Tip of the Spear Ventures

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30 Days to ETA | Day #24 – The ETA Confidential Information Memorandum (CIM)

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #23 post I believe that as an Acquisition Entrepreneur if you fill your Mergers & Acquisitions pipeline with qualified companies to explore acquiring, Entrepreneurship Through Acquisition life will become easier for you. But how will you know which businesses are right and which businesses are wrong to begin the filtering process on? So, in yesterday’s 30 Days to ETA post, we explored ETA Industry / Business ID (You can read the previous post by CLICKING HERE). But identifying seller personas and industry specifics are not enough. You’ll want to know how to rip apart the information you receive as a part of due diligence. The center piece of this information is the Confidential Information Memorandum, or CIM. So, in today’s 30 Days to ETA post, we’re going to explore The ETA Confidential Information Memorandum (CIM)… Enjoy!

The ETA Confidential Information Memorandum (CIM)

This collection of written documents and printed reports provided by sellers on their business’ relevant details of their company is called a Confidential Information Memorandum (CIM). If the CIM is well-comprised and well-structured, a CIM book will have you as the Acquisition Entrepreneur salivating at the opportunity.

5 Sections Every ETA CIM Needs

Since every company is different, the ETA Professional Team will offer advice for what you need to see in the CIM for the industry you are searching in. Most ETA CIMs include five major categories.

  1. The history of the company
  2. The company’s team
  3. Their business model
  4. The company’s current financial situation
  5. The company’s financial forecast

They say that compiling this information is hard work. At times, digging through this ETA CIM will feel like even harder work — It will feel tedious, futile, and frustrating. But if you take the time to review it, the ETA CIM’s existence could bring you to a conclusion as to whether or not to filter the organization out of the ETA Deal Flow mix, or pass them on to the next step.

Why Most Sellers Should Follow an ETA CIM Pro Forma

For me, reading an ETA CIM is an evolving process. I want to see the entire company outlined in such a way that it tells an accurate story of the business that you are investigating for Mergers & Acquisitions.

If accuracy in ETA CIM is the goal, why are so many business sellers not willing to put in the effort to produce a quality production? The reason is that it takes effort and energy, and often times while they’ve successfully run their business for potentially several decades, this might be the first time that they are preparing it for sales. Therefore, they rely on the advice/counsel of others who might not have the best example, or pro forma to follow.

I love seeing an ETA CIM pro forma helps business owners communicate where they have taken their company over the years — What is their story? It also provides a nice trail guide of where they’ve been and what’s worked over the past few years. Beyond Profit and Loss Statement categories that fall into the ETA CIM pro forma for each year, somehow business owners miss that the ETA CIM needs to also include current year to date information as well. This way Acquisition Entrepreneurs can clearly see how much the company’s income has grown over the past four or five years.

Once ETAs can see the actual growth rate of the organization over the years, they can make realistic predictions about their future financial growth. If the company’s revenue has grown at a 10% annual rate, then the ETA cannot realistically project a 30% yearly growth rate in their pitch book unless they make drastic changes. However, if the ETA CIM pro forma shows business owners have maintained a historic growth rate of 10%, and they’re now projecting a 9% future growth rate, that should be easy to obtain. The Acquisition Entrepreneur can easily “buy into” that calculation.

Reading The ETA CIM

Where do you start? Here are a few ideas to help you get started on your ETA CIM. You’ll need to modify them to fit your individual needs.

  • Designate a team member to review all the necessary information.
  • Write down and record your reflections of the company’s history, including highlights and lowlights.
  • Ask your ETA Professional Team — or deal flow analysts — to review/write their reflections.
  • Identify questions that you have to be answered by broker and/or business owner.

As you review the ETA CIM, don’t get so caught up in every word, there will be general themes that should emerge. Your ETA Professional Team will make suggestions on what are growth opportunities which will culminate in whether or not to move forward with the opportunity or discard it.

