Right-Size Your Numbers Before You Sell Out

Martin Romjue
Posted on August 18, 2019
Former operators Brian and Anne Daniells share their expertise on how to financially arrange limousine operations for sale during a seminar in March at the International LCT Show in Las Vegas. (LCT photo)

Former operators Brian and Anne Daniells share their expertise on how to financially arrange limousine operations for sale during a seminar in March at the International LCT Show in Las Vegas. (LCT photo)

LAS VEGAS, Nev. — As company mergers and acquisitions have accelerated this decade, more business owners are discovering how varied and nuanced the financial details can be.

Whether an operator is selling to make a profit, retire, or avoid further distress, each motive for a sale brings its own approach to maximizing value so the deal works out, say two former luxury ground transportation owners.

Brian and Anne Daniells, spouses who bought Torrey Pines Transportation in San Diego in 2011, closed a deal Oct. 1, 2015 to sell their 17-vehicle operation to Dav El/Boston Coach Chauffeured Transportation Network, a division of Boston-based Marcou Transportation Group. Over the four years, they tripled the revenues of the company.

In the process, the Daniells gained valuable insights about preparing an operation for sale that they shared in March during a seminar at the International LCT Show in Las Vegas. Just six months before the sale, Torrey Pines won a 2015 LCT Operator of the Year Award.

Brian Daniells, an MBA-educated CFO, has consulted across different industries, working with almost 200 different clients. The common thread in all of those relationships he said was how to properly communicate the performance of the business. Sellers need to make their businesses as valuable as possible.

You can work within your financial statements to optimize the performance of the business and convey it in the best light to those who will be looking at it, whether it’s a buyer or a bank. But there are common errors sellers often make in financial statements that don’t serve the goals, said Anne Daniells, who also served as a board director of the Greater California Livery Association.

Expense Listings

Listing accounts and P&L in alphabetical order can cause you to miss out on an opportunity to better aggregate some of those expenses and learn how they are truly performing in the business, Brian said. Instead, use logical categories to list expenses, such as all facility expenses under facility. That would not just include rent or mortgage, but all costs such utilities, repairs, etc.

“If we're talking about the value of the business, and we're talking about the stability or what ultimately that business may fetch, then the answer lies in the balance sheet,” he said. The balance sheet is the most powerful financial statement you have. Personal expenses or one-time issues such as a moving costs or legal issues, may not serve you well if you have them in your business financial reports, Anne added.

Three Different Seller Goals

The Daniells outlined three different goals or scenarios in selling a business, with each requiring its own set of procedures, protocols, and analysis:

1) Holding onto a business, for various reasons, such as being a cash cow that brings in lots of money and may be handed down to children.

2) Selling eventually at an optimal price in the future.

3) Selling now, which means you have to get out no matter what and need to present the best finances possible under the circumstances.

Key Financial Terms

Before getting into the details, the Daniells made sure operator-attendees knew some basic terms related to the bottom line.

  • Balance sheet: Lists assets and liabilities, and provides a snapshot of how the business does at a particular moment in time.
  • Gross profit: Defined as revenues minus variable expenses. It is the most important measurement in the business and determines if you can make a profit.
  • Margin: Any cost divided by the revenue that it's related to, which shows how you're controlling expenses as revenues change. What's important is to note how expenses change as revenues change.
  • Equity: What you truly own; all your assets minus your liabilities. But it is not the value of your business.
  • Value: What the business is worth. It can be calculated in many different ways, and there is no perfect way.
  • Change: How does a business change over time? What are its trends? You have to look at performance over time to gain an accurate understanding. Compare a balance sheet in the past with one in the present.
  • Liquidity: Ability to pay bills and is measured by a concept called working capital.
  • Working capital: Your current assets, such as everything that can be turned into cash in the next year minus your current liabilities, and everything you owe in the next year. “Current assets minus the current liabilities equal your working capital, which shows your ability to pay your bills. The banks measure is the current ratio.
  • Current ratio: That's current assets divided by current liabilities, but it's telling you in essence the same thing, your ability to pay bills.
  • Asset leverage: If you take all of your assets and you divide them by all of your liabilities, it gives you a metric that tells you how you're using borrowing, the liabilities, to acquire assets. “If you're building your fleet, watching your asset leverage change over time will tell you how the value of that fleet is growing relative to the obligation to finance it, measuring it over time,” Brian said.
  • Debt leverage: Liabilities divided by your equity. This tells you how you're borrowing, and how you're using your equity to finance the business. The larger the equity, the smaller your debt leverage will be. The more you borrow to grow your business, the higher your leverage will be. “What's important is how it's changing. Are you increasing your leverage? That's a sign of cash problems to come. Or is your leverage improving? Those are the things to pay attention to.”
  • Multiple: Multiples are a value that's assigned to the business based upon the perception of the buyer. If you are selling your business, the multiple is crucial. A multiple represents the strength of those earnings: How many years’ worth of earnings will you get by buying this business? “The bigger the multiple is, the more you get,” Brian said. “And the way you raise your multiple is to strengthen your financial picture. So the more together you are, the more properly organized your business is, the better your schedules, the better your financial statements, the more you have your house in order, the longer those will last, the higher the multiple you will fetch.”

