Mark Daoust | How Much Is Your Business Worth?

Unstoppable CEOPodcast

You’ve gone from startup to six or seven figures. Your business is healthy and growing. You’re ready to sell. What next?

Just like selling a house, you can’t simply throw up a “For Sale” sign. You have to stage the house for showing, the financials should be in order, and you have to ensure that prospective buyers see value.

But all too often, Mark sees business owners with badly kept books – they do just enough to file their taxes each year. They may be profitable, but they don’t know how that translates to value. As a result, they don’t know how much the business is really worth… and they’re definitely not able to convince prospective buyers to meet their asking price.

Hope is not lost. You can get back on course and sail off into the sunset after selling your business. Mark sets the course in our conversation. (Buyers can learn a lot, too.)

Tune in to discover…

  • Where you can get a free business valuation
  • Identifying your business’s Achilles Heel(s)
  • What really drives the value of your business – it’s probably not what you think
  • The key financial metrics you won’t get from accounting software
  • And more

Listen now…

Mentioned in this episode:

Transcript

Adam Lean: Welcome to P is for Profit, a podcast that breaks down business concepts into simple and clear language. This season is dedicated to interviewing eCommerce experts that can help you improve your eCommerce that I recently had the pleasure of interviewing the founder of an online brokerage business, they help online business owners sell their business, ideally for top dollar. So why does this matter? Well, the goal is many business owners to sell their business one day, that’s a dream of many business owners, but sadly, not that many actually do sell their business. Why is that? Well, one of the largest culprits is that the business simply is not valuable in the eyes of a potential buyer. The big question is that, how can you get your business valuable enough so that other people are interested in it, and it sells for top dollar? The answer lies and the reason why people buy businesses in the first place, they buy a business because of the cash stream that this business can give them. A business that generates $500,000 in yearly cash is much more valuable. And this will sell at a higher sales price than a business that generates $50,000 in yearly cash. So what should you do? Well, regardless, if you want to sell your business now or in five years, you’ve got to do one thing, you’ve got to start improving the amount of true free cash flow that your business generates. So let’s jump into the interview with Mark and say and see how he helps businesses sell their businesses. Mark, welcome to the show.

Mark Daoust: Thank you for having me on.

Adam Lean: Yeah, so Mark, you help business owners sell their business, specifically online businesses, your website’s quietlightbrokerage.com. And we’ll put that in the show notes. So you help people sell their businesses? So how did you get started with this?

Quiet Light Brokerage: Who Are They, and What Do They Do?

Mark Daoust: Yeah, no, great, great question. I started the business in 2007. So we’re going on 12 years ago. Now, since we started up Quiet Light. And really, it came from doing it myself, you know, going through the process of selling an eCommerce business that I owned. And going through that process and realizing that there, the the advisors in this space didn’t really have a lot of experience with online businesses. And in order to really evaluate an online business, that kind of helps to know it. You know, it helps to know what metrics are important from a buyer and seller, you know, having been on both sides of the negotiation table, both as a buyer and a seller, I was able to bring that experience to the transaction. And and really help out on the sell-side and on the buy-side eventually help people evaluate these deals more carefully. Now, things have changed quite a bit since 12 years ago. And you know, the types of deals that we’re working on are significantly different. But we still are able to bring in one of our key advantages that we try to bring for our clients is the fact that all of our advisors have that same background, we’ve all been on both sides of the table, we’ve been in that startup shoes, you know, we’ve all started up our own online businesses, we’ve all sold we’ve all bought as well. And so that first hand experience really helps and understanding the dynamics of the transaction, what to expect, and also anticipate potential problems, which is really where I think a company like ours hopefully helps for that business owner who wants to have an exit.

Adam: So why quiet life? How did you come up with that name,?

Mark: It’s got a few… pretty significant… there’s a few different meaning for it… you know that the idea is pretty clear for what we want our role to be in the transaction. You know, I remember when I sold my business, and now 14 years ago, and thinking man, this guy came in, and he took 10% of what, you know what, what a great gig he’s got. But I didn’t feel like he was all that, that useful. During the process, I felt like I was doing a lot of work. Throughout the process, I wanted my life to be an advisor who’s there, advising, but not trying to direct or tell our clients exactly what to do, right, our role is there to, again, shine light on the transaction, and advise our sellers advise the buyers to the extent that it makes sense to do so on how they should be going about or what they might be looking for.