ETA CIM Red Flags

When you read the ETA CIM, you obviously want to see the company in an accurate state, not a fictional “best light possible” one. Unfortunately, most seller brokers will want to show historical growth that shows-off their all-star team members if their financials don’t justify success. ETA CIMs will also outline an “enviable business model” and illustrate the company’s current “stable” financials, but provide little/no accuracy. Two ETA CIM Red Flags that should cause you to run for the next opportunity hill are:

  1. An inflation of financial forecast. If their ETA CIM makes their financial forecast overly optimistic, you should delay the mergers or acquisitions process to make sure the company reaches its “projected” sales success. If it fails to meet predictions, you should significantly lower the terms of your Letter of Intent (LOI) as you drive towards Purchase Order (PO).
  2. Don’t give a pass on the company’s success. As an ETA, you would love to get your hands on the ETA CIM to learn all of the company’s secrets. If they provide those secrets with supporting company data without asking you know you’re in good shape. Unfortunately, my experience is that securing secrets is akin to pulling teeth. Too much effort to identify company success details is the equivalent in my mind to too much effort and energy. I’m not afraid to dig for details, but at a certain depth even I will stop!

SUMMARY

In this 30 Days to ETA post, we explored The ETA Confidential Information Memorandum (CIM). A good ETA CIM can put you in a great position to offer a fair price/offer for a business. A poor ETA CIM will also provide you with an opportunity to ask questions of the broker and business owner. The filters you put in place will allow you to determine whether or not the ETA CIM provides you, the Acquisition Entrepreneur with the information required to either continue due diligence or eject.

Sam Palazzolo

30 Days to ETA | Day #23 – ETA Industry / Business ID

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #22 post I discussed how as Acquisition Entrepreneurs there is one mistake that I see time and again made by Entrepreneurs Through Acquisition (ETA), that being not having enough opportunities in the Mergers & Acquisitions pipeline. So, in yesterday’s 30 Days to ETA post, we explored ETA Deal Flow | Brokers (You can read the previous post by CLICKING HERE). I believe that if you fill your Mergers & Acquisitions pipeline with qualified companies to explore acquiring, life will become easier for you. But how will you know which businesses are right and which businesses are wrong to begin the filtering process on? So, in today’s 30 Days to ETA post, we’re going to explore ETA Industry / Business ID… Enjoy!

30 Days to ETA - ETA Industry / Business ID

ETA Industry / Business ID

Business — and therefore life — would be boring if we were all the same, right? I mean, I know that the “like” attracts “like,” or we enjoy things in life that are similar to what we like or enjoy. But isn’t diversity the key to success? How many times have you heard “Don’t put all your eggs in one basket” told to you by your parents probably? While on the one hand, I’m glad we’re not all the same. On the other hand, I’d like there to be greater similarity. I know, a catch-22, right? We all have different likes and dislikes, different preferences and tastes. It takes all of us to make the world go around.

Similarly, Acquisition Entrepreneurs come in all different shapes and sizes. Some of us who pursue Entrepreneurship Through Acquisition (ETA) have a little bit of money while others have a lot. Frugality rules some while “spend it if you have it” are the rules for others. Some may want an instant return on their investment while others don’t really care about getting a return. And what about those that are looking to sell their business? Some look at the potential long-term capital gain from selling their business, while others just want to concede to their competition.

So who are the sellers? What type of person or company sells their business? Well, there are a couple of different categories into which sellers fall, and by going through the following exercise with me you’ll identify your potential seller persona. Once you understand who your seller is, then you can design, shape, and create your ETA strategy to appeal to that particular type of business seller.

I believe that if you fill your Mergers & Acquisitions pipeline with qualified companies to explore acquiring, life will become easier for you.

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

The Low-Risk Sellers

The first major category of sellers consists of two very different types of business owners who both desire low-risk Mergers & Acquisitions.

1. The Financial Seller

First, we have the individuals who trade businesses like they trade stock. These owners will crunch numbers to estimate their return on investment in every type of detailed scenario. Oftentimes, these sellers are looking to hold the business for less than 5 years. Thus, they’ll want to know all of the ins and outs of their business so as to put it in the best light when it comes time to sell the business. They are NOT taking any risk that they won’t make a return on their investment within a very short time period.

Not all Financial Sellers are number crunchers or business traders, though. Some Financial Sellers come in the form of family members or employees who sell the company. They may want to go “5 and out” so that they won’t be taking risks and gambling with their investments. They’ll look to earn a sizable living by continuing the legacy of the company you buy. Most will hope to sell it for profit when they’re ready to retire.

