Successful entrepreneurs see their current business as a valuable asset that can be sold when they decide it’s time to move on to their next adventure. Right? No.
Every year over 1,000-times more businesses are founded in the United States than the number sold. Does that mean that 99.9% of businesses are failures? I guess the answer depends upon your definition of success.
Leaving tens or hundreds of thousands of dollars on the table at a point in your life when you could really use them doesn’t sound like entrepreneurial behavior to me.
One of my primary missions in helping business owners succeed is to get more of them to seriously consider the idea of selling-out in the future and to begin preparing today to maximize the sales price when that day finally comes.
That’s why I asked a seasoned business broker, Dustin Zeher of Horizon Brokers in Woodbridge, Virginia, to join me on this week’s Radio Free Enterprise. Dustin has been involved in sales transactions involving businesses from a wide range of industries and annual revenue figures.
I’m going to ask Dustin to dig into the psychology of owners selling their businesses and share his thoughts on why so few take this course of action.
We’re also going to talk about what a typical sale transaction looks like, what owners can do today to help increase the value of their business in future, and common mistake he sees made and how to avoid them.
What follows is a computer-generated transcription of our entire conversation. Please excuse any typos!
My guest today is Dustin Zeher. Dustin is the principal broker at horizon Business Brokers in Woodbridge, Virginia. Dustin’s heir, welcome to the program.
Dustin Zeher 00:40
Hi, Frank. Thanks for having me today.
Frank Felker 00:43
I’m glad that you’re here Dustin, we have a topic today that’s very near and dear to my heart. Many frequent viewers and listeners of Radio Free Enterprise know that I seem to have a guest on I don’t know, once a month or so to come and talk to you about selling your business. My belief is that if you are not planning on selling your business, and if you’re not building towards getting a value as high as you possibly can, for the sale of your business, you’re making a huge mistake, you’re, you’re potentially leaving 10s or hundreds of 1000s of dollars on the table. And for a successful business owner entrepreneur, that just doesn’t make sense.
Now, a while back, we had Rodger Stephens here to talk about how to maximize the value of your business when you sell it. More recently, we had Steve Kann come and talk about the idea of selling your business to the public through an IPO or a spec or a reverse merger. Today, we’re fortunate to have Dustin Xavier here to talk about the actual process of selling your business. What’s it like? He’s been through the process many times with many business owners, different industries, different size companies, you name it.
And I feel as though maybe one of the reasons so few business owners don’t choose to sell their business is fear of the unknown. They’re not really clear what this process might be like. And I’m hoping that Dustin can bring some clarity to the topic for us. And before we get to that, I want to start with a very fundamental question, which is what exactly is a business broker?
Dustin Zeher 02:24
The easiest breakdown and explanation is we’re essentially like a realtor. We help people buy and sell businesses, just like a realtor would help somebody buy and sell a home, we take the business owner, from the very beginning stages of the process all the way through the end, and helping them understand how a business like theirs is valued packaging, the sale of the business marketing and advertising the sale finding the buyer, qualifying the buyer, and negotiating, facilitating the sale to close, we do this pretty much the same thing for our buyers as well, helping them understand really what their goals and expectations are, what they’re trying to get out of the business, how much money they’re trying to make to determine what their budget and ultimate sale price of the business would be helping them find opportunities, do their due diligence and negotiate and facilitate the sale to close just the same.
Frank Felker 03:24
That’s great. That was a very complete and succinct answer. And I appreciate you making that so clear. Now to help sort of finalize putting a foundation under our conversation, can you give our viewers and listeners an idea of two or three businesses that you have been involved in the sale of either on the buyer side or the seller side, and with an eye towards giving us a picture into the variety of businesses, vertical industries size of companies and so forth?
Dustin Zeher 03:56
Sure. So generally speaking, we’re working with your small businesses in the mainstream marketplace. The mainstream marketplace, depending on who you talk to could range up to five to $10 million in annual revenue. Most of the businesses that we typically work with are you going to see revenues in the you know, two to $500,000 range, our sweet spots, probably more in the 500 to a million dollar range in revenue. We are an industry agnostic firm.
