The Importance of Transferrable Value

How much more successful would you be if you had lunch once a week with insanely successful entrepreneurs who share their biggest secrets on how they think and achieve success? Grab your seat at the table because this is business lunch with Roland Frazier and Ryan Deiss.

Let's dive into today talking about transferable value. So a lot of the things that we've covered before are going to impact value. So I'm not going to re review them, but I will mention them as they impact it. And we'll kind of start with just looking at the model. Remember that we've got leverage, sales and bankable profits. And with that we have momentum. But without the ability to have transferable value, we don't have the power that you get from being able to raise money and fund your business and attract great management and things like that, as well as get buying volume discounts in the market and such. And then without that and on the profit side, you don't have the option of continuing to either go in business and raise money or continuing to just own it. So optionality and power are not there if you don't have that. So that's why we're talking about that as one of the critical three components of having scalable impact. Remember that everybody exits eventually, whether you plan to or not. We talked earlier about the five stages of the entrepreneur. The five exits of an entrepreneur, that is, and really where you want to get as quickly as possible is out of the blue and out of the green into the red where you can get off the org chart. This is important because as part of your ability to have value in your business, it needs to be able to run without you. So if you're on the org chart, that means you have a job title, that means you have a job description, and that means that you need to do things that are valuable to the company and maybe essential may be critical to the company being able to continue to have sales and operate effectively. You don't really ultimately want to be there if you're going to have the best value. You want to get above the business. Right. The other thing you want to do is think about what's the number that you want. Now you don't have to have a number, but most of us do where we say, you know, if I could hit this number, I think maybe I'd be willing to let this business go. So let's talk a little bit about how you would calculate that very first thing you do. You want to say, what is my desired monthly income? And just to keep it easy, we will say that that is $10,000 a month. So you're going to take that desired monthly income, multiply it by 12, and then you're going to divide. And this is really important, and a lot of people miss this, too. You want to divide by the estimated percentage return you're going to get on your investments after you exit. And it might be a lot lower than you think. If you look at returns over time in the stock market, they run about 8%. Real estate runs 11%. So that's going to tell you what your assets needed are. So if we were saying $10,000 a month was our target, $120,000 a year, multiply that by 12, and then we divided by a 5% return on investment we could get on our post exit investment. That mean you need 200, excuse me, $2.4 million to earn $10,000 a month. And that surprises a lot of people. So it's good for us to be aware of, of exactly what that number is because a lot of times it is significantly higher than we expect it to be. I'm going to get the chat here so I can see. Okay, cool. So that's an important thing for us to consider. So in this case, your number would be 2.4 million. How do you hit the number? That's the next question, right? Well, you divide the number that you've come up with, the assets that you need by whatever the exit multiple is going to be for your business. And that's going to give you your MRE or your minimum required ebitda, your minimum required profit, because that's what you're going to need to be able to hit your number. Right? So the next question, what multiple do I use? All right, there's a lot of things that go into it. We talked earlier about ebitda, if you remember, that's a fancy way of saying profit in the accounting and investment banking world, it's earnings before interest, taxes, depreciation, and amortization. The other thing to think about with that is that there are lots and lots of multiples for different businesses. So the most common way that businesses are valued, although There are over 400 different documented ways to value businesses, believe it or not, that is using industry multiples. So basically, this is where companies like institutions like the Stern School of Business at nyu, they'll look at cohorts of transactions of companies that are selling in different industries and, and then say, okay, this is the multiple that these businesses sold at on average. So what you're getting here is larger transactions Typically, and this will give you an idea, though, around lots of different industries. You can see down here in the third column that retail breaks down to automotive, building supply distributors, general grocery and food, online and specialty lines. And the multiples go from as low as 5.75 in grocery and food to as high as 33.5 times EBITDA, 33 times profit. Right. For online retail businesses when they're larger. Okay, the