DONE DEAL

By Nick Whitmore

When Ken (not his real name) decided to retire and sell the company he’d spent over 20 years building (12 as owner), his business was generating revenue of around $2 million.

Ken’s rental business offered props (e.g., tents, furniture, dishes) and planning help to those organizing graduations, birthday parties and other celebrations. The established rental business had multiple locations, which included retail space and a warehouse for storing the rental inventory.

Unfortunately, the sale of Ken’s firm didn’t go quite as smoothly as planned, with one of the major stumbling blocks being the value of his rental inventory. Ken placed a value of $1.2 million on it, whereas the buyer valued it at just $600,000.

“One of the key elements in a sale like this is getting a handle on the true utility value of the rental inventory,” said Sue Wain, director of business sales at Calder Associates and Ken’s business broker.

After some negotiation, the parties agreed to a sale price of just over $1.5 million, including all inventory, which represents a 6.0 multiple on Ken’s $250,000 of earnings before interest, taxes, depreciation and amortization (EBITDA). The full amount was paid on closing, and there was no earn-out involved in the deal. Real estate was not included in the sale of the business; the seller decided to lease the premises to the buyer.

Wain believes that Ken made a good decision choosing to sell his business. “He didn’t want to make the additional investment required to grow the business on his watch. He felt like he was inhibiting its growth. It was a perfect invitation for a buyer to come in here, but not only buy it—grow it.”

Deal Snapshot

Business type: Party rental
Revenue: $2 million
EBITDA: $250,000
Selling price: $1.5 million *
Multiple paid: 6.0

*includes inventory valued at between $600,000 – $1,200,000

(photo courtesy of Flickr/ *ASAP*)

DONE DEAL

By Nick Whitmore

Ed’s payment-processing company in the tri-state area was producing revenue of $1.86 million when he was asked to join the $50-million family business. Ed had a decision to make: keep growing his small business or join the much larger family empire. In the end, a sense of obligation to the family business tipped the scales, and Ed decided to put his business on the market.

“Initially, he did not want to sell, but his family really needed him in their expanding business, and Ed wanted to answer the call,” explains Sonny Soi, Ed’s business broker and the president of CrossPoint Business Group.

>> More

One of the most interesting things about researching our new Done Deal series for this site has been discovering how common it is for the person selling the business to lend part of the money to the buyer.

It’s called “vendor financing” and for the sale of smaller businesses, it has become common. Basically you mutually agree to what the company is worth. The buyer then pays you a portion of the money on closing, with the other chunk paid to you over time with interest (the rate is negotiable).

>> More

When I started to contemplate selling my last business, I was looking for data on what similar private companies were selling for. The media reported big company deals, but I knew they didn’t bare much relevance to my situation.

When I did hear about a private company sale, the details were never released publicly. Sometimes, the selling price was announced but rarely would they include the details of the multiple paid or the terms the sellers agreed to. >> More

Where were you on Monday March 13, 2000?  That was the day the dot com bubble burst and the NASDAQ began a drop that would see it lose almost nine percent in two days, eventually settling at less than half of its peak value.

Back then, I was the founder of a professional services firm and desperately trying to figure out how to add an “e” to the name of my company to get my share of the ever-growing valuations for any company remotely involved in the internet.

Eleven years later, I think we’re in the midst of a new bubble for consumer web businesses like Facebook, Twitter, Groupon and their many imitators. In fact, JP Morgan Chase just announced a fund they are flogging to their wealthy clients which aspires to spot the next big social media business. I, for one, will take a pass. Goldman Sachs may also scrape its knees on the fall off the band wagon it has jumped by peddling Facebook shares to its high net worth clients.

All the hype around the technology space can leave an old school business owner feeling optimistic that their business might finally fetch a fat multiple only to be disappointed that today, there is an ever-increasing divide between the value of a web business and everything else.

But just like the market of the late 1990s, I imagine this too will soon pass and usher in a time where real businesses – ones like yours with real profits, customers and a defendable moat – will be back in favor.

Would you like me to speak to your group on my book tour?

I’m arranging a book tour around the launch of the second edition of Built To Sell: Creating A Business That Can Thrive Without You on April 28, 2011. I’ve got dates booked in Toronto, ON and Washington, DC and would like to fill out my calendar with a few other gigs. I’m offering to fly (at my cost) to any city in North America the week of May 2, 2011 or May 9, 2011 and wave my speakers fee in return for pre-ordering 400 copies of the new Built To Sell.  We’ll make sure the books get to your event in time for my talk and I’ll also throw in a box of 40 copies of the first edition which we’ll ship to you right away so you can use them to promote the session to your audience. Just email Rachel@BuiltToSell.com your pre-order receipt and we’ll be in touch to arrange your talk. Please understand this is a onetime offer for the weeks of May 3, 2011 and May 9, 2011 only and once my calendar is booked up, it’s booked.

Al Gore’s slide master scales up

In other news, the woman behind Al Gore’s slide deck in the movie The Inconvenient Truth has scaled up her professional services firm to 82 people and offers some great lessons on how you too can scale a service business.