Type of Business is Comparable to Yours? One That Appeals to the Same Buyer! Same Type of Work for Job Buyers - workstyle issues (i.e. sales/mgmt., outdoor/indoor) - lifestyle issues (i.e. owner benefits, time & place) Same Type of Investment for Financial Buyers - price range and amount of cash needed, returned - similar industry type of risk profile ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What Type of Business is Comparable to Yours? SIC and NAICS Codes Standard Industrial Classification (SIC) Codes - Google SIC Code for business type - use just 2-4 digits North American Industrial Code System (NAICS) - new, but not used as much - use just 6 digits ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What Do Business Buyer Prospects Want? A Job, Investment, Growth, Lifestyle & Legacy Job that Offers Freedom and Pays Bills Investment (20% - 30% Potential ROI +) Growth (Interesting, Engaging, Vital Work) Lifestyle (Right Time, Place and People) Legacy (Chance to Count) ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ 9. 9 What Do Business Buyer Prospects Want? Value From Seven Key Categories: Attractive Work Strong Market Position Right Location Working Systems (Marketing, Operations & People) Proven Stability Good Books & Records Reasonable Terms (Price & Financing) ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ What Do Business Buyer Prospects Want? Questions Buyers Ask: Whats for Sale? Whats the Opportunity? How Was the Price Determined? What Financing Is Available? Why Is the Seller Selling? ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ Glen J. Cooper Business Broker / Business Coach 303-919-2694 GlenCooperColorado@gmail.com GlenCooperColorado.com ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________