next thing that we'll look at is the Ecuadam multiples. This is the same kind of calculation. It's just done by a different company called Equidam, and it's different industries. But you'll also see that there are some of the same industries listed here and they have different multiples. That's because Equidam used different transactions to calculate the number. So the importance of having both of these is that there are like on here, I don't think they have any categories for retail. So that's not even on the Equidam list. But over on the other list there are multiple categories. So it's good to have a couple to work with. Now, the other thing to think about is that, as I mentioned, these are larger transactions. And as we, as hopefully you recall from one of our earlier sessions, the price that you're or the multiple that is going to be applied to your company is going to be higher. The bigger the company is, the more profit, the more ebitda, the more seller discretionary earnings it has, the higher the multiple will be. Since the multiples I showed you on those charts are from larger deals, it's a good idea to divide those multiples by 4. So if you saw 30, then divide by 4 and your multiple is 7.5. If you saw 10 divide by 4 and your multiple is 2.5. That's a good rule of thumb. That doesn't always work. But rules of thumb are imperfect, but they give us a good generalization. The median sales price compared to EBITDA. So the medium multiple for businesses as of the second quarter of 2021, according to deal stats, is 3.8. You can see that it really, really peaked up around 5.6 in the third and fourth quarters of 2018. And then it's kind of gone up and down since then, but we're trending back down towards it runs in that 3.5, 3.8 range. So we're around 3.8 right now. Now, your industry might be one that has a higher multiple. And we'll also talk about SAS here in a second, too, but this is Just again, a good general guideline that if you were going to sell your business on average across all industries, you could expect about a 3.8. The other thing, and by the way, EBITDA as we talked about before, applies to professionally managed businesses. So if you are an owner operated business, then we use a different term. We call it SDE or seller discretionary earnings. And that's basically ebitda, the earnings before interest, taxes, depreciation, amortization, but adding back any salary that you're getting above what market is. So you can go to like payscale.com or glassdoor.com or salary.com and, and see what a manager or a CEO for a business like yours might be paid in your area. And then you want to look at that and compare that to what you're receiving. If you're an owner operator, and if maybe you're paying yourself $300,000 a year, but the average is 150, then you would add 150,000 back to your EBITDA to get to SDE. The reason that's a good thing for you by the way, that means that you're going to have a higher number because you're adding back those extra benefits. If you take your family to Paris and have a, have an owner retreat and you write that off on your business or if your, your car is in the name of your business or other things that entrepreneurs do to have lower taxes, then you want to add all those things back as well to come up with SDE. Okay, now SDE is lower than EBITDA and it runs about 2.5 compared to 3.8 across all industries. And you can see here several industries are listed and some of them are higher and some of them are lower. Like moving is it Mining and quarrying is super high. And one of the lowest ones would be healthcare here. Right? Third thing, the third thing that multiples are based on in one particular industry called SaaS, which is software as a service, is ARR or annual recurring revenue. Sometimes you'll hear this referred to as MRR for monthly recurring. But what happens in the investment banking world as we multiply monthly times 12 and figure out what is ARR? Now this can also apply to subscription businesses that are not SaaS, but they really have to have a low churn rate. They need to have good stickiness, meaning that people aren't leaving faster than they're coming in. So you want a churn rate that is typically under 4% to try to get this kind of valuation. But if you can it's magic, because if you can, it is a multiple of revenue, not a multiple, not a multiple of profit. So if your Profit margin is 20%, that would mean that you had, let's say you had a million dollars of ARR or a million dollars of EBITDA. If you had a million dollars of EBITDA, that means that that's based on $5 million of revenue. So your valuation would be a multiple of million dollars some number times a million dollars. If you have annual recurring revenue as the metric and your annual revenue was 5 million compared to 5 million in sales, that would be five times the revenue. You would get an extra 80% of value. So it's a pretty significant benefit if you can qualify for that. The average SaaS multiple in the second quarter of 2021 is 15.5, 15.5 times annual recurring revenue. So let's see. And that's after tax. Stephen says also I have a really good reference book for smaller business valuations. 