2. The Strategic Seller

Now, the Strategic Seller is just a slight bit different. This individual is not looking to flip a business, per se. Rather, they’re looking to sell their business to enhance their life. They may want to add a cog to his business wheel that will work in harmony with other current lifestyle events.

But not all Strategic Seller want to divulge of harmonious pieces to their existing business. Some may be your competitors in some other form or fashion, looking to take over your customer base or market niche right out from under you. They want harmony in the sales process, but beware their underlying intentions.

The High-Risk Sellers

The second category of business sellers breaks into three different high-risk takers. These are the gamblers of the business selling world!

1. Angel Investors

Angel Investors typically work with start-up companies that show promise but have no proven track-record. Therefore, they take the most risk. These investors come in, buy part or all of the company, and help drive its success. Whenever they purchase or buy-in to a business, they usually don’t take all of the assets or buy all of the stock. However, they’ll take a majority of the interest equity in the company. This seller may look for similar high-risk, high-reward payouts from the sale of their business.

2. Venture Capitalists

Venture Capitalists are not going to sell companies at ground level. Think multi-millionaires who buy a company or take ownership of a company that has a proven track record of success but needs connections that only the venture capitalist can provide. The Venture Capitalists hope that their high-level affiliations will drive the company to exponential success, making them even more money. When it comes time to sell, they want the earth, moon, and sky!

3. Private Equity Firms

Private Equity firms are a bit different from the other business sellers because they typically only purchase the best of the best companies. Consequently, they pay the most and typically deal with the largest companies worth over $100 Million. These firms are looking to buy the next Google or Amazon. When it comes time to sell while less aggressive than Venture Capitalists, will still want a healthy return on their investment.

Business ID (Identification)

So we’ve categorized the types of low-risk and high-risk sellers looking to sell their business. Besides identifying the type of risk-taker you want to buy your particular company from, you have to look at the rest of the Business ID (Identification) demographics. What I mean is the local, regional, national, or global size of the business that often determines which types of business sellers will be attracted to your Mergers & Acquistions ETA pitch.

Those companies that operate in a small, localized area will normally seek “mom-and-pop” purchasers. These seller’s goal is to go out and get a return on their investment within about three to five years. They’re really not interested in spending a long time getting a company off the ground, so they seek an established business they can then sell for hundreds of thousands or a few million dollars. Then, they expect to recoup their investment in a short amount of time.

Regional sellers will typically sell companies that operate in larger areas that have mastered the art of scalability. These sellers will purchase companies with multiple storefronts in multiple cities or states. Because of the bigger investment and the larger marketplace, regional sellers expect to wait about five to ten years before they see a return on their initial investment.

National and/or international sellers will purchase the publicly traded or globally based companies. These sellers/investors look for companies that are the “best of the best.” Expecting to be paid more than local and regional sellers, they want everything the company has to offer and then some. With such a large investments taking place and hanging in the balance, these sellers will insist on solid profits from the very beginning. So they’ll look at selling companies that show reliable trends and steady customers.

SUMMARY

In today’s 30 Days to ETA post, we explored the concept of ETA Industry / Business ID (Identification). This post should help you identify the types of business sellers most likely to sell their business based on risk and location. If you can determine the specific seller for your future ETA company, you have an idea of which location to search for the company during the ETA search phase. If you’re ready to buy, identifying your seller persona — or at least knowing who they could be — will help clarify where and how to reach a seller that will agree to your desired acquisition price.

Sam Palazzolo

30 Days to ETA | Day #21 – ETA Mistakes

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #20 post I discussed how as Acquisition Entrepreneurs you can identify and hire the most vital part of your Professional ETA Team — ETA Business Law. No matter how many jokes you’ve heard about lawyers, good attorneys can save you hundreds of thousands — or even millions — of dollars when it comes time for you to acquire a business (You can read the previous post by CLICKING HERE). Another ETA difficulty is the opportunity to make mistakes. You are going to make mistakes, but how you recover from them will make a massive difference. So, in today’s 30 Days to ETA post, we’re going to explore ETA Mistakes… Enjoy!

