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How to improve the value of a business

I Love Bali Podcast

Review from Rich Dad Kieth J Cunningham's seminar day 2: How to buy and sell a business

Do what you love and the money will follow, is no good advice. No one is interested in, what you are patient for. You should not love your product, but your customers instead! The 4 hour work week - is not a business, but a lifestyle book. None of it will help you to improve the value of a business.

Artists, just want to do, what they love. But no one cares what you love. So they never make any money nor improve the value of a business.

The business operators do it all on their own. And can't grow, because they cannot triple their effort.

Owners concentrate on monetizing the ideas, they measure results and optimize.

The Investor got a completely different way of thinking about:

WDIS = What Don't I See?

That's why they need to have other voices on the board of investors or a mastermind group. What you don't see costs you money. It is about asset allocation and risk management and avoiding to pay the dumb tax. It is about keeping the money by protecting what I have. It is how to play defense. What can go wrong? Slow down, take a deep breath, because it is an intellectual sport.

Every investment has
1. upside - that's easy
2. downside - most people ignore what is the worst thing that can happen.
3. can I live with the downside?

Buying and selling a business are like two sides of the same coin.
What do I need to do, to make my business the most attractive possible?
Instead of intensifying marketing to steal your competitor's customer, it is much easier to buy your competitor.

How to improve the value of a business?

The answer is a question: How do I run my business if I would run it forever?
Which ends up in: I could sell it tomorrow! Because it makes it excitable.

There are two reasons, to exit a business:
1. A change in the environment, e. g. self-driving cars will have a big impact on all transportation business
2. Some event in the company, e. g. a business that only needs employees that are a millennium.

Example: Company with earnings (EBITDA) 1 Mio
Selling it pretty well for 4 Mio (typically business get soled for 2.8 times the annual earnings). After taxes, you end up with only 3 Mio after taxes. Now you got to invest 3 Mio. to make 1 Mio. in earnings. This is pretty unlikely!

What need's to happen, that the value and attractability of the business are as good as possible?
- To make it less relying on me

Selling the business usually works like this:

Earnings 1 Mio
then it sells for 3 Mio
1,5 in cash
1,5 will be paid over 5-10 years to the seller
- 400 k taxes
- dept, e. g. 1 Mio
so you end up with 100k + plus 150 k for 10 years
Now, how to invest this 100 k to earn 1 Mio a year?

The better possibility is, to give it to your children. Often the children don't want to continue the parents business. 60% of all business are closing down, due to that.

From a Job with 0 revenue to a business 2 Mio, it takes 5 years. This is the riskiest time of a business. Instead of that:

Buying an existing business got
- actual results
- revenue & cash flow & profits
- trained employees
- brand / customers / clients
- expert training/systems
- financing options

It is like entering a plane which is already flying and learn from the pilot.

Building a new business is like assembling the plane and after you managed to do so, learn to fly it on your own.

How to calculate the value of a business?

The multiplier for the value of business commands is directly proportional to the predictability and sustainability of the future stream of earnings.
If predictability and sustainability are low, the business has a low value.
If predictability and sustainability are high, the business has a high value.

What could disrupt the future earnings of my business?

If I am the operator of the business, and I want to sell the business, the value is very low.
If the business runs without me,

The seller usually finances 1/2 to 2/3 of the price of the business, e. g. over 7 to 10 years. Only the rest gets financed from a bank, e. g. for 5 - 7 years.

1. There is no natural business owner. Running a business requires a set of tools and methods, that can be learned.
2. Trial and error is the most expensive way to run a business. Too much dump tax.
3. Practice does not make perfect, it makes permanent. You usually run the wrong direction enthusiastically. You should
4. To act better, you need to get better.
5. People with the best lives have the best choices.

Value = Earnings * Multiple
The multiplicator gets adjusted for estimated growth and risk. Bigger growth an less risk makes it more valuable.

Financial Literacy

Lousy decisions turn out in bad numbers, good decisions lead to good numbers. For making good decisions you need to have optics on the numbers. What you can't see kills you. Visibility of the numbers, it is like a blood test for a doctor. It tells about the health of the business.

Whoever goes out of business, does it because of a lack of optics. Not because they have not been enthusiastic enough about their business.

A business without optics is like a treasure map without an "X". You don't know where to dig! The X shows you where to take action:

  • to plug profit drains,
  • maximize cash flow,
  • increase returns,
  • anticipate the crisis,
  • spot danger signals,
  • optimize performance,
  • drive results

And finally, maximize enterprise value = business mastery!

Management => Decisions => Activities => Numbers

Acounting Report Card turns Activities into numbers.
Business optics = scoreboard turns numbers into activities.

Accountants have 3 big dials:

  • balance sheet
  • income statement over time (months and/or years)
  • statement of cash

Financial optics = trends, and relationships

A balance sheet = world atlas

1. Things and stuff = assets

  • cash
  • accounts receivable
  • inventory
  • PPE

2. owe = liability

  • invoices from suppliers
  • taxes
  • credit

3. own = Equity

  • investment
  • earnings/profits

1. = 2. + 3.

It is a snapshot, only for the moment in time.

Cash and earnings are completely different things! Because you can't spend earnings, you only can spend cash.

Income-statement, win, and loss = road map

Revenue, sales,
- expenses
bottom line, earnings, profit, net income

It is a movie and a theory, but an essential one.

Cashflow Statement = road map

operating cash (sales, payroll, rent, ..)
Investing cash (selling or buying equipment or real estate)
financing cash ( credit)
cash flow

This is a movie and it is a fact! But you will never get to see it before you buy a business. Because the seller and the broker do not know what it is! They sell you based on the earnings. But only Cash Flow allows you to pay back the credit.

