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This business coaching episode explains 4 ways to determine the value of a business.

Results-Focused Training, Tools, and Workshops from Expert Business Coaches.

Featured Coaching Excerpt - Notes & Transcript, Part 1
  • 4 Principles To Evaluate A Business For Purchase: 3. Liquidation value
  • Notable Quotable: "The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table." - Warren Buffett

[MUSIC PLAYING] -So under this model, what you would do is you would take the value of those assets-- and again, as a general rule-- this is not a fixed rule that you have to do. But typically what will happen is, you're going to take the value of the assets, and you're going to say, I'm going to buy it for that or some comparative multiple. So if another gem sold for 2.5 times the assets, that under that model, what will happen to that model is that that would be to sales price. So under this model, just so that we're clear, what will happen under this model is that you're basically going to take the value of the stuff, just the value of the stuff, and we're going to multiply that times 2 and 1/2 times. And we're going to say that's the most the company's worth, which is $162,500. So under this model, let's just be clear, the maximum that this company is worth, under this model, is $162,500. Now under the other model, under the other model, it's $328,000. So we're seeing two way different options. Now the third option here is the liquidation value. Now the liquidation value is what Warren Buffett buys companies for. And the liquidation value is what I would encourage you to buy companies for. Liquidation value is what our main man Mitt Romney-- maybe some people watching this hate Mitt Romney. Some people like Mitt Romney. That's what Mitt Romney's done well with. The idea with liquidation model is that you're basically buying stuff at the worst possible time for the seller. And so I'm going to read this to you. He says, "The best thing that happens to us when a great company gets into temporary trouble. We want to buy them when they're on the operating table." So again, "The best thing that happens to us is when a company gets-- when a great company gets into temporary trouble. We want to buy them when they're on the operating table." Warren Buffett. So Warren's saying he wants to buy a company right when they're just at the bottom of the value cycle. I'll give you an example. There was one business that I worked with about three years ago. And the business was worth over $15 million. Cool? But under new ownership, the owner comes in, and he buys a new house-- new ownership. New owner comes in. Buys a new house. Buys some stuff. Government regulation, as you mentioned, came in. All of a sudden he had a business that had cash reserves that normally were around $3 million. He somehow got that down to about $100,000. So he's now down to about $100,000. And he doesn't have enough money because of all the new equipment that made him buy, all the new government regulation, all the changes he had to make. So he was like, oh man, I'm in trouble. Then he got a lawsuit. I mean, things got bad. So now he's at the bottom. And he kind of feels like this. It's worth $15 million, he can't-- it's not worth $15 to him. He can't make payroll. He can't whatever. So another group came in, bought this company. It's worth about $15 million. They bought the company for just a hair over $7 million. Total. And they were able to do that because they were saying, hey, buddy. If you do a fire sale, and you sell your office buildings and all your crap right now, if you have to sell it within 90 days, the most money you're going to get for that is like $4 million. And he was like, well, I think I might be able to get $7. And they were just like-- they treated him kindly. But they probably could have hone lower. But the liquidation model is like, hey, you're screwed. And if you don't sell it right now then you might have a problem. So on Sunday, I'm actually go into an auction. And I'm going there. And there's this beautiful house I'm looking at. And this is kind of my move. I'm going there. This is the little house. This is my version of-- And I go there, and this house is worth, I don't know, it might be worth like $300,000 or something. But the opening bid at the auction is $10,000. Now I'm not saying I'm going to get it for $10,000. I'll probably get it for $100, maybe $150. But for somebody who can't make their mortgage payment, and their house is going into foreclosure, or they already lost it, anything's better than nothing. So what you're going to do is you want to find-- in my mind, this is just for you and for anybody watching this. I encourage you to look-- If you're trying to sell a company, use this first model. If you're the seller-- I mean, if you're the guy who says, I am trying to sell a company right now and make some big bucks, you want to be talking about future income. But if you're a buyer, you do not want to get into this future income deal. Because this future income deal is a very high valuation of the company. OK?

