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Why Some "Ordinary" Businesses Sell For Massive
Premiums?
By Richard Parker, President of The Business
For Sale Buyer Resource Center™ and author of
the most widely used reference resource and
strategy guide for buying a business for sale –
How To Buy A Good Business At A Great Price©
A study was done recently in the State of
Florida to determine how small business purchase
prices have evolved over the years, and it came
as no surprise to me that, in the past twenty
years, small businesses have typically sold for
around two times the seller's discretionary
income total. The same holds true today, yet a
certain segment of the market commands an
enormous multiple regardless of the business's
size.
I've always said that there are certain
fundamentals that any business can have which
will increase its value when the time comes to
sell. These include:
- Clean books and records
- A reasonable selling price
- Good terms, including seller financing
- A proper transition period to a new
owner
- Non-specialized skills required to run
the business
These are all things that any seller can work
towards implementing so that they ultimately get
a higher price. However, there are certain
components that some businesses have that can
dramatically increase the multiple to five,
seven and even ten times as opposed to the
general one to three times valuation.
The businesses today that command these
multiples include: marinas, alarm companies and
storage businesses. There's also been an
inflated market created by medical-related
businesses, although this may be more so because
buyers have a delusional view of this industry
segment. Instead, let's focus upon why these
other businesses sell for such high multiples:
Recurring Revenue:
Any business that has a built-in revenue base
will command a higher selling price. It's a
whole lot more enticing for a buyer to know that
they will have and immediate and locked-in
long-term revenue stream the day they get the
keys to the business.
One of the most challenging aspects to
business is when you have to “go into business
everyday.” When you have a company whereby there
are contracts in place, written or verbal, that
provide you with a base income every month, it's
a huge benefit. Marinas, storage companies,
alarm-monitoring companies, service businesses
such as water and coffee suppliers to offices,
equipment maintenance companies with annual
customer contracts, all fit this bill.
The concept of recurring revenue is not only
attractive; it just makes good business sense.
It's far easier to expand a business knowing
that you have a base to work from everyday. It's
also a lot easier to sell additional products or
services to a customer who is already buying
from you.
“Buy land -
they're not building any more” – Will Rogers
Perhaps this statement explains the gold rush
(a.k.a The real estate market) we've been
experiencing in many parts of the U.S..
Investors and developers are making gobs of
money throughout the State of Florida as an
example, and have been for about fifteen years
and there is no let-up in sight. Although, with
so may purchase being by speculators, one has to
conclude that it's a matter of “when” the bubble
will burst and not “if” it will. Now, it's not
an easy game to get into, but think about the
offshoots to this concept-marinas are a perfect
segment that is taking advantage of this
scenario. Furthermore, there is a moratorium in
some parts on building new marinas. These
factors are pushing the prices up dramatically.
A marina that owns the land is commanding up to
ten times the Net Operating Income while ones on
leased land, with a long-term lease, are still
getting 4-6 times the NOI. These are insane
numbers when compared to other businesses for
sale.
Limited Specialized
Knowledge
Any business where a new owner with general
business skills can take over and run will
improve the value versus ones where specialized
knowledge, experience, licensing, etc. is
required. Take a look at storage units. They are
all over the place and they're building more of
them. It has been an absolute explosion in the
past several years (I've always wondered what
people did with all this stuff before?). While
no business is easy, you certainly do not need a
ton of experience to take over a business such
as these.
Of course, no business is easy; and I've
always said that the best business in the world
is everybody else's. However, one can easily
adapt to this environment and quickly ramp up to
the skills needed to successfully manage it, and
better yet, to have it operate absentee. Think
about it: you have a storage building with
limited capacity, and once the space is filled,
you can't really go out and market it more. You
can increase the fees, improve client turnover,
but once it's filled, it's filled. And, best of
all, the checks come in every month.
It's A Beautiful Thing when it's
Harder to Lose an Existing Customer
Than To Gain a New One
Nobody thinks about changing alarm companies
unless they incur a break-in and the alarm
doesn't go off. Likewise, if you have a
water-supply business, or marina and you provide
the services you're expected then, people don't
change. Storage businesses are even better
examples: people just keep their “stuff” there
year after year and never move it. Actually,
it's a beautiful thing when you own this kind of
business. These are the ones where customers
either don't give a second thought to paying the
monthly fees, or they realize that it's simply
not worth the hassle to change to a competitor.
In other words, you'd have to really mess things
up to lose a customer. The commercial ones are
even better since the customers are always
moving stuff in and out and you get paid anytime
you handle the goods.
By the same token, getting new business is
not easy for the same reason that it's hard for
one business to lose a customer; it's difficult
to gain one from the competition. But, the costs
and time required to keep an existing accounts
are infinitely less and easier than getting a
new one. This is a very attractive concept for
any prospective business buyer, especially ones
with limited professional or entrepreneurial
experience.
The question you must ask yourself if you're
thinking about buying a business is what you
want from the business. While some businesses
command massive premiums, the potential growth
may be limited. However, the downside risk is
far less than other types.
Also, these lend themselves to absentee-run
situations which make them even more attractive
to some. On the other hand, if you have
entrepreneurial blood running through you veins,
you'll probably be bored with these particular
types and so there are many other options
available to you as well.
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