From Main Street to Wall Street
Knowing where your company fits into the world of businesses is a must, if you want to understand the dynamics of selling it. The rules that govern the sale of public companies like Ford, Microsoft or General Electric are radically different from the rules that control the sale of private companies. Successful business sales are dependent upon managed expectations for both the seller and the buyer. The clash of buyer and seller perspectives has been fueled in recent months by the surge in prices being paid for public companies. This brief overview is designed to help you understand the market rules that control the sale of the four major categories of businesses.
Main Street.
These are small companies, sometimes referred to as "Mom & Pop" businesses, because the owners play the central management roles. Main Street businesses are the backbone of the American economy and the marketplace for their sale is active. The acquisition rules for Main Street businesses are not formalized, but are represented by rules of thumb and hundreds of other valuation methods. The greatest obstacle to the successful sale of the Main Street business is overcoming the buyer’s perception of risk.
- Earnings - $100K, more or less. Expressed as Seller’s Discretionary Earnings (SDE) or Discretionary Cash Flow (how much money the business generates when the owner's desire to reduce taxes is eliminated by reconstructing the financial statements).
- Price to Earnings (P/E) Ratios - 1 to 4 times SDE
- Terms of sale - Down payment of 75% - 100% of SDE, plus a seller's note for the balance over a 3 to 7 year period
- Management - Owner wears most of the hats.
Upper Main Street.
Larger than Main Street businesses, Upper Main Street companies have typically been in business for many years and have reached a level of maturity that often equals Middle Market firms. Upper Main Street companies usually demonstrate consistency in earnings and solid organizational structure. Owner involvement in the day to day management of these firms is typical. Like Main Street businesses, comparable sales data is limited.
- Earnings -Greater than $100K, less than $250K Earnings Before Interest and Taxes (EBIT).
- P/E Ratios - 3 to 7 times earnings
- Terms of sale - Down payment of 1-2 times earnings, plus a seller's note.
- Sometimes lender financing (SBA or other) for a substantial portion of the price is available.
- Management - Owner is a major element in company's operation.
Middle Market.
These are typically substantial privately-held companies, often earning profits comparable to Wall Street firms. Comparisons to public companies for sales purposes, however, are misleading. Private companies do not actively trade their stock and liquidity issues affect their sale. Because of this and other factors, Middle Market companies are the most difficult companies to sell.
- Earnings - $250K to small millions (various EBITs)
- P/E Ratios - 3 to 15 times earnings
- Terms of sale - Cash or the same structure as Upper Main Street deals
- Management - Structured and disciplined. Owner involvement varies.
VR focuses on the sale of Main Street, Upper Main Street and Middle Market companies where annual revenues do not exceed $20 million. Our company takes pride in affording to these firms the professional assistance typically available to Wall Street firms, but impossible to acquire as a small company. At VR, your small company is big business!
Wall Street.
These are the very large public companies traded on stock exchanges around the world. The rules for their acquisition are taught in businesses schools and their mergers and acquisitions are typically handled by investment banking firms. These companies have the objective of maximizing shareholder value. They are characterized as follows:
- Earnings - Measured in millions, after taxes
- P/E Ratios - Typically more than 15 times earnings, often much higher (how much higher is mind-blowing; some Internet stocks are currently selling at a P/E of 450+)
- Terms of sale - Cash or equivalents (stock, warrants, etc.)
- Management - Professional, many layers.
When Is The Best Time To Exit My Business?
Businesses and Professional Practices are selling for the highest prices in history and this may be your best opportunity to cash in on years of hard work and investment. Our current economy is the most favorable we have seen in years to make your move!
At some point every business owner will exit his/her business through a sale, family succession or other ownership change, one of which may now be appropriate for you. Regardless of the type of exit you choose, there will be several parties wanting to look at your opportunity.
It is never too soon to start planning your strategy! Such major decisions always require adequate planning and educated decisions. VR in Lynnwood, Washington and its 120+ affiliate offices is a full service business transfer consulting organization, which has provided sound solutions to business owners, sellers, and purchasers for over twenty-five years.
Regardless of whether you want to start a new company, buy an existing company, sell your company or learn how to improve your current company for future opportunities, our certified professionals are qualified to assist you. This information is provided to help you understand how to make the appropriate exit from business ownership and to do it in a way that will be most rewarding for all involved. Fasten your seat belt and get ready for an exciting ride into your future!
What are the Necessary Ingredients of a Successful Exit?
Your company is probably your most valuable asset and your exit from it should be conducted like the most important thing you will ever accomplish! In over 20 years of assisting and guiding owners through the sale of their companies, VR Business Sales/Mergers & Acquisitions in Lynnwood, Washington has observed that the most successful transactions all contain the same common ingredients.
The first ingredient of a successful transaction is obviously the concern that an ownership transfer happens. Some companies are just not salable as a going concern. However, some good companies never sell for reasons that are not caused by negative aspects of the business. They do not sell, because those responsible do not make proper decisions regarding important steps necessary to consummate a sale, merger, or family transition. The first concern is to make decisions that can result in a transaction!
The second and possibly most important ingredient is to assure that your company sells for the highest achievable price. Surely, no one would ever consider selling their most important asset without securing a professional business appraisal from an independent third party who values businesses on a regular basis nationally. We coordinate the flow of information to the third party to assure the best and most accurate professional appraisal of your company.