Featured Coaching Excerpt - Notes & Transcript, Part 2
  • 4 Principles To Evaluate A Business For Purchase: 4. Comparisons
  • Lesson Nugget: An accountant or attorney that specializes in business acquisitions can provide you with comparative prices.
  • Jargonization Diligence: Due Diligence - Reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something.
  • Action Step: Ask the seller how they are evaluating their business.
  • Lesson Nugget: Avoid hiring an expensive firm to evaluate the business you are looking to acquire. When the time comes to purchase the business, hire professionals to handle the actual transaction.
  • Lesson Nugget: When acquiring companies, make sure you look at comparative prices of similar businesses in your market.

[MUSIC PLAYING] -So again, future income. That's good for the seller, but for the buyer, the second level here, this whole asset valuation-- The asset valuation is a great way for you to look at it. That's a great thing for you as the buyer. The next one here is the liquidation value. That's a great way to do it. And the final is comparisons. Now comparisons is pretty much as simple as it sounds. And you wouldn't believe how many businesses are bought this way. This is probably the most common way right now. So what happens is you own-- for the sake of this example-- you own a gym. And it's over here. We'll call it Gym A. And I own a gym. We'll call it Gym B. And then Johnny over here owns Gym C. Well, Gym A did X amount of revenue, and the business just sold for $200,000. This one did X amount of business and sold for $250. This one just sold for $300. X amount of business. They all did the same amount of business, but one sold for $300, one sold for $250, one sold for $200. You add up those three, you divide them by three. So in this particular case, we'd have $450. So it's be $750 divided by 3, which is $250. Yes. So the total value. You add up this plus this. You divide it. You go, well, without even getting into the minutia and getting into the crap, we're saying that your business is worth about $250 because we did some comparisons in the area, and this is what we felt made sense. MAN: How do you find the comparisons? -That's where you would go to like an accountant or an attorney who helps businesses sell. And what they do-- I'm not talking about a consulting firm. You do not want to hire a consulting firm to do business evaluations because we're going to spend a ton of money on it. What you want to do is you want to go to-- they're actual groups. There's attorneys and there are actual accountants that that's what they do is they handle the transactions of buying and selling businesses. And they can usually, as a matter of public record, get you the information. So they can say-- excuse me-- they can say, this business sold for $750 last Tuesday. This business sold for $1,000 last Monday. This business sold for-- they can do that. Or they're so ingrained in the industry, they know. You know what I'm saying? But these are your four valuation methods that you want to use. And this really allows you to figure out what the value of that business is. Now a couple other nuances I want to share with you here because it's huge. When you're doing the comparison model, compare your business to like businesses. Don't compare-- because if I'm the seller, I'm going to try to compare it to, like-- I'm going to go, I'm a business, and I have 50 employees. And another business with 50 employees sold for $4 million. And you're like, yeah, but you're a gym. And I'm like, no, I'm just a business that happens to be in the Connecticut area. And so we should compare it with other Connecticut area businesses that sold. And therefore it's worth $4 million. And you're like, no, it's worth $250 because it's like a gym. And so you got to agree on that. So we're going to get into the deep and the very specific nuances of how to do this. But the main thing is I just want to make sure you know those four. And so I'm going to review those again, just so we're good. Because when we're talking about buying a business, the first step is you need to ask the homie, the seller, homie, how are you evaluating your business? And he's going to go, well, you know, I mean, what's your best offer? They'll usually say something stupid like that. What's your best offer? Well, you know, I'd be open to talk. Or anything. Here's my favorite line. Anything can be bought for a price. I mean that kind of crap. You don't want to get in there with that. What you want to do is you want to start, you want to say, hey, before we get into it, I want to figure out how you're evaluating your business. You might have a little bit different nomenclature. But you say, are you going to value it based on future income? And he says, well, no. Are you valuing it on asset? Are you valuing it based on the asset valuation, the actual stuff? No. Liquidation? Yeah. No. Comparisons? And then once you understand how he's evaluating the business-- determining the value of the business-- then you can go back in and do your own due diligence. But don't hire a fancy schmancy consultant to come in there and do all that. This is stuff that you can do on your own. But to handle the actual transaction-- the actual buying and selling, that part, once you get real, definitely have an attorney and definitely have an accountant look over those numbers. But I'm just saying, you can get the numbers from the guy, look at it yourself, and you can get a very good idea whether it's even worth pursuing. And once you get serious that's when I would get my accountant and my attorney involved. MAN: Makes it make sense to me. -Awesome. You're a great American, my friend. MAN: So are you. -Thank you.

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