SPEAKER_00 0:01

What is a mistake that I see over and over again? There are a couple, but the one I want to talk about the most and most pending because I see it quite frequently right now. It's often around e-com businesses, but it's now kind of trickled into service-based business as well. And that comes to something I've hit on before is valuation and why doing a multiple of your net your gross revenue is not the way to go, or even the best way to set your expectations. Now, there's a couple reasons why that is, but the ultimate the ultimate reason is because if you plan on selling your business, and the most common scenario is the person is not just going to pay cash, they're going to go to a bank and get a loan, and they're going to leverage that loan and the acquisition and all that, there's a debt to service. And that debt needs to be paid off the profit of the business. In other words, there's a big expense that doesn't currently exist in your business that will exist for the new buyers. And that's going to be whatever they get a loan for to pay for your business, there's going to be a monthly payment associated with that. So that's a new debt. And that new debt has got to get paid every month from what was profit, but no longer is because it's going to service that debt. And if you if you're going in with the calculations of I'm going to do 1x, 0.5x, 2x, whatever it is, of gross revenue, gross sales of your business, it's irrelevant when it comes time for the bank to look at is there enough cash to pay for the loan based on the profit? So the the true valuation of your business is typically always going to come back to what is the profit of the business and how much debt can be leveraged, or can the debt that's being presented be leveraged with the profit? So if you're making$50 billion a year, but you have zero profit, you are still sleeping on the floor, you are homeless, and a bank is to look at that and say, okay, in order for you to really crack to a trillion dollar business, and I'm using uh obviously hyperbolic terms or numbers here, you need a$20 million loan. Well, how are we gonna pay that loan? You are making zero dollars. So ultimately, the quicker you can clean up your books, the better you can pay yourself, the least amount of hours that you can work and your business is actually making money for you without having to trade your physical presence, which means it's not dependent upon you in order for it to make money, it's not a job, it's a functional operating business that's not dependent on this individual, the greater degrees of opportunity that you're gonna have. In other words, you know, it's a lot easier for me when it comes to the buying pool. If you're running a business, let's set aside the profit. I want to have this side conversation. If you're running a business and you are only working three, four hours a week, you've got, you know, two employees, ten employees, twenty employees, and the business is functioning without you needing to be the main you know, the main spoke in in the wheel, then I those are businesses that open up the buying pool for a broker. Because uh that business can function in from buyers all over the country. Now, if it's completely dependent upon you, they now have to look at how can I move somebody into operations here, which is gonna reduce the profit because now they're replacing your two jobs that you were working, but the company was overpaying for. Now they have less profit, which means ultimately they're gonna have less borrowing power when it comes to buying your business. So that's another reason why it's important for you to begin to work less. Ultimately, that's the point you need to be at is figuring out how do I exit this company in terms of needing me as a complete dependent in order for my physical presence needs to be here in order for the company to make money. That's that's not what you want. So you want to be moving out of that direction, and ultimately, our goal here should be how do we how do we continue to increase the profitability of the business without damaging the quality of service or the quality of the product? So the multiples that you really want to be looking at, because again, you could take it to the market, you can have a bunch of interested people, and they could go, hey, that sounds great, but unless you plan on owner financing the entire thing, it's not gonna be the right metric. And I can tell you through experience, if you plan on owner financing the entirety of the business, whatever money you get down at the closing table should be the only thing that you really calculate ever getting. Now, it doesn't mean that you're not gonna get the rest, but you are you are exchanging the business that if those if if that debt is not serviced, which nobody really can calculate the in the right way when you're doing an owner finance, it seems there's always issues why they can't get a loan for the bank. There's a good chance you're gonna end up getting the business back, and it's gonna be in a worse case than when you left it, because they didn't have the money to grow it either. Yeah, and you're gonna end up having to figure out what to do at that point, and you didn't get the rest of the money from the owner finance. Obviously, you had to take the business back. So think about things in terms of multiples of profitability, what you as an owner are earning from the business with all adbacks. Then from there, the biggest variables are gonna be what multiple is the going rate based on those circumstances. And there's all kinds of adjustments that need to be made there. And in fact, there's gonna be adjustments in what's considered addbacks and what is not. But that gives you a barometer to be thinking about your business. If you are making$3 million a year in gross sales today, and you think that you're gonna get$3 million for your business, but you are only paying yourself$50,000 a year. There's there's just gonna be some letdowns in this journey. And I'd rather you know that now than you incorporate a broker and you try to figure out all that, and they have to be the bearer of bad news. But there are ways to obviously figure that out quickly and make some adjustments that are going to start to bring you toward the goal that you want to get. You're just not gonna get there this year. So, but before you make any decision, as always, consult a broker, get a good, accurate broker opinion of evaluation, and then from there you can make any informed decision. Most brokers don't charge to get a broker opinion of the evaluation, and you'll be in the ballpark of what you could be expecting. So I hope that helps. You take care and have a great day.