2021 Business Reference Guide. Yeah, the BRG is a good one, I agree. So, yeah, you can, you can look at the 2021 Business Reference Guide as well. That's something I subscribe to. Peter says, doesn't insurance broker count in this? No, but each industry does have its own specific valuations. So we're just kind of talking generalities here so that you can have a rule of thumb to see what's my business worth and then how can I bump that valuation? That's what we're talking about today. So EBITDA valuation would be 3.8. The average SDE would be 2.5. So that's professionally managed, 3.8, owner operated, 2.5. And then if you've got some sort of SaaS or good subscription business with low churn, you're going to be, and this is a wide, wide range, somewhere between 3 and 25, the average being about 15 right now. Okay. The other thing to think about is that the industry that you're in affects multiples, which means it affects the value of your company. So one of the things that you can do is be aware of what are the better industries to come and focus your business in. And are there any industries that you could kind of tilt your existing business towards or expand into if you're thinking about expanding or doing something new? The interesting thing is McKinsey, which is one of the big consulting companies, did a study on the 10 factors that most impact the growth of a company. And one of those is universal industry trend growth. That was the number one important factor. So here's why that's important to valuation is if we know that an industry that's growing is good because a rising tide looks, lifts all ships, we know that just by being in that industry you're likely to have a growth in sales and profitability, then a investor is going to say, I like this company better than one that's in a declining or stagnant industry because no matter what they do, it's likely to go up in value, which reduces the investor's risk, which means your company is worth more. So that's something to think about when we look at the industries that are experiencing the greatest growth right now. In particular, if the forecast for it to grow more is good, that's really good too. And so some of these industries are worth looking at. Unfortunately, some of them decline. Like you can see air transport, which is the third one down. They looked at 17 firms in the cohort. It grew by 17.4% in the last five years, but revenue actually decreased. Income went up, so they were finding ways to optimize, but revenue decreased and it decreased by 6%. And it's looking like it's going to go down another 16% over the next two years. That's not a great place to be. On the other hand, if you were in soft beverages, then you can see they looked at 41 companies in this cohort and they had a 12.74% growth rate in net income over the last five years. They also had a 27% growth rate in revenue, and they're forecast to continue to have strong revenue growth, 15%. So we like that kind of industry. So you can just kind of go through this and see which are the industries that might have the biggest opportunities for you to expand your company in, knowing that when you do that, it's going to move you up towards a higher valuation. There's not, It's. It's like if there's a range of value, if there's a range of value between, say 5 and 8 in your industry, then the more things like this that you have going for you, the more likely you are to get up to the high end.

Ever wondered how some people build real wealth through acquisitions, while others just sit on the sidelines? Well, I'm here to tell you it's not about luck. It's about having the right system, the right deals and the right guidance. And that's exactly what we give you in the epic deal. Fast track. If you've been thinking about buying a business, but you keep getting stuck Whether it's finding the right deal, structuring the financing, or negotiating with sellers, you are not alone. Too many people waste months, even years just thinking about acquiring a business while the real opportunities pass them by. The EPIC Deal fast track is not another course. It's actually an implementation program and it's designed to get you from the idea to the acquisition in just 16 weeks or less. We work with you one on one to help you find, fund and close your first or next deal. And once you do, we're gonna plug you into our elite EPIC board community so that you can keep scaling through acquisitions. We install three powerful systems in your business. The first is the deal flow engine so you always have high quality off market deals coming to you. Number two, we give you our offer and funding system so that you can structure offers that get accepted and fund them creatively many times with no money out of your own pocket. And number three are closing and integration systems so that you don't just buy a business, you actually successfully run and scale it once you have acquired it. Plus you'll have direct one on one support from an EPIC Deal Advisor every step of the way. And that's people that have actually come up through this system and done these deals themselves. That's the only way to become an EPIC Deal Advisor. And if you're serious about acquiring a business this year, don't just sit on the sidelines. Just text I'm in to 334-458-9034 and we'll get you in. So text I'm in to 334-458-9034 will get you in. No fluff, no wasted time, just real deal making from people that are actually out there doing deals right now. I'll see you there.