Sale Motivators

Several primary factors determine the value of a sale, such as the motivations of the buyer and seller, market conditions, and your financial statement.

Brian cautioned valuation is a financial art all onto itself. It derives from a calculation of what a business is worth based on the buyer’s priorities, discount rate, and cost of capital.

“The riskier that business is, the higher the discount rate, the lower the future cash flows are worth, the less he will pay for that business,” Brian said. “If he sees risk in your business because your financial statements aren't in order, then he's going to see more risk in the purchase. He will discount it higher and it will fetch you less.”


What Is The Discount Rate?

Discount Rate is the rate at which future cash flows are discounted, in order to find out their value today (present value). In some transactions, the sum of the future cash flows (discounted) is the same as the purchase price of the business.

Discount rate is also the return rate the company would have to achieve in similar investments. The higher the risk % (or discount rate), the lower the future cash flows are worth. The riskier a business, the less a buyer will pay for it. 

Remember, there is no single, perfect way to valuation. Most valuation firms use three different methods, then triangulate them to see if they arrive at similar results — that provides them valuation. Some of those methods are comparable sale (i.e., what recent sales of similar businesses can we analyze? This is similar to home value setting); discounted cash flow (as described above); and multiple of earnings or revenues (multiple is a reflection both of the sustainability of the business as well as what other sellers are getting).


Accurate Financial Reports

Have your financial statements in order because the business needs to survive long-term. Only include expenses that fit the goals of succession planning. To demonstrate recurring and sustainable performance, financial reports should use trend analysis, and include budgets and forecasts so you're constantly in tune with how the business is performing.

Use a cash management strategy that captures a 13-week cash flow or a treasury management strategy if the business produces abundant cash. Make sure all budgets and forecasts are accurate to a T. Other factors to consider:

Succession requires certain types of financial reporting, such as the balance sheet and the cap table, which shows ownership positions, percentages, values, etc., Brian explained.

“It all comes down to how are we transferring ownership? What does that look like? How can we do it from a tax advantage standpoint, from a legal and compliance standpoint, from a fairness standpoint? And that's done through optimizing that cap table early in the process. These are all financial statements and financial reports used to improve the performance of the business and to achieve your goals.”


No Heirs

The next strategy on selling applies to owners who will not pass the business down to their kids. “From a financial standpoint, you want to get the most for your business that you possibly can,” Anne said. “We all want every penny we can get out of it, and all the blood, sweat, and tears that have been invested into it.”

Several market and personal factors should be considered in this scenario, Anne said. “You might do this because you're not in a hurry. Whatever your reasons, the timing is important. Business conditions, your personal business, and operator conditions can change rapidly. Business performance is important. Being ready when the right time comes is the goal with your financial reports.”

To get the best price, the business has to perform at its best, Brian said. “The future cash flows of the business are a critical determinant in the value of the business.

“Remember, we have discretion and we have ways to break down those numbers to highlight the best performance within them.”

Among questions for sellers to answer: Who is the audience? Who are you supplying this information to? Who will potentially buy the business? “It's critical we understand who we're playing poker against in order to be the best poker player,” Brian said. “Different buyers are motivated by different factors and goals.”

Just like with a resume, you get one first impression, Anne added. “Do your research. You've got to know what's going on. What's this person looking for, and how can you shift and change your financial statements truthfully to better provide the information you know that potential buyer wants?”

Deep Research Needed

To avoid that money getting whittled away, the seller needs to prepare thoroughly well head of time, honestly and correctly, Anne said.