So I have worked with a variety of different businesses, from construction services to you start construction services to your brick and mortar type of businesses that everybody is typically used to seeing in like retail shopping centers. So things like restaurants and hair salons, convenience stores, laundromats. On the service end, you would find like cleaning service companies that could be residential commercial. I like working with a lot of daycare centers has seemed to be a hot industry. As well as pet service related businesses, so we do kind of cover the gambit.
Frank Felker 05:04
Mm hmm. It sounds like a pretty wide range. And you know, I wanted to focus in on. When I say I want to focus in, I want to focus in on the emotional side of this transaction for a seller in particular, we may touch on the buyer side as well. But I’m more interested in speaking to people who currently own businesses and should be thinking about selling them. And I came across a couple of very interesting statistics. Now, these two statistics are from completely different sources. And they may be totally unrelated.
But with full disclosure, I found a statistic on forbes.com that said, about 700,000 businesses are founded in the United States every month. Now, that’s, you know, just people filing articles of incorporation, getting a business license, what have you, doesn’t necessarily mean they ever got up and running Rubbermaid dollar one. But at the same time, a website that I’m sure you’re familiar with, it’s called biz buy sell.com. Lists only about 7000 businesses sold every year in the United States. That’s a difference of about 99.9 2.01.
Now, I find it hard to believe that it’s that big of a discrepancy in terms of the percentage of businesses that are sold. But I’d be willing to bet that six or seven out of 10, that could have been sold were not sold. What is your take on the statistics I just shared? And why? If you do agree with them, or find them plausible? Why is it that you think so few business owners choose to sell their business?
Dustin Zeher 06:54
So I appreciate you sharing the statistics. I know that there’s a lot of businesses that that certainly incorporate, but probably don’t do much after they, after they, they get their business license. What I can say is that I think that a lot of people start their business, and they don’t have an exit strategy in mind. And so when it comes to the point of where they’re retiring, or moving out of the area, where they’ve established their business, they don’t give it thought to sell because they didn’t have that that exit strategy, whether or not they had the policies and procedures in place, where they thought that they had a viable business to sell, or maybe it wasn’t cashflow positive enough. Or maybe they just thought that they were the business. And that wouldn’t translate much into value. So that’s why, you know, I believe that it’s important that when you start your business, that you have an exit strategy in mind, whether that’s three 510 15 years down the road, so you can ultimately get the value out of the business that you’ve created in establishing it and growing it over the years.
Frank Felker 08:13
I agree completely with you. And the way I put it is start with the end in mind. Part of this is are you familiar with a book called The E Myth?
Dustin Zeher 08:25
I have not read it.
Frank Felker 08:26
No. It’s a it’s sort of a classic in business literature. And the E myth is the E is for entrepreneur. And the myth is that all business owners are entrepreneurs. And the point that the author makes is that Gerber, Michael Gerber is his name is that most business owners have the mindset that you just described, they see the business in themselves as the same thing. They don’t plan for the future or even think about the idea of selling a business. And they may well I use the expression on from background in the printing industry, of a successful printing press operator who makes some good money, and besides his own is open his own print shop, who suddenly finds out that running a print shop is a completely different job from running a printing press.
And so but a true entrepreneur would look at this from the standpoint of this is my current opportunity that I’m pursuing, but the world is full of opportunities. And if I look at it that way, I may be able to leverage what I’ve invested in time and sweat and trouble into this business into a big payday in the future. And this is I’m preaching to our viewers right now that I really want them to be thinking about that. And if you don’t do that, that you’re leaving money on the table. Now, I agree with what you just said and but I still think there’s something deeper and it may even be unspoken within the mind or the heart of a business owner regarding the sale of a business or their business. And one of those things I wonder is do they think it’s going to be really difficult What is the most difficult part? Would you say for the seller of a business,
Dustin Zeher 10:06
I think the most difficult part is, is their emotional tie to the business and realizing that the value might not necessarily have been what they were hoping to get out of the business, so to, to then let go and say, you know, what, this is what my business is worth. So, you know, if I want to move on to the next chapter of my life, you know, I should take it and, and, and move on. Oftentimes, you know, business owners are coming to us, too, we have started the process, and the very first thing is reviewing their financials and determining the value. And, you know, for example, you might say, hey, you Mister, mister missus business owner, you know, based on the cash flow that the business is generating for you, you know, it’s worth, you know, let’s say $500,000. And, you know, they think, oh, man, I, I thought my business was worth a million dollars I can’t sell for half a million.
