This case study reviews how one owner got an extra $1 million on the sale of a business. The business name and details have been omitted to protect the confidentiality of the owner and purchaser.
A small business owner was nearing retirement and was interested in selling his business. The business was very profitable, with a bottom line of about $400,000 on sales of $2.5 million. The business had grown about 5% per year over the past 3 years.
The Problem with Brokers
Several business brokers had approached the owner. They wanted fees to prepare a business profile so they could market the business. And they attached an asking price of about $2.5 million, and figured the business would sell for $2 million.
While this is a respectable amount of money, the owner felt he would go to a professional, independent person to do a business plan. The owner recognized that the broker was really interested in doing the transaction, not in maximizing the selling price.
Step 1 – Business Analysis
In order to maximize the value of the business, it is necessary to understand the business, how it goes to market, what the costs are, and what the future potential is for the business. All this was documented in a business plan format. In addition, we documented the future plans for the business, which included ISO9000 certification and implementation of a computerized manufacturing system.
Step 2 – Restate the Financials
The next step was to restate the financials, so the owner related expenses were removed from the costs including car expenses, owner salary and bonuses, payments made to family members and so on. The financials were adjusted going back 5 years. Then the salary for a general manager was added. The profit now truly reflects the return on investment that an outside investor would expect to receive from owning the business.
Step 3 – Develop the Business Case
The next step was to build the business case for the future. The owner purposely restricted the business growth to 5% per year, so the business would not grow beyond his ability to manage it. . It was determined the business was constrained by limiting inventory, and by limiting the sales efforts.
By removing these limitations and injecting the cash required to execute a more aggressive plan, the projections showed a growth rate of 20% for 5 years. This would double the business over that period. The business plan was completed on this basis.
This business case showed the present value of this business was now $4 million.
Step 4 – Prove the Business Case
Once this new business plan was presented to the brokers, they immediately said they could get $3 million for the business. Of course everyone discounted the projections, saying they were theoretical.
But we decided to go one step further. What if we took one year and ran the business the way the plan outlined? What if we could grow the business 20% doing the things laid out in the plan?
We did just that. The business grew 20%, right on the target numbers. The ISO9000 system was completed and the computerized manufacturing system was operational.
We had proven the business case, and shown the business could grow at 20% per year using the tactics laid out in the plan. This greatly increased the value of the business!
The owner was able to sell the business for $4 million, and with better terms than first proposed by the business brokers.
It pays to prove your point.
Stay focused and make progress every day on something that moves you forward on a sustainable path. Do these changes come easy? Of course not. If it were easy, you would have done it already. However, once your plan gains some momentum you will be amazed at the results.
A Word About Using This Report
In order to get value from this report you will need to do the action items and implement the strategies in your business environment, and sometimes this can be challenging. You will need to be persistent and diligent in your follow-up. You won’t get any positive results unless you take action on the information and strategies outlined!
About the Author
Mr. Ray Smalley is a veteran CEO who works with owners and managers who are frustrated with their business performance. He is a specialist in business troubleshooting and strategy.
He has led the management team for companies that include manufacturing, technology, service and construction, from $3 to $50 million in sales. In each case, he achieved outstanding increases in sales and profits in very mature or declining markets, including turnaround situations. He is able to provide leadership for all levels of the organization and effectively manage change.
Mr. Smalley graduated with the top award in his engineering class and graduated from Honeywell’s internal Executive Management Program presented by Harvard Business School.
(c) 2013 Ray Smalley, VenPlan Inc. All rights reserved.
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