And then putting the decision in their hands, right, allowing people to be grownups make their own decisions, but make good informed decisions. So that’s really where the name comes from, we want to be there as an advisor, but we’re not there to control or dictate what people do, and really have that respect for the fact that, look, somebody else built this business, somebody else put the work in that sweat equity, and they risk their money is their choice, at the end of the day, what they want to do with the business, and not our place to tell them to simply be there to advise them.

Adam: Now that makes sense. So you’ve worked, you know, I mean, you said yourself that you are on both sides of you’re a buyer and also a seller. And it’s important for you to know, the advisors to have experienced what their clients are going through. What are the biggest surprises that you found that when you’re working with a seller, that they just didn’t realize through the selling price process? And also with the buyers? What what are the biggest surprises that buyers, when they come to you, want to buy a business? That you know that they that seems to sort of shock them or they just didn’t realize?

Mark: That’s a good question, I think depends on what type of buyer and what type of seller you’re working with. On the buy-side. I think the valuation process can be a little bit mysterious for buyers trying to understand how businesses are valued. Why we use this metric called sellers discretionary earnings as the foundation, you know, you aren’t going to find sellers discretionary earnings in any report that you can pull up in QuickBooks or zero or whatever accounting software you use. And so sometimes it seems a little mysterious and kind of maybe, like we’re playing around with numbers. So on the buy side, I’d say the valuation approach. On the sell side, I think the biggest surprise for sellers is just how important your financials are. I think this is disappointing to some sellers, because they think the focus on the financials is undervaluing maybe other aspects of the business such as unique relationships that they’ve built up or, or proprietary software or any other number of things that we work in our businesses to to make them better. It often feels like those things are valued, but they are the value pretty heavily. But I think for the sellers, seeing just how heavily their financials make an impact on the total value their business. Sometimes it’s a bit of a shock, maybe a little bit of a disappointment. But after time, most people start to understand exactly why those become so important.

Adam: Oh, man, I couldn’t agree with you more. So explain what the sellers discretionary earnings are.

Mark: Yeah, so sellers. discretionary earnings is a number that we present to potential buyers to potential acquirers. And what we’re trying to do is we’re trying to provide a baseline number for a large set of potential buyers, which will allow a buyer to insert their own assumptions into the acquisition. And that might sound really confusing at first. But here’s a simple explanation, Buyer A might have different expenses in an acquisition, and Buyer B buys by a look, this is an eCommerce business, they might have a warehouse and a staff or fulfillment already. And so that’s going to be something that they don’t have to pay for. Whereas Buyer B might have to hire a bunch of people to run the business. And so they’re going to have their own set of expenses.

Sellers discretionary earnings is a number that we calculate there are rules to calculate sellers, discretionary earnings, to show the amount of earnings that a business has, that a seller or a business owner has to spend at their discretion. So in practice, what does this look like? Pretty simple. We remove accounting expenses, quote, unquote, accounting expenses, such as amortization depreciation, and we get to EBITDA, that’s the baseline number that we’re going to get to. And then we remove one owners benefits, right. So the salary that you pay yourself, if you have a home office and your expenses, that we would remove those or add those back is a terminology that we use. And then we add back true one time expenses, such as filing for patent or trademark, and that nature, there are set rules for determining what expenses we can add back to the bottom line.

But there is some interpretation that happens as well. And actually, my business partner and I, we have a podcast as well, we just recently recorded, it’s not yet entered, but we recently recorded a 45 minutes discussion between he and I, and what is the legitimate add back? Because there are these kinds of grey area scenarios and it can get kind of in depth. But at its at its basic level, what are we doing, we’re adding back one owners benefits, accounting expenses, and, and true one time expenses back into the bottom line of the business to be able to provide this baseline number for potential buyers to begin making a valuation as to whether or not a business is going to be a good return on investment for them.

Adam: And by the way, what is your podcast?

Mark: So it’s The Quiet Light Podcast. And we talked about selling a business buying a business, we interview previous clients. And then also experts as well we bring in people that we know in our expert, circle of friends into that, but a lot of it is just focused on this buying and selling online businesses.

