If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #18 post I discussed how as Acquisition Entrepreneurs one of the paths forward for you could be The ETA Conglomerate. If you love what you do, and in doing so want more love, then it’s natural to want to explore owning more than one business as a part of your Entrepreneurship Through Acquisition journey (You can read the previous post by CLICKING HERE). Part of the ETA difficulty as an entrepreneur is identifying the value you should be willing to pay for a business. So, in today’s 30 Days to ETA post, we’re going to explore how you can create and justify the price you should pay based off of objective versus subjective criteria — The ETA Business Valuation… Enjoy!
The ETA Business Valuation
At Tip of the Spear Ventures’ Mergers & Acquisitions practice, we’ve analyzed over one-thousand businesses in our screening process. The filters that we employ allow us to accurately, and objectively based on quantitative data, assess a business for potential acquisition. Why do we look at so many?
The reason why we invest time/money/effort into exploring so many different businesses for mergers or acquisitions is because we have a number of filters in place in our search for a business. These filters are by design established to move potential businesses out of the process, as opposed to passing them on or through the process to the next step. Why do we want to filter out organizations sooner, rather than later?
Preparing for The ETA Business Valuation
Buying a business as an Entrepreneur Through Acquisition will find you with a ton of businesses you could explore purchasing. Today, as I write this, there are over 11,000 businesses listed for sale on BizBuySell.com in the geographic-freindly location that we focus on conducting M&A work. With this large quantity of businesses available to explore, you will have to have the mental fortitude, the financial fortitude, and the emotional fortitude to get through this ETA process. It’s imperative before you begin the process that you stop. Let’s do a personal and business assessment to determine the Minimum Viable Acquisition (MVA) Criteria you need before exploring as an Acquisition Entrepreneur.
Minimum Viable Acquisition (MVA) Criteria
Minimum Viable Acquisition (MVA) Criteria focus on what you need a business to consist of at the minimum levels in order to move forward in your due diligence investigation. It’s in this MVA analysis phase where you are identifying if you should move forward and further investigate the organization or discharge them from the process. Whatever your answer is, have you quantify this in an objective manner.
ETA candidates typically ask me why I’m so firm on the objective nature of MVA versus a subjective one. After all, I’ve had several ETA candidates tell me that the concept of “love” as in “I love what I do” is typically a subjective one — not an objective one. While I encourage you to love the business that you’re exploring, I also know that love can cause you to be blind. And it’s exactly in these blindspots that if you allow for subjective decision making to take over, you’ll quickly fall out of love and worse yet end up in the poor house! None of us — and I mean none of us — are going into this Acquisition Entrepreneur initiative with the end goal of arriving at the poor house (Perhaps this is why the focus of nearly every Day #1 through Day #18 here in this ’30 Days to ETA’ series has been focused on end results of selling the business you ultimately acquire for a profit!)
So I ask you to stop, pause, and look at your leadership capabilities. Then, ask yourself the following Minimum Viable Acquisition (MVA) Criteria planning questions:
- What do you need cash flow to be?
- Will you have enough to finance the Acquisition?
- Are your risks managed?
- How will you lead your new business?
The ETA Business Valuation meets MVA
You see, the goal for most of us in the ETA space is to acquire a business and grow it to where it’s just a part of our overall net worth, not 80% of it. Many times at this ETA phase, I see entrepreneurs desiring 500k, 1, 5, 10, 15, 20, or even 40 million dollars a year in revenue. Or, like many of my clients, they are bringing in hundreds of thousands of dollars a year in their personal income from the organization that they currently work for — income that needs to be replaced/offset/improved on after the acquisition of a new business.
I was interviewing a candidate for our Entrepreneur in Residence program here at Tip of the Spear Ventures. The candidate was extremely bright, very well educated, and had what I thought was a great aptitude to be one of our owner-operators of a business that we would acquire. What they weren’t great at was seeing that being an owner-operator wasn’t like working for a Fortune 500 company or a consulting firm with built in compensation structure. As the owner of a business, there are times when you acquire one and need to sacrifice your monthly compensation so that you can make payroll for the team you inherit. The candidate couldn’t wrap their head around this, and ultimately went to work for a consulting firm instead.
How to Estimate the Value of a Business
So this is where business value comes back into play. At this point in your ETA process, you will need to have a rough estimate of the value of the company. Now, I’ve created a whole post about business valuations and how businesses are valued. My experience as a Managing Director at Tip of the Spear Ventures and as a value growth expert has led me to draw up detailed assessments of current business values based on EBITDA and industry-specific value multipliers.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. So if you have a business that is worth five times EBITDA, or 200% of collections, or three times recurring revenue, all of those things are good guidelines to follow to get you close to what you think your business is worth. At this point, I’m not talking about the nitty-gritty of value calculations. I’m just talking about getting together a very rough business value estimate, or assessment.
Determine the Minimum Viable Acquisition (MVA) Criteria You Need
After you evaluate and quantify your personal and business assets, you will need to determine whether or not you have enough money on which to live after you buy the company you are investigating.
If you tell me that the current value of the business you’re exploring is two million dollars, I’ll ask, “How much do you need to reach your goals?” If you tell me you need two hundred thousand dollars a year to reach your goals, I’ll ask “What other assets do you have and what in the business could be potential levers we could improve to achieve that comp level?” If the business doesn’t currently generate that compensation level for the current owner, who is smart and has been running the business for the last 30 years, what makes you think you can jump in the President role and achieve that so as to reach your desired compensation. In other words, you may be in trouble.
Conduct ETA Business Valuation GAP Analysis
After running personal and business assessments, you may find that there is an ETA Business Valuation GAP. In other words, there is a difference between the business valuation of the company you’re looking at and the minimum viable acquisition criteria you actually need to meet your life goals.
That ETA Business Valuation GAP can occur at many different business and personal levels, so it’s time to find it. Now is the time to look for the gaps – before you buy the business on the open market.
SUMMARY
In this ’30 Days to ETA’ post we’ve explored the concept of the ETA Business Valuation and the role it plays in allowing you to search for businesses that are appropriate for your goals. Too small of a business valuation could lead to missing your Acquisition Entrepreneur goals. We’ve discussed the objective versus subjective nature of ETA, one that can keep you from falling haplessly in love — and help you avoid the poor house! I also introduced what I call the Minimum Viable Acquisition (MVA) criteria. This MVA criteria allows you to focus on best-case businesses that are closer to where you ultimately want to get with your goals.
Sam Palazzolo