When buying a business, it is essential, that the cash flow is good. You need to fix it before you make an offer.

Assets create revenue
Revenue creates profits
Profits create operating cash
operating + investing + financing cash = real cash

The Financial Rosetta Stone

Earnings = EBITDA = Earnings Before Interest Taxes Depreciation


  • If inventory goes up = bad for cash = keep your inventory low.
  • If accounts receivable up = bad for cash = keep your payable days short
  • If accounts payable up = good for cash = pay your bills latest possible

assets + $ on the balance sheet, # of employees, payroll $, bill
=> - expensive
=> - Accounts receivable - Inventory + accounts payable
= operating cash flow

"Business reference guide" book costs 140 $
Publishes the multiplicator of earnings for calculating the value.

You want to pay for the bast and buy it for the future.

= Gross profit
- operation expenses
- interest
- depreciation
- taxes
= Net profit

Operating cash = Net profit + depreciation

"The ultimate blueprint" explains in detail the cash flow model.

To calculate the health of a business, one can utilize the indirect method to calculate net cash flow from operations. You only need the start and end balance sheet and the income statement for that period of time.

Do not rate a business on an income/win and loss statement. Further, it is important if financial accounting is done cash or accrual accounting. If it is cash accounting, there are some corrections to be done. An accountant can do that in a view hours. Especially by the end of the year, some revenues and expenses are getting shifted into the next year to make the result look better. If you don't know which kind of accounting the seller has, you are about to make a big mistake!

The reason to make the accounting to get optics for the management, not for doing the taxes.

cash flow
1 operating cash flow OCF
cash generated or used by the operations of the business
2. investing cash flow ICF
cash generated or used in buying/selling fixed assets (PPE)
3. financing cash flow FCF
cash generated or used from lenders of investors
4. ICF needs - OCF generated = FCF required
5. OCF - ICF = FREE cash flow

I am surprised that the inventory does not get into the equation.
I would assume, if a company that owns the building in which it is operating, has a higher value, than the one that operates from a rented property.

Real estate makes things more complicated, rather have someone who has the knowledge about it to operate it.
If the seller has an appraisal for his business, this business is death, you are wasting your time.

So if buying a business with a property, sell it to an operator, or source it out in an extra company, that's gonna run it.

To reduce the price of a business for sale: Send a straw man who makes an offer 20% below mine.

The seller who is old and sick and doesn't want to negotiate will die on his desk. Don't get emotionally engaged.

Harold Marcs, Billionaire Investor
big brain about finances
His company is called "oak tree financial"
in his book "the most important thing" he writes:
- the less risk you perceive, the more risk there is
- if a house can resistant a hurricane, you can only tell after the hurricane

shotgun cause
Push-Pull technic = one cuts, the other one chooses
A: 60%
B: 40%
If A is unhappy, he should offer a company price for which he would buy the remaining shares, or sell his.
Buy one part or sell the other one
Now B has to choose within 7 days if he wants the deal.
If so they have 90 days to negotiate the conditions.

A = Effectiveness
B = efficiency
C = productivity

A * B = Profits/ Assets
A * B * C = OCF / Assets

If you got negative free cash flow, you got 6 choices

1. delay to paying bills
2. reduce costs
3. sell assets
4. credit
5. get an investor
6. go broke

A company with low assets make a bigger percentage of profits per asset.
This is true for any kind of assets, $ cash, # of employees, operating cash

I want OCF growing faster than profits!
Profits faster than sales!
Sales faster than assets!

Become the big gorilla in the deal, to be able to reduce the receivable days and increase the payable days. Have the suppliers agree to pay the latest possible.

Sales/assets + profits/sales * OCF/profits = OCF/assets

Primary strategy
- reduce inventory
- reduce accounts receivable
+ increase accounts payable
- reduce expenses

Secondary strategy
+ increase sales
- fixed assets

Metrics (KPIs = Key Performance Indicators)

Low hanging fruit: The cost of doing business vs. investment
Most sellers put their business on a diet before the wedding to make it look good and slim. Each saved $ turns into 3 $ higher sales price.

Is the money I am spending a cost or an investment?
There are only 2 reasons to spend money on a business:
1. to keep existing customers
2. to make new customers
And I need to measure the return of those investments! Only if the juice is worth the squeeze keep on doing it.
Sign all of your expenses before they get paid.

Analyze the business you want to buy, how much it is squeezed out = if there is no space to optimize.

Instead of increasing sales by 30% to increase the profits by 50% it takes 90 days,
Reduce the expenses by 12,5%, can be done in one month!

Keys to the vault example
Look at the trends of at least for
3 years of income statements
4 years of balance sheets
3 years of cash flow statement
recalculate the cash flow statement in percent, with sales = 100%

So you can compare with other players in the industry.
But more interesting is, how am I doing compared to the best year in my historical performance on a percentage basis.

What are the 3-5 leverages I can use, to improve the value of a business?

First I need to diagnose the situation.

1. Pay the bills after 28 days.
2. Withdraw the deposit within one day after the contract is closed
3. Let me see all the payments and let me think about it.
4. Pay rent on the second working day of the new month

How can we reduce assets?
Sell everything we have not used for 1 year.

How can we save money on suppliers?
Negotiate costs with the landlord and other suppliers.

Where do we spend money, that doesn't maintain existing customers, nor creates new ones?
Control all invoices received before they get paid.

How can we increase sales?
Additional space and rent it for a premium price.
Increase the rent by 6% to prepare for the big investment.
Reduce days of inventory.

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