30 Days to ETA - ETA Mistakes

ETA Mistakes

At Tip of the Spear Ventures’ Mergers & Acquisitions practice, we have a quality goal – “No Mistakes!” While it’s a great goal to have, as Managing Director I know that it is 100% unrealistic. We are going to make mistakes when we set out to look for businesses to merge or acquire. I like that it’s a high goal, so we’ve kept it from the inception of the practice area.

Mistakes are a part of business. Your ability to risk mitigate, or go into damage recovery after you identify that you have made a mistake, will make all the difference. We also make a habit of backing up and identifying how we don’t make similar mistakes in the future if at all possible.

So if mistakes are a matter of “if” and not “when” for the Acquisition Entrepreneur, I wanted to share in this 30 Days to ETA post some of my most proud mistakes.

You’re going to make mistakes. Your ability to recover from them is the part to focus on.

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Emotional ETA Mistakes

The seller of a business, be they an individual or a group, is not and does not personally care about your business goals and aspirations, but you do and can often be mislead to believe that they do too. Come time to sign the Purchase Agreement (PA), you’ve put years of blood, sweat, and spears into buying a business based on their value. The majority of your personal worth will most likely be tied up in the new company after acquisition. So, buying it will be hard, scary, and emotionally exhausting. You don’t want the seller to interpret your emotional ups/downs as weakness. Demonstrating a halfhearted attempt to buy a company at your valuation-derived asking price could prove devastating. If you’ve assessed the Minimum Viable Acquisition (MVA) price, you need to stay strong and fight for the price you identified regardless of your emotional state.

The ETA Mistake of Going All-In

Once you provide a buyer’s offer, you can do several things to exude an air of confidence you may not feel. You don’t want to walk into a sale with weakness and work from anywhere but a position of strength. So, what can you do to ensure a successful purchase happens?

  1. Have courage. – Pull yourself up by the bootstraps, and man up! The minute you decide to sell, jump in or stay out.
  2. Assemble your Professional ETA Team. – Now is the time to bring in your ETA Professional Team in for some much needed counsel. A well-rounded team will help you stay strong and vigilant during the ETA process.
  3. Build the Exit Plan. – Choose one of your four professional players to oversee the ETA process with precision.

A Rookie ETA Mistake

As you prepare to show a strong, united front in the face of your potential seller, you don’t want to make rookie ETA mistakes, such as:

  1. Don’t stop working on other Mergers & Acquisitions deal flow.
  2. Don’t take any counter-offer just because it’s their first business sale.
  3. Reign in your eagerness to buy.
  4. Don’t quit in the middle.

SUMMARY

I’ve heard it said that buying a business is 80% emotional and 20% business. As we’ve identified in this 30 Days to ETA post, the largest hurdles you face will be ETA Mistakes that derive from emotional errors. You are going to make mistakes, but how you recover from them will make a massive difference. While you won’t be able to avoid making ETA Mistakes, your ability to plan for the recovery afterwards will be beneficial.

Sam Palazzolo

30 Days to ETA | Day #20 – ETA Business Law

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #19 post I discussed how as Acquisition Entrepreneurs you can create and justify the price you should pay based off of objective versus subjective criteria — The ETA Business Valuation. Part of the ETA difficulty as an entrepreneur is identifying the value you should be willing to pay for a business as a part of your Entrepreneurship Through Acquisition journey (You can read the previous post by CLICKING HERE). Another ETA difficulty is knowing who you can trust. No matter how many jokes you’ve heard about lawyers, good attorneys can save you hundreds of thousands — or even millions — of dollars when it comes time for you to acquire a business. So, in today’s 30 Days to ETA post, we’re going to explore how you can identify and hire this vital part of your Professional ETA Team — ETA Business Law… Enjoy!

30 Days to ETA - ETA Business Law

ETA Business Law

As go through the process of Entrepreneurship Through Acquisition, there’s one person on your professional advisory team who will probably make you feel like you’re operating in a safe/confident manner – the lawyer.