And then it’s just getting them to understand what buyers are interested in primarily is the cash flow that a generate. So there needs to be enough cash flow there to support the debt service from the acquisition, pay themselves a fair wage, and hopefully have money left over to reinvest. So if the numbers add up, though, they’ll get their million dollars, but if they don’t add up, then they’re going to get what the market, you know, suggests the value to be. So it’s that emotional tie the blood, sweat and tears that they’ve put into the business, that they need to understand, hey, well, I did build something. So let me get the most value that I can.
Frank Felker 11:46
And that makes perfect sense. And, you know, it’s funny that you mentioned the, they thought it was worth a million, but it was only worth 500,000. I can’t tell you how many times over the years, I’ve heard business owners say, Well, I want to walk away with a million dollars. And you know, it’s just sort of a round number that they that’s what they want, it doesn’t have any connection to what the business might sell for. And, you know, and another way of looking at it is if you could, and even $500,000 is a pretty good payday. If you could walk away with 500,000, that would be great or even 100,000, provided that you hadn’t even been considering selling the business previously.
But I agree with you. And I think you’re right, I think it’s the blood sweat and tears and what they’ve invested in the business. And this sort of dream of what they have that it might be worth. Now, you also mentioned, you’ve mentioned a couple of times having to do with the policies and procedures in place. If you if a buyer or a business buyer decided to buy a brand new McDonald’s franchise, for example, and not an existing Victor’s pizza palace, they would one of the things they’d be paying for. And one of the biggest things is the operations manual, here’s everything you do from the moment you turn on the lights, to the moment you lock the door and walk away, in the end, how important is it for the sale of a business for the value of a business ad sale, to have a document like that in place,
Dustin Zeher 13:13
I think it’s very important, especially for your larger size businesses. And when I say larger size businesses, I’m really specifically talking about businesses that are that are at the upper echelon of that mainstream marketplace, you know, the ones that are generating five to $10 million in revenue, or maybe just short of that, but when a buyer is spending, say, you know, a million dollars or more on the business, they’re expecting a lot more from that business. So the, the operating, you know, manual. So, so they don’t have to come in and kind of reinvent the wheel, then they know that when they come and purchase the business The next day, they can operate it as smoothly and as efficiently as, as the seller did, and make sure that they can train all of their employees, their employees, so they don’t miss a beat for your smaller businesses that, you know, I would say are in the, you know, couple $100,000 price range or less, that have fewer employees, the an operating manual or policies and procedures aren’t as important to buyers. You know, I’m certainly would love to see that.
Frank Felker 14:32
That’s interesting. One of the things that I think can help a seller of a business separate themselves from the business is an operations game, where it means that the business doesn’t require their personal presence all day every day in order to operate efficiently and profitably. And but I can see what you mean if it’s, you know, doing $200,000 a year, got two or three employees one or more of which is part time. It’s Not as critical, but I do see what you’re saying. Now, what about how long this process might take? Let’s say, somebody decides Today’s the day I’m going to start selling my business. When they come to you what how does the process work? What happens first, what happens next? How long does the whole thing take?
Dustin Zeher 15:24
So, generally speaking, you know, the national average length of time to sell a business is typically around eight to 12 months, horizons average has historically been around five to seven months, we printed our shorter timeframe based on our very thorough and detailed evaluation approach and the amount of marketing and advertising that we do. And we feel like we’ve really streamlined the process. But the very first step that that has taken is a review of the past three years of the business’s financials. So we would be looking at P&L, balance sheets and tax returns, as well as some year to date financials depending on where you are in the calendar year, just to see how the business is performing. You know, this year over the last year is it in an uptrend is in a downtrend? Is it been flat, you know, these are all important factors that a buyer and a lender are going to look at when evaluating the value of the business and their interest in purchasing and financing the opportunity.
