This week I went to see a company in Southern California.
We considered buying the business and real estate.
The business is a custom sign-making company.
Imagine a 60,000 square foot wharehouse. Filled with huge machines that make every type of sign you can dream of.
Those large banner ads on the side of sports stadiums? They make those.
The Ross store signs. They make those
The see-through prints that go on the side of buses? They make those too.
The owner is 80 years old. He has become a millionaire many times over both from the business and the value of the real estate.
Now he wants to sell the business.
But it's not worth anything.
Which breaks my heart.
This business has generated millions of income for him. And provided jobs for 20+ people for 18 years.
So why isn't it worth much?
Let's look at what's going on
The business has two owners.
Owner #1 is the IT lead. He knows how to fix and work all the machines
Owner #2 manages inventory and quality.
Everyone else in the company does the work. They are on the phones managing customer orders. Or they are working the machines.
On the surface this looks like a nice business.
It made $1.6 Million of profit last year.
But when we dug in, we saw the following issues:
The market rent in the area is $18/Sq Ft per year. Which means the market rent for a building this size is a million dollars!
If you pay someone to replace each owner with a competitive executive salary for California it will cost you $250k per year.
Now you're left with a business making under $200k per year.
You're also taking meaningful risk as a buyer in the following ways:
The sign-making machines are expensive ($800k each). If you break one or order the wrong machine one year you could lose hundreds of thousands per machine.
Between the slim profit after rent and the lack of management in the team there is not a lot of value here for an investor.
What do investors want to see in an investment?
They want predictable returns for their investment.
The more predictable returns are. The more valuable the investment.
As an owner you want to build a business that would be valuable for an investor.
You may never want to sell you're business. And that's ok. But the same metrics of value apply.
If you have a good management team and healthy profit margins. Not only will it be more valuable to a buyer, but you will enjoy owning your business a lot more.
Here's how you can increase the value of your business:
Keep in mind a business is like a machine. On one end you provide a service, and on the other end you get money. The more you can run your business like a smooth running machine the more it will be worth.
Hire a coach -
My parents started a dental office. For 10 years they ran the practice with no outside help. They just followed their intuition. And here's what happened.
Their schedule was disorganized. They were not making enough profit. And both of my parents were frustrated with the business.
One of their friends heard their struggle and suggested they hire a coach. So they invested a lot of money ($80,000!) and hired a dental consulting firm. The consultants organized the practice schedule based on best practices, they taught the staff to answer the phones and they even helped update the pricing.
After 6 months the business we more profitable, and more enjoyable for my parents to run.
We spend our life learning topics in school. But when it comes to business most people refuse to hire a coach. Hiring the right coach will transform your life. Find someone who has been there before. Who has built a company of value. And can now teach you their strategy.
Plan your exit - even if you never plan on selling. You should plan your exit from day 1. If you can maximize the value of your business in the market. It's also more enjoyable to run a successful business.
Research your market - you would never leave your home to drive somewhere unknown without a map.
It's the same thing for a business. Research the industry you're in to create a map for your business journey.
Speak to 3 people in each of these categories:
Ask them questions like: what are the best businesses you've seen in this industry? Why do you think they're the best?
Get organized -
The business above had no inventory management system. The owner simply walks around, and when he sees something is low he asks his secretary to order it.
To run a valuable business you need to organize your processes, your inventory, and your finances. Quickbooks online costs $30/month and a bookkeeper will cost you $400/month. It's worth every penny.
The hit by a bus test - If you as the owner got hit by a bus, would the business keep running without you? For most people the answer is NO. Unfortunately, that means you have a job, not a business.
Buyers will value a business with a management team much higher than simply an owner running a company.
A buyer will be worry that you get hurt and their investment in your business is lost.
You can test this by taking a 3 week consecutive vacation per year. And don't answer your phone or email!
Track your sales -
Track your sales and sales efficiency (what percent of leads turn into a sale).
Track gross margin across your different offerings and have a target GM, so you know you're making good money on each sale.
Building a business that is worth something at sale is simple, but it's not easy. It will take a lot of work, but you'll be rewarded. You can take more vacation. You will do less work you don't like, and spend time on work you enjoy.
If you enjoyed this write-up, and you want to see future deals we plan to invest in, sign-up here (accredited investors only).
Sieva
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👉💰💰 It’s ok
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
