By Dave Driscoll
Currently, we are in a buyer’s market for essential businesses. Until a few months ago, most of us never gave a thought to which businesses would be categorized as “essential,” but now that’s a significant factor for buyers and sellers. First-time buyers see the current market situation as a good time to invest in their personal futures by placing their experience and education into practice.
In this unprecedented time, the value of essential businesses is stable. However, some seasoned business owners no longer have the desire to continue in this role. The past 15 to 20 years have presented numerous challenges and many owners are tired and looking forward to their retirements.
First-time buyers have limited experience with the relevant steps and may struggle regarding where to start as they consider a purchase.
The top three considerations when investigating the purchase of any business are cash flow, passion, and lifestyle.
Cash flow is the baseline used to determine the value of a business. Cash flow, also called free cash flow, discretionary cash flow, or seller’s discretionary earnings, indicates the market appeal of the product, service, or concept offered by the target business. Without discretionary cash flow, you do not have a viable business.
Simply put, free or discretionary cash flow is the total amount of cash the business generates that is available to the owner(s). That is the key to the “free” part of cash flow – cash that has no demands on its use. The market value of that free cash flow is determined using the multiple of free cash flow realized in the sale of similar businesses within the industry. When evaluating an acquisition, historical free cash flow is the diary of the business’ performance. Analyzing and properly interpreting a company’s historical cash flow provides the prospective buyer with the information necessary to weigh opportunities and risks and make informed decisions.
Weighing opportunities takes into consideration the repayment of debt, including interest, necessary to make the purchase, the personal financial needs (base income) of the buyer, and a return on investment that is commensurate with the risk taken. Free cash flow must cover these costs to make a purchase a viable opportunity.
Passion. If you are going to buy a business, you should have a passion for the specific product, service, or concept, as well as skills in solid business practices. You NEED significant passion to fuel your drive to get through the difficult times that you WILL face as a business owner and operator. Passion provides the energy and motivation to dig in and work through issues. Commitment to making challenging discoveries and difficult decisions is what separates those who are successful from those who fail.
Lifestyle. Realistically, a business must satisfy the lifestyle needs of the owner(s). Granted, personal sacrifice will be required, but once the initial learning curve is over, will the business provide the basics to support your desired lifestyle? Identify your lifestyle needs and wants prior to looking for a business and use those parameters to keep you focused. Consider the amount of time and attention the business will require and compare that to your family’s priorities.
Buying and operating a business is a rewarding experience and can fulfill personal dreams and aspirations. Targeting businesses with adequate discretionary cash flow to support the purchase, provide income to support your lifestyle, and feed your passion is a dream worth pursuing.
Dave Driscoll is president of Metro Business Advisors, a mergers & acquisitions, valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or (314) 303-5600. www.MetroBusinessAdvisors.com