From there, you know, after we review the financials determine what the financial health and performance of the business is to see the cash flow, that’s what drives the value of the business. So you’re reviewing financials to determine the value to set up our asking brace. From there, we’re going to market and advertise the sale very confidentially on major business for sale platforms, as well as you know, an outreach to other business brokers and financial advisors, that we have relationships with that point where then, you know, attracting these buyers, we’re having them complete what we call our buyers package, which is the confidentiality agreements, a brief questionnaire and a financial overview. So we can share with you the name, the location and detailed financial information about the opportunity.
From there, you’ll have your buyer seller meeting so they can interact and engage with each other, they can see if the, the buyer is a good fit for the business. Make sure we can answer any financial or operational questions that the buyer has of the business and the seller, again, to see if it’s a good fit and see if there’s any red flags that are presented. At that point, you should we should be able to then field an offer from the buyer to present to the seller.
And then once that’s accepted, you know, we would enter into what we would call the due diligence phase of the of the acquisition where the buyer is reviewing in more depth the financials. So that would be taking a closer look at the P&L and the balance sheets to compare against the bank statements and invoicing as well as you know any vendor payments and such that are being paid payroll, etc. Taking a look at the operational health as much as the financial health, maybe getting landlord approval if there’s a lease that the business operates from.
And of course, you’re obtaining any necessary funding from a lender. At that point, you should be wrapping up your due diligence and moving into the closing phase and getting all the legal paperwork finalized. And moving forward to that closing date. that pretty much wraps you up in a nutshell.
Frank Felker 19:00
That was great, did a great job of rapidly going through every one of those steps. And I really appreciate that. Because that’s what, in my opinion, is one of the biggest reasons why many business owners don’t enter into the process because they don’t really know. They know the first step they’re taking perhaps, but they don’t really understand what the rest of the staircase looks like. And I appreciate you sharing.
Now, what kind of payment terms are usually found in these types of deals. Again, your business owner who is looking for a million dollars, they’re looking for a check, check for a million dollars. And that’s another area where I know a lot of business owners get upset was mine a minute, it’s not an all cash deal. What kind of terms what kind of payment terms are typical?
Dustin Zeher 19:46
Sure. So you know, and being involved in the mainstream marketplace for over 15 years, you know, we’ve seen all those sellers that want you know, their million dollars up front and you know, we’d love to give it to them all the time. But generally speaking, there, there is some sort of some sort of financing that’s involved, right. So, you know, there are those sellers that get lucky, and they get 100% of their their cash proceeds at closing, you know, from a bank that might be involved, or maybe there’s a well capitalized buyer. In most cases, you know, some, some small business transactions wouldn’t actually happen without some element of seller financing. So that means the seller is getting some cash, you know, I like to see at least 50% come from the buyer.
So there’s a, an equal invested interest and skin in the game by both parties. So maybe the seller is going to finance 50% of that million dollar purchase price. So they’re getting half a million dollars down, and the other half a million dollars, they might finance over maybe a five or 10 year period, they would get, you know, a favorable interest rate, what you might see, you know, a bank provide for your typical, you know, business acquisition funding, so probably somewhere around five 6%, plus or minus, again, five to 10 years. You know, what, even when there is bank financing involved, or you have a well capitalized buyer, the, the buyer still might want to see the seller do have some skin in the game. So, I often see, you know, most seller still holds somewhere around 20% of the sale price, and that would be personally guaranteed by the buyer against also secured against assets of the business and other assets of the borrower as well, in case there is a default.
Frank Felker 21:47
How about something that’s referred to as an urn out? Am I understanding what that is that the seller, the original owner of the business stays on, either in a management capacity or an advisory capacity for a fixed number of months, in order to ensure that a smooth transition of the business? Can you speak to that?