Adam: Excellent. I’ll put that in the show notes as well. So let’s talk a little bit more about the seller’s discretionary earnings because I think this is so important that anybody that’s wanting to sell their business either now or even five years down the road. So it sounds like from what you’re saying the number one thing that business owners can do to increase the likelihood that their business sells for more is to improve their seller’s discretionary earnings. So they have money that the business produces, taking out all the personal, the current owners expenses. So if a new owner bought it, you’re saying that the sellers are great. earnings are what the new owner could sort of expect to make from the operations of the business. Is that right?

Mark: That’s basically right. Yeah. So the sellers, discretionary earnings is that number that we use to help us meet with a potential return on investment is just keeping in mind that different buyers are going to have different scenarios, right. So one buyer might want to be an owner operator, and they won’t have staff costs, we have other buyers who hire a CEO for every acquisition that they do. So they have to inject that cost into their calculations for able to provide them with a foundational statement. And they basically tell them, here’s what the money that you’re going to have to spend at your discretion that this business is currently generating.

So if you’re preparing to sell or if you want to exit in the future, one of the key things that you can do, one of the most important things you can do is to trim up your expense profile to be as efficient as possible. Because something that we see frequently with sellers, especially when we’re having those initial conversations, and they start to get this idea of an ad back, they then look at this and say, Oh, well, you know what I spent $100,000 on advertising. And frankly, it’s pretty inefficient, I think we should add back $25,000 of that, well, it doesn’t work that way, right? You’ve actually spent that money on the operations of the business, you can’t just add it back. Because you think that you can get away with that you do have to show that in actual histories, one of the key things that the people should do, anyone that is looking to exit their business and one two or three years is to a understand what the value of the businesses right now.

And it’s easy to do that by doing a free evaluation either with us or someone else or just studying up on it and figuring out on your own, it’s not too complex. And then be understanding what’s driving the value of that business. And where they can possibly maximize the value of the business in that exit. Trim means up your expense profile, one of the easiest things that you can do, and most important and most influential things you can do to increase the value of your exit.

Adam: Okay, so I just jotted down three things that you said that some sort of tactics or strategies people can use. First, trim up your expense profile. Second, know your valuation. And then number three was driving the value of your business. And I guess once you know that, then you can take steps to actually improve that. 

Mark: Let me comment on knowing the value of your business. My business partner brings this up when he gives talks at conferences, he’ll often ask the room for people to raise their hands if they know how much money they have in their checking account. And then keep their hands raised if they know how much they have an investment such as stocks or, or the retirement accounts, and then keep their hands raised if you know the value of the home of your car. And most people know these things. But how many business owners know the value of their business

And when he asks that, usually the vast majority of hands drop in the room. The fact is, if you own a business, it’s probably one of the most valuable assets that you own. And if you don’t know the value of that business right now, then it’s really hard to understand a Should I exit be when should I exit? See how should I increase in value? Understanding what drives the value of your business is key if you want to exit someday, because you not only do you know what your starting point is what’s realistic, but she was also getting a sense for what the leavers are, that can increase the value, what’s going to potentially decrease the value of that business.

And frankly, at that point, and exit strategy kind of lays itself out in front of you, once you understand these things, it’s pretty easy to say, I need to do A, B, C and D if I want to exit In one, two or three years. And just as a footnote to that. You don’t have to exit your business or want to exit your business to go through this exercise. Having a great business to sell is usually a great business to own right, which makes it desirable for potential acquire is that it’s a great business. And so going through this exercise is really good for those who even don’t want to sell or don’t really have ideas that they want to sell someday, knowing the value of what you’re sitting on is just good information to have. And knowing what can make it more valuable is also very good information to have.

Adam: So what is your experience… what are some of the most common things that people can do to improve the value of their business?

The Four Pillars of Value

Mark: Yeah, great question. Great question. So we actually developed a very simple framework that people can use, and really in any business, online or offline, you can use this, this framework to understand what’s driving the value of a business. And we break it up, we call it the four pillars of value. And the four pillars are risk, growth, transfer, ability, and document. And if it’s okay with you, I’ll run through these really loud, sounds amazing with everyone. So, risk, we’ll start with that somebody who wants to acquire your business is going to stroke a check for more than the business makes per year in earnings. Right. So they are staking and putting that risk some money that on your business, and they want to make sure that they’re not going to lose all of that, right? That’s pretty important for them. And so the risk profiles of your business become really key in their evaluation of if they want to write this check.

