Will the sale of your business determine the lifestyle you’ll live during retirement?
If so, your retirement will likely need lender approval.
When you’ve been in business for a while, you’ve experienced cash flow problems.
We’ve all been there.
If you still have cash flow problems, the real question is why?
Over the past 33 years, I’ve started, acquired, and grown some very profitable companies. When looking at a company, due diligence is part of the acquisition process. To present an offer, I must first determine how much the business is worth.
The value of a small business is derived predominantly from cash flow and profit.
To determine an accurate valuation, I start by looking at three years of corporate tax returns, an up-to-date balance sheet, and a current profit and loss (P&L) statement.
What’s startling is how many businesses have less than two months’ cash in their company checking account.
Surprisingly, many companies have 15-21 days of cash to survive.
Talk about stress.
So many business owners start their business because they no longer want a job or a boss, and they create a company that gives them both. If you work 35 hours a week or more, I hate to break it to you, but you don’t own a company; you have a job. Sure, you may be the largest shareholder, but if your company needs your labor to survive, the value of your shares is very low. You may be the employee of the century, putting in long hours, hitting all of your sales goals, and even taking home a huge paycheck, but at the end of the day, you’re a high-paid employee, and if you stop working, the paychecks stop.
You own a lifestyle business, which is nearly impossible to sell because no one can do your job like you can.
But what does this have to do with cash flow, Dave?
The way to go from a high-paid employee to a highly profitable business owner is to fix the cash flow problem you’ve had since you started your company. Until you do, you’ll never sell your business for anywhere close to what you think it’s worth.
Lifestyle businesses have very little value to lenders or investors because they need YOU after the sale.
Are you ready to transition from employee of the century to wealthy entrepreneur with a business worth keeping? If your company creates the cash flow you desire without your labor, why would you ever sell it?
A cash-flowing business is a business worth keeping.
Investors want consistent cash flow and appreciation. When your business offers both, investors will trip over themselves and pay top dollar because they can invest with predictable growth and returns.
There are two ways to increase profit: decrease expenses or increase revenue. You can’t cut your way to cash flow because you can only cut so far before you are at the bare minimum.
Solving cash flow problems starts with acquiring new customers. Do you know the most common answer to the question, “How do you get new customers?” If you guessed “word of mouth,” you’d be correct.
Word of mouth is great advertising, but it’s slow, unpredictable, and not scalable.
And word-of-mouth advertising can prevent you from having the retirement of your dreams because lenders don’t trust it. Ultimately, if you’re going to sell your business, less than 1% of acquirers do so with cash, and the rest get financing. So, without systems and processes in place to get new customers, you are at the mercy of your existing customers telling others about what a great company you have, and that’s never going to give a lender a warm and fuzzy feeling if there’s a sudden drop in sales.
Here’s why we walked away from 3 million in equity.
Recently, we were working on a winery acquisition. The deal still stings a little because we invested high 5 figures during due diligence. I like wineries because they have a unique blend of business and real estate. However, because of the rural nature of most wineries, the real estate is valuable if the business is profitable; conversely, if the business is not profitable, the real estate is not much more valuable than rural land.
In March 2024, we put a profitable winery under contract to acquire for $5.5 million. This winery was an extremely unique find. Our plan was to buy the business and real estate, build some additional lodging, and put systems and processes in place to drive customers to the business. But we never closed the deal. Just before Thanksgiving, my business partner Ankur and I put the deal on hold.
Even though we had a lender terms sheet (meaning preliminary lender approval) and an appraisal for 3 million over the asking price, we knew our lender was not going to move forward based on the 2024 financials.
During due diligence, everyone could see that sales in 2024 were down a lot, but the sellers could not articulate why. Their primary response was, “Sometimes we have a down year; it always comes back the next year.” I asked how I could be sure, and the response was, “It always comes back.”
This sounds good, but without systems and processes to immediately improve cash flow, no one will buy this business with a conventional loan.
Ultimately, we backed out of the deal for three reasons: a substantial drop in profit in 2024 and some management turnover, but neither was the deal killer.
What killed the deal was there were no systems in place to recover from the drop in sales.
They didn’t even know why the drop happened.
Business can’t be left to chance.
You have to know what’s going on at all times and how to fix it when it breaks.
The drop in sales destroyed the bottom line. Our offer was based on $883K in EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2023, which dropped to $85K in 2024. It’s important to note that this winery had not made less than $550K in EBITDA for the past five consecutive years. They even made money during COVID because they had outdoor seating.
Without our expertise, there was no predictable way to get the business back to profitability. I really liked the company because it checked many boxes for my team and me. High quality, high margin products, a team of experienced people in place to care for customers, in business for over 25 years, over 100,000 visitors per year, and gross sales of over 3 million. We knew we could grow this business, but instead of investing in more lodging on-site, we would have to invest a lot of money into getting enough customers to the winery to make it profitable again. The deal went from an acquisition to a turnaround.
And if we were going to invest our money into sales and marketing and making the company profitable, instead of our value-add strategy, we couldn’t pay the price the sellers needed to retire, so we called off the deal and walked away from 3 million in equity.
Here’s the sad part.
The sellers are in their 70s and need to sell the business to maintain their lifestyle during retirement. Now they face at least two more years before a lender will loan anywhere close to the $5.5 million they want to retire comfortably.
When lenders see a loss, that’s all they’ll focus on.
They want to see at least two years of profit before lending and a clear path to recovery during down years. The sellers may be correct in their belief that the business will recover quickly because it always has. But without a predictable method that assures the lender (and us) there’s enough cash flow to make the loan payments, they lost their buyer.
Unpredictable cash flow postponed their retirement for at least two years.
And it didn’t have to happen.
For years, they had more than enough cash flow and profitability to afford to hire a slew of talented people to develop a sales and marketing system.
But they put it off and left their business vulnerable to the “word-of-mouth” marketing system trap.
Do you really want to wait another two or three years to retire when you’re in your 70s? If you are depending on the sale of your company to continue your lifestyle into retirement, your retirement needs lender approval. Investors use leverage, which means a lender will look at the systems and processes in place, so if there’s a hiccup or two, the year you’re selling, you have the data to assure them the new buyer can repay the loan.
Don’t leave your retirement to chance. Your entire business should be built around getting more customers while taking care of the ones you have. The ultimate goal is to have people who can sell and service your customers better than you.
When we look to acquire a company, we often see solutions to obstacles preventing you from getting the valuation you seek. It’s tough to read the label from inside the jar. An experienced set of eyes may be all that stands between you and the retirement of your dreams.
Are you approaching retirement and thinking about selling your company? Book a confidential call today. If I like what you’ve built, we’ll give you an honest assessment and a fair offer. We’ll even show you what to address if your business isn’t quite ready for a new owner.
A comfortable retirement might be closer than you think.
About the Author: David Mulvaney moved to Florida from Wisconsin in 1987. He worked as a locksmith’s apprentice until 1992, when he acquired a locksmith company primarily focused on auto and residential services. By 1994, Dave converted the company to 75% commercial services and sold the company in 1998 for over 10 times the acquisition cost. Since then, Dave has owned or owns controlling interest in businesses in the following sectors: manufacturing, engineering, global distribution, home services, commercial services, e-commerce, SAAS, residential, and commercial real estate. His companies have grossed over 250 million in sales over the past 33 years.
Dave buys and builds great companies and advises entrepreneurs on how to exit profitably on their terms. To Book A Call, Go Here.