Dustin Zeher 22:08
Yeah, so earnouts are a another very common way to acquire a business and for the business to be I guess financed, if you will, they’re more common in your larger transactions, in my opinion. Again, those in the near the upper Main Street or lower middle market marketplace, you know, a lot of small business owners and kind of that that real mainstream marketplace, they’re not usually too keen on an earnout. For whatever reason, that may be most importantly, I find the, the reason to be because if they turn over the business to a buyer, and the buyer, you know, doesn’t you take control of the policies and procedures that that that were outlined, and maybe they have just a different way of operating the business that can be a detriment to to the seller, you know, they might, you know, come in and raise prices on their customers and that could cause you a very high attrition rate. So that is essentially going to devalue the business for the seller in the long run.
So But to your point, you know, if the seller you know, does stay on and some sort of you know, employee or consultancy capacity, you know, it can help the buyer you retain their customers and the seller could get every penny that they were expecting and perhaps more but, you know, it’s my advice and what I’ve seen in the 15 plus years of doing businesses you try to try to keep it simple right and just you know, if you get an all cash deal or maybe you’re just going to hold some seller financing so it’s a guaranteed amount of money and there’s very limited downside for you for the seller, but I have had a couple of burnouts and they didn’t work out very well for the seller, and yet so
Frank Felker 24:22
well, this is a good segue into my next question, which is, you know, not every deal goes as smoothly as we hope over time. And occasionally, the buyer doesn’t do a good job of operating the business. And maybe they stopped making their payments on the seller financing and so forth. What are the sellers options in a situation like that?
Dustin Zeher 24:47
So if a buyer defaults on any sort of, you know, personally guaranteed, you know, note there’s usually provisions in the purchase agreement or The promissory note that basically says after default, if if the default hasn’t been cured, then the seller could essentially take the business back over. Just like a bank, Mia would repossess a car or foreclose on a house. So the seller would have that, that ability and opportunity. In fact, they even might be forced to, in some cases, if the business is operating from a brick and mortar location, and they have a landlord, because the seller might still be on the hook for the lease, if there was a lease assignment that was taking place. From you know, in the in the acquisition, the seller still has an obligation to the landlord. So they would step back in and take the business makeover operated to fulfill their obligation to the landlord, you know, then then, of course, there’s the other scenarios where, you know, with the personal guarantees, the seller could essentially go after the buyers and try to obtain you what, what remaining balances view through the legal process.
Frank Felker 26:15
Okay, and of course, we all want to avoid that. But I wanted to address it, because again, that could be something in the back of the mind of a prospective seller about why they’re avoiding this process. Now, my next question has to do with working with a business broker, as opposed to trying to sell your business on your own. I would imagine, and we just talked about this, one of the biggest benefits that you bring to bear is the vetting of the buyers, and the qualification of the buyers and helping to determine whether they are qualified for a purchase of this size. Just like in real estate, you know, we could go FSBO, for sale by owner, or we could choose to work with a real estate broker who’s going to charge us a commission, why should we choose to work with a business broker when we’re choosing to sell our business?
Dustin Zeher 27:06
Great question. And, you know, my opinion is that, you know, if a business owner is trying to sell their business, that it could severely and dramatically impact the overall value of their business. And the reason why is because they’re going to be so distracted in trying to work with all these different buyers that are expressing interest in in the opportunity and trying to get them through the process that they forget about what’s the most important, and that is operating their business, I have seen it firsthand where a client of mine who actually owned a printing company in claim, and he tried to sell his business for over a year. And during that year, that his his revenue fell, and his cash flow fell, it must have been about 15 or 20%.
He engaged our services and was able to refocus on operating the business, you get his revenue and cash flow backup. So there’s that most important element, then it’s the fact that if they try to go at this alone, they don’t really know the true value of their business, they’re most likely just coming up with some number that that they felt like it was worth and were they able to justify that maybe they’re, they’re asking too much. And then they don’t get any buyer interest, maybe they’re asking not enough, and they’re getting a lot of buyer interest, and then they’re leaving money on the table for themselves.
So you know, if they engage a professional brokerage firm, to help them, they can focus on what’s important, they can make sure that they get the most value out of their business, and they have all the resources that the broker has, and trying to help the buyer obtain the funding that they need. You know, they have the professional relationships with the accountants and attorneys and other advisors that might be needed to go through the process to help both sides be able to come to, you know, a deal a lot quicker and a lot sooner or quicker and sooner would be the same thing. So
Frank Felker 29:27
I would like it to be both quicker and sooner. Now, that begs the question, there’s a lot of value there, obviously, in bringing in a business broker. What’s it going to cost me?