So you need to evaluate your business and areas of risk. Look for single points of failure in your business, do you have a vendor that you rely on that if they were to change terms, and go out of business? or decide to compete for direct head-on, you know, one on one with you? Would that damage your business significantly? Most of us would have to say yes, at some point. So do you have contingencies for that? Do you have key employees? Or if they were to be incapacitated for some way or leave the business or work for a competitor would be very, very dangerous for you to take a look at these different aspects. Are you in an industry that is potentially at risk with legislation? Or do you have a couple of unicorn products, which are really driving most of your business?

So look for the areas of risk within your business, and start to develop contingencies for those risks. Right? If it’s vendor reliance, which is the most common issue that we see, at least have backup vendors, you don’t necessarily have to retain them, but know that you can move over to them should the need arise. So the risk is again, this is a really large area, one of the most influential factors, if you have a really high-risk profile, you’re simply not going to get as much for your business as you could. 

Growth. Obviously, nobody’s investing in business hoping to lose money. Buyers are buying a business because they want to make a good return on their investment. And so the growth potential of your business becomes really key towards the valuation that you receive. And on that your trends, your financial trends are one of the key indicators of growth. are you growing at a pretty, pretty consistent rate? What does that trend look like for potential buyer? Can they reasonably assume that over the next 12 months, the business is going to continue to grow, the more you can paint a picture of growth and real growth opportunities, the higher the valuation you’re going to receive? Right, the other areas that we look at for potential growth would be easy expansions are naturally untapped growth that you just simply haven’t gotten to yet more work you have to do to unleash that growth. Less you’re going to get out of it less credit, you’re going to get out of that, that the area of growth and easier growth that’s right in front of you, the more value you’re going to get, for example, I’m working with an e commerce business right now, where the owner has released products on a fairly regular basis, but it’s running into cash flow issues. But the owner is a great product designer and has a whole set of new products that are ready to go.

They just don’t have the cash to be able to release them. But everything is ready to go. It’s really just a matter of injecting that cash. That’s fairly low hanging fruit for a new owner, who can see a proven track record that the product designs are successful. That’s a really good growth opportunity. Right. So that’s the first one was a risk. second one’s growth. Now we get into a little bit more fine pillars, and that would be the transfer ability and the documentation. On the transferability front, what we’re looking for is how easy is it for somebody else to come into your business and run it from day one? Do you have a good standard operating procedures in place? Do you have a team in place? If your business is large enough to support a team? Are there any knowledge barriers to your business that you need to have, that somebody has to overcome? Or are there physical requirements so far, we work in e commerce pretty heavily. Some vendors used to require having a physical storefront.

And in order to supply the product, that would be a transferability issue. And when we look at this, there’s a little bit of a, you know, push and pull dynamic here, right, because having high levels of transfer ability sometimes increases the level of risk because competition can come in. And sometimes having a business that’s a little less transferable. Maybe because there’s a knowledge barrier or special requirements in order to sell certain products, you know, these can reduce your risk profile. So there’s a little bit of push and pull, it may not be possible to score 100 on both of these pillars, but you can do pretty well, all the same. Last documentation. This is the least exciting of all the pillars, but maybe the one that has the most impact because you have 100% control over this.

And I’m going to throw right at the top of this list. having great financial records. I already said the biggest surprise for sellers is just how much their finances come into play. Well, guess what they do. having great financial records that are clean, verifiable, separate from other businesses, it makes, it reduces the appearance of risk or the unknown for potential buyers. It helps them assess the value of your business at a glance, and it adds value to your business. Now throw one last thing on here. It’s not just about having good books kept. It’s understanding how your books should be kept. And one thing that we see here, especially with growing physical products, businesses, so many of them on cash basis accounting, so the recording revenue and expenses, as they’re spending them, you can gain a lot of value, just by having your books on accrual basis, which is probably a better way for you to be recording two books Anyway, you will gain significant value if you have a growing business by having your books on accrual basis.