I’ve been fortunate to work with both good and bad lawyers in my professional and personal life. I say fortunate for both good and bad not because of the obvious outcomes of why I employed them, but because each provided a different subject matter expertise (SME) that I needed at the time given whatever I was working on. Similarly, as a part of being an Acquisition Entrepreneur you’ll want to make certain that you find just the right lawyer for the Mergers & Acquisitions task at hand. To get us started on finding the best lawyer, here are three overall tips to follow: 

  • Choose a razor-sharp attorney to be on your Professional ETA Team – Pick a seasoned lawyer who knows the ins and outs of the business acquisitions process.
  • Work with the attorney as long as the acquisition is in progress; then stop – You will get tired of the legal jargon and the mountains of legal paperwork involved in the business acquisition process (and don’t get me started on the retainer funding and billing procedure!)
  • Be 100% focused on the specific legal tasks at hand – Your attorney is going to ask you questions over and over during the business acquisition. It will take effort to answer questions in answers that are short, concise, and accurate.

I’ve spent more money on attorneys that I’d ever care to admit.

The reason why I spent so much? They were worth it!

Sam Palazzolo, Managing Director @ Tip of the Spear

ETA Business Law Contracts

I’m often challenged on this lawyer-thing, typically by an Acquisition Entrepreneur asking, “Why do I even need a lawyer when you acquire a company?” I know that the internet is a plenty with legal forms/templates that you can use. I also know that while you didn’t finish law school, you can get yourself believing that you can skip a few steps and save some money without employing an attorney. I’m going to tell you that’s a huge mistake!

You’ll be dealing with a ton of documents and contracts that require a lawyer’s knowledge and keen eye. Contracts are legally binding documents that detail all agreements between two or more entities. Since you’ll need a strong contract to record every facet of the buyer-seller agreement, term, and condition, you’ll want a lawyer to protect your assets, future business and personal goals.

6 ETA Business Law Contract Elements

I have seen six basic reoccurring elements in the best contracts I’ve seen during my career.

  1. The offer
  2. Acceptance of the offer
  3. Consideration of the details
  4. Mutuality of obligation
  5. Competencies and capacities
  6. Written and recorded specifics

Those are just the basic elements in sound contracts. Obviously, each business will require industry-specific and business-specific provisions to be added to the contract.

6 Additional ETA Business Law Contract Elements

There are many more provisions that could go into your business sales contract, but here are a few additional ETA Business Law Contract Elements:

  1. Ability to choose a closing venue
  2. Allowable time extensions and term expansions
  3. Coverage of attorney fees in closing costs and buyer loans
  4. Provisions for termination
  5. Hold-harmless Indemnification Clauses
  6. Market exclusivity demands

Trusting ETA Business Law

I started out this post by sharing that you’ll want to find/hire a lawyer that you can trust. For me, trust is the foundation that everything is built on. However, trust is not blind. In other words, I am going to recommend that you don’t put 100% of your trust in the ETA Business Law process and never inspect what it is that’s being done. While I want to hire a competent attorney, and you do too, we both need to inspect for what we expect. Here are a few more helpful tips when it comes to trusting the ETA Business Law process:

  1. Read contracts thoroughly – Ask questions on anything you don’t understand 100%.
  2. Make sure it contains the terms to which you agreed.
  3. Take out irrelevant terms and conditions.
  4. Delete duplicate statements.
  5. Ensure fairness to both parties.
  6. Prepare for what-if contingency scenarios.

SUMMARY

In this 30 Days to ETA post, we explored how you can identify and hire the vital part of your Professional ETA Team — ETA Business Law. Part of the ETA difficulty is knowing who you can trust. No matter how many jokes you’ve heard about lawyers, good attorneys can save you hundreds of thousands — or even millions — of dollars when it comes time for you to acquire a business. I made several suggestions on how you can find the right lawyer as well as key aspects to a contract that you’ll want to consider.

NOTE – I am not an attorney. This post is purely for educational purposes and should not be taken as legal counsel. Seek an attorney to provide you with ETA Business Law solutions.

Sam Palazzolo

30 Days to ETA | Day #19 – The ETA Business Valuation

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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!

30 Days to ETA The ETA Business Valuation

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:

  1. What do you need cash flow to be?
  2. Will you have enough to finance the Acquisition?
  3. Are your risks managed?
  4. 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