Dustin Zeher 29:40
Yeah, so the average brokerage firm is going to charge a commission of somewhere between 10 and 15% of the overall sale price of the business, or a flat fee of 10 to $15,000, whichever is greater. As you start to get into the multimillion-dollar price range, you might see different variations of a commission, you know, perhaps something like a double layman’s formula where maybe the first million you pay 10%, and the second million you pay 8%, and the third, a 6%, and so on. So it just like anything is part of a business transaction, you know, a commission can be a negotiable, depending on the size and of the opportunity, and of course, the sellers expectations.
Frank Felker 30:28
Okay, I want to make a little bit of a left turn here and talk about the difference between purchasing an existing franchised business versus purchasing an existing independent business. If I were from the buyer side, you know, let me flip that around, because I want to stick with the seller side. If I’m a business owner of a franchise business, do I face greater hurdles, and less flexibility of choice in selling my business than I might have, if I were the owner of an independent business?
Dustin Zeher 31:05
Yeah, 100%, you know, when you have a third party involved, like a franchise or the franchise, or is is another step another layer and in the process, the franchise or is ultimately going to have the say, as to whether or not you’re maybe perhaps going to have the ability to sell your business, but who you’re going to be able to sell your business to. So they’re going to, they’re going to qualify the buyer, you know, just the same make sure that they have the professional experience, to be a good operator, make sure they have the financial ability to, to acquire the business and have enough capital to sustain the business.
So, you know, if you’re an independent business owner, you’re looking to sell, you know, the business that you’ve established, you don’t have this, this third party that’s, you know, over your shoulder saying, Hey, you know, what, we’re sorry, we don’t we don’t like this buyer’s qualifications, they’re, they’re not going to they’re not a good fit for us as a franchise or, and purchase your business. So definitely a lot more flexibility when it comes to an independent operation as to who your buyer can be.
Frank Felker 32:12
That’s what I thought, but I wasn’t sure. And I’m glad that you knew and were able to clear that up. One last point about franchise purchasing a franchise business, does the franchise or extract any upfront money from the new home? Or did they was the new owner only on the hook for the ongoing franchise fees?
Dustin Zeher 32:33
Great question. So I’ve seen it actually go both ways. In transactions with franchise opportunities. Typically speaking, the buyer would have some upfront franchise fees as well, just like the seller of that franchise. So when the seller of that franchise started, they likely paid, you know, an upfront franchise fee, to get to get established, to protect their territory have the rights to the brand, and go through training. So for example, you know, that franchise fee might be 30 4050 plus $1,000. Now, with a franchise acquisition, the they call it a franchise transfer fee, which is typically significantly less than the the upfront fee that the original owner or seller has paid. But I have seen it where the fee is the exact same. So they’re paying again, to their rights to the territory, or the franchise brand and the and the training that goes along with it.
Frank Felker 33:41
So that’s money that the buyer is going to have to pay that could have gone in the pocket of the seller, had they been the operator of an independent business rather than a franchise business. So I’m glad that we brought that up. We’ve, we’re just about out of time, Dustin, we’ve covered a lot of territory. I always like to ask, Is there a question I have not asked you, or something that’s come to mind that you’d like to share before we sign off?
Dustin Zeher 34:09
I think we covered a lot. I think we’ve provided a lot of great information for your audience. I hope it was helpful to them, trying to sit here and think if there’s anything else that that was missed, or you know, that could be, you know, addressed.
Frank Felker 34:25
Well, let me ask you one more question. Are you ready that you had something for us?