So again, those four pillars risk growth, transferability, documentation. Take the time to document your business. First, of financials, go through the other aspects as well as standard operating procedures for your business diagram on your business to actually do an organization chart, you might think you don’t need it. But for potential buyers, it’s really good to have. And I’ve never run across a business owner who’s gone through the exercise and hasn’t found it useful. So take the time to do that. With those four things, you can understand the value of a business, if you just focus on those four things, you will be at 90% of the way there to maximizing the value of your business.

Adam: Wow, this is very good information. And I mean the risk, growth, transferability, documentation. So I’m assuming when you get a potential seller comes to you wants to sell their business, you go through these three, or these four things. Yeah, what percentage of clients come to you and they’re just not ready, they don’t have one, two, or three, or all four of these.

Mark: Now we tell the vast majority of people who come to us, we tell them to wait because they’re not there. And if I were to just guess a percentage, and I haven’t looked at these numbers in a while, but if I already get a percentage, I’d say about 80% of people who come to us, we would tell to wait. And the reason is, look, it’s ultimately their decision, some people don’t want to, I’m dealing with a client right now where my recommendation was to wait three months because I think your business is going to be significantly more valuable in three months.

And the responses, I’m ready to go now, you know, even though there’s literally money sitting on the table just three months from now. So not everybody takes that those suggestions. But the vast majority people who do come to us sell, we do as we do recommend that they wait to try and get a little bit more value out of the business, I wouldn’t recommend somebody Wait if you the increase in value is 5% or 10%.

In some of these cases, value change is significant, especially with this cash to accrual change. You know this is pretty simple. If you’re growing and continually adding inventory to your business that obviously affects your cash reserves. But it doesn’t affect the profitability of your business in the same way, and the profitability is, you know, one of the starting points for understanding the driving value of your business. And so this can be a really key part to influence the value. We’ve had clients swing with hundreds of thousands of dollars in value just by making the switch.

Adam: I mean, I can’t overstate enough to 100% agree with you, you have to have great financial records, even if you never sell your business you how can anybody operate without knowing the financial state of their business? It’s like playing a basketball game without having a scoreboard. How do you know what to do?

Mark: Yeah, and I think stems from people not understanding how financial statements work and look, I’ve been in the same boat. For years, I preach the gospel of making sure you have clean books in my books are a mess. I know it’s difficult to do. And when you don’t understand the value, or you don’t really understand what all these reports mean. Oftentimes, it just kind of goes by the wayside because you focus on what is understandable and right in front of you. But for business owners, having data is really key to making decisions. And the fact is your financial records are a key data point. And these reports have been developed over hundreds of years, right? This is not something that just recently came about. These reports have been measuring sticks to measure the health of a business for a long, long time, take the time to understand it and take the time to understand what a balance sheet is, and why everything’s supposed to balance out and how it actually works. And then you can look at your own business and say, is business healthy? Or maybe do I need to tweak how I’m running the business? There are some really key insights that you can have just from understanding your basic financial reports.

Adam: Well, Mark, I mean, I, there’s so many things I want to talk about. But we’re almost out of time. This has been really, really helpful where if somebody’s interested in selling their business, or just learning more they know they want to sell maybe one day, where can people find you and learn more?

Mark: Yeah, absolutely. Anyone can email me mark@quietlightbrokerage.com is my direct email, we have a ton of resources on our website, we do have a podcast as well, you can find that at quiet life brokerage calm. And the last thing that I’ll throw out there is if you do want to know the value of your business, reach out, we can do a valuation call, it takes 15 minutes to 30 minutes to get a rough idea of the valuation of your business. And really start to key in on the areas that you might want to focus on with the business to increase its value. It won’t be the fine points of evaluation that we would do if you’re actually going to sell but it’s going to give you the 80% of the way there to really get a good sense of where your value is we don’t charge for that it’s really out there for us to add value in the marketplace. We understand that adding value for business owners comes back to help us later on. So we really want to add value and help you make good decisions with business. So again, quietlightbrokerage com if you want to pre valuation or reach out to me directly at mark@quietlightbrokerage.com

Adam: Wow, that’s really great that you offer that so yeah, we’ll put all of that info in the show notes. Mark, thank you so much for coming on the show today.

Mark: Thanks so much for having me.