Jason talks to David Barnett; a private transaction advisor. Today he is going to specifically talk about acquisitions, but not from the seller's point of view, but from the buyer's point of view.
Episode Highlights:
- 2.30: David says that he works with business owners who realize it might be faster and easier to grow through acquisition. Another pool of buyers are people who work someplace and don't like it and typically these people are sort of in the Middle age group where they have got mortgages and families and maybe children and they realize that if they want to pursue their entrepreneurial dream the risks of a startup may just be too great, but if they buy a business, they can become an entrepreneur without the risk of starting up.
- 06.04: In the world of acquiring businesses, we often hear about EBITDA earnings before interest, taxes, depreciation, and amortization. We hear about EBITDA multiples, and in the mid-market space people toss around ideas of what businesses are worth various multiples 4,5,6 times or what have you. In the world of main street businesses, we use a different level of cash flow is called SDE - Sellers Discretionary Earnings and it is the total amount of cash flow available to an owner manager who works full time in the business.
- 14.36: If you double the size of your business by buying an equally sized company in another city and you double your volume of purchasing, you might not increase sales, you might not increase margins, but you might be able to increase your leverage with suppliers.
- 18.46: When there is momentum in the transaction, when the buyer is eager and they want to make a deal, it benefits the seller to be ready to feed that desire with all the information they're looking for so that you can move quickly.
- 25.02: The reason someone is buying the business, the reason someone is going to be willing to pay some amount of money towards the goodwill that's been built into the business, is because they want to avoid the risk of a startup, says David.
- 31.02: When you go to do the due diligence on that business, what you do is you, you check the bank statements to make sure the deposits are all correct and then you go through the box of invoices from all the suppliers, and you add them all up and you compare it to your income statement. If it looks kind of closely then you can be reasonably certain that the financial statements are likely close, but they are never exactly correct.
3 Key Points:
- David explains the details between EBITDA (Earnings Before Interest, Taxes, Depreciation, And Amortization) and SDE (Sellers Discretionary Earnings).
- David talks about the factors that prompt a seller to sell their business.
- David shares how a buyer has to be ready to be able to deal with the unknowns and a lot of the times those unknowns are managed through the structure of the deal.
Tweetable Quotes:
- "Economics of buying a job is different than the economics of - hey I have got an enterprise already in place I am buying your client list right at you know will be preferred to as a strategic buyer." - Jason
- "I have also had clients who have mailed out letters in more than two years later, people have picked up the phone and reached back out to them." - David
- "A properly prepared buyer knows that there are always going to be these unknowns within the diligence." – David
Resources Mentioned:
- Facebook – Jason Pereira's Facebook
- LinkedIn – Jason Pereira's LinkedIn
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