Dustin Zeher 34:30
Yeah. No. And I’m happy to answer your other question. as well. I guess the other thing that I was thinking of was, you know, I guess how a business is valued, you know, to determine, you know, the price and what a buyer is really expecting to pay for that. And I know we briefly touched on it, you know, earlier that’s
Frank Felker 34:51
it. That’s a big point, and I specifically sort of glossed over it. We had spoken to another guest previously about it, but I would like to get your take on it nonetheless, let me let me give you a couple of rules of thumb of valuation. You know, the first one is my business is worth a million dollars. And I’m going to get a check all upfront, that one’s not so good, but it is one that a lot of business owners use. Another one is one times last year’s revenue, or three times last year’s profits. Now, again, those two could have as much value as the first one I spoke up, do you know of any rules of thumb or any guidelines, you can give us? how we might do a quick back of the napkin calculation of what our business is worth?
Dustin Zeher 35:38
Yeah. So, you know, those are two different approaches that I hear so often. And, you know, it’s not that they’re wrong, but they’re not necessarily right. Okay. Each industry actually has different valuation practices. And they could be based on a multiple of earnings or cash flow, they could be based on a percentage of revenue, I would say most common in the mainstream marketplace, you’re going to see buyers pay, what’s the equivalent to about two times the seller’s discretionary earnings, or cash flow.
And that truly is the average, but I’ve seen businesses sell for as little as one times cash flow. And I’ve seen businesses sell for, you know, three plus times cash flow, again, it’s very dependent on the industry, because you can have businesses that that are service related that have that are very capital rich. So there’s a lot of furniture, fixtures and equipment, maybe they have service contracts, so there’s guaranteed revenue, that that will be made over a certain period of time, and those businesses are going to sell for a higher multiple, because that’s it’s pretty much all but guaranteed revenue and cash flow performance that the buyers going to have.
And then again, if you have businesses that, you know, are generating, you know, let’s say a half a million to a million plus dollars in cash flow, or EBITDA, those businesses are going to sell for a premium. So you’re going to see your three plus times cash flow and those opportunities where you know, the sole owner operator that the business is so dependent on them, you know, even though they might be making $100,000 a year in profit, you know, because they are the business, that type of business is only going to be worth maybe one to one and a half times cash flow, I find the cashflow values to be more accurate and more commonly accepted by buyers and lenders, because that’s what they’re lending against. While revenue is important. And there’s those metrics that are in place, you know, 100% of revenue or 50% of revenue, whatever the case may be, they usually don’t hold hold up as much as the cash flow values that the that the banks and the buyers are looking at.
Frank Felker 38:09
So would it be fair to say that the extent to which the seller prior to choosing to sell their business are pulling the trigger on selling it, the extent to which they’ve been able to grow their personal income over time, and show a track record of growing earnings over time, and the extent to which they’re able to remove themselves from the day to day operations of the business so that the money they’re earning is in effect, as an entrepreneur rather than as a manager, or somebody making sandwiches on the front line? or what have you that those two things are things that they could be doing now or aspiring to be doing to increase the value of the sale later.
Dustin Zeher 38:48
100% I don’t even have anything to add to that you hit the nail on the head.
Frank Felker 38:54
And that’s part of what I want people to be thinking about as well. It’s like you said early on in this conversation is they should have been thinking about this from the beginning. But even if you weren’t thinking about it from the beginning, it’s like the old thing about the best time to plant a tree was 20 years ago, and the next best time is right now. So you should start planting that tree thinking about the sale of your company. If you want a million dollars, how are you going to get a million dollars and speaking with somebody like yourself does tend to find out where they are now where they need to get to get to the money that check they’re looking for and what they can do between here and there to make that happen. And with that in mind, what is the best way for somebody who’s been watching or listening to reach out to you and ask you a few questions.
Dustin Zeher 39:42
Great. Yeah, happy to talk to anybody, please visit our website, horizon brokers.com your contact page My contact information is right there my cell phone number 571-437-5135. You can also email me directly Dustin at her rise in brokers calm I welcome anybody to call I give you all the time in the world that you need and help you through the process the best that we can.
Frank Felker 40:09
Dustin Zeher, thank you so much for joining me today.
Dustin Zeher 40:13
Definitely my pleasure.
Frank Felker 40:16
Thanks again to Dustin. And thank you for joining us. Until next time, I’m Frank Felker saying, I’ll see you on the radio.