“When we sold Torrey Pines Transportation to BostonCoach, they held 10% back in escrow for months looking for skeletons in the closet,” Anne said. “They're looking for it and you can't blame them. Any buyer really should. And you want every penny of that.” A 10% holdback for six months is fairly standard, although Anne said the terms are negotiable.


Urgent Exit Strategies

On the third scenario, a sale is urgent, due to such developments as a medical or family emergency, divorce, or financial needs.

“The sooner you get out, the sooner the headache goes away, whatever the headache might be,” Anne said. “So timing and your cash is important. Obviously, you still want to get as much as you can, but it’s a distress sale. So it will shift some things.”

Generally, six months is considered a fast timeframe to sell a business. An owner must present the business in the best possible light. “You've got to make some difficult decisions and then you have to be prepared for a challenging process,” Anne said.

Brian stressed the time value of money: “You don't want to be pound wise and penny foolish. If you're losing a dollar a day and you're holding out for an extra $2 and you're taking three days to hold out, the math doesn't add up.”

Assets Vs. Equity Sales

These two types of sales require different financial reporting and tools.

An asset deal, often the more common approach, requires more detailed financial records, assets schedules, and asset value statements. “A more complete schedule will fetch a higher asset price because it's organized, accurate, and compelling,” Brian said.

In an equity deal, everything is involved and requires more due diligence, time, and risk. “With the financial documents you're looking at, you need to understand the whole range of liability exposure the seller has if you're the buyer.

You need to understand the risks, exposures, and obligations, and dig deep into the financial statements if you're the buyer,” Brian said.

“In this situation, a really critical factor is how do we market these results? Obviously, we're not marketing the success of the business because we have to run from the business. So we need to know who we're marketing to and we need to put that in the best light.”

The seller should recount time when the business flourished, and document why it’s taken a downward turn and how to turn it back around. “We're going to paint the story that defuses the distress. “This isn't a manipulation, but we are swaying the audience. We have this discretion in the presentation of our financial information.”

Finally, control the process, Brian advises. Get all agents and advisors onboard and on the same page.

Anne advised any operator should always be prepared for the need to sell in a distressed situation, and anticipate what could happen. “You may be planning for the long term but if something were to happen this year, what would you do?”

Asset deals are closely negotiated, Brian said. “What we had in our situation was BostonCoach wanted the business, vehicles, and chauffeurs. We got to keep our accounts receivable. We got to keep our cash and bills. Isn't that exciting? But that's typical where they say you take that, we'll take this, and it is part of the negotiation.”

Valuation Steps

One question is can a seller’s CPA or CAA provide opinions, valuation, or analysis, and support this process? “Yes, they should be able to,” Brian said. “CPAs are not finance, they're accountants. So they're focused on the production of the financial statement, which tells me how I did yesterday, not how I'm going to do tomorrow. So they may not have the deep skillset to do analysis or forecasting. It's a different deal based upon accounting, but a different skillset.”

A business valuation goes through at least three different methods to triangulate a value, to justify the fact different methods produce similar values, Brian said. “It validates it. So your valuation will involve a detailed process by a skilled professional that truly does valuation, and CPAs are not that skillset.”

Brian cautioned operators to understand the different roles of accountants and financial experts. “CPAs drive down the road and operate looking in the rearview mirror. Finance people drive looking through the windshield. If you only have a CPA, you only have half of what you need.” A finance professional can answer such questions as: What are possible if-thens? What might your business look like if you change this? What might your business look like if you buy another one? What might your business look like if you changed the type of cars in your fleet?

CFO Supreme

Although most ground transportation operations don’t have one, “the CFO is the business advisor that sits inside the organization on your shoulder, giving you advice, difficult and good, what you need to hear, not what you want to hear, and is able to provide you a look into what the future looks like and what the business might fetch,” Brian said. “Or the CFO can do the reverse of that; you indicate your goal and what you would like to get out of your business, and the CFO turns around and develops a plan to achieve that.”

Brian suggested companies can benefit from part-time or fractional contracted CFOs. “You can have the value of a CFO and only pay anywhere from 10 hours to 40 hours a month. You get the full benefit of someone who's knowledgeable about the business and protects your best interest.”

Know Your Destiny

In sum, Anne advised operator-sellers know where they are headed. Prepare financial reports accordingly and be ready for the possible need to get out sooner than expected, even if it's after 30+ years.

“Look deeper into those financial statements,” Brian added. “They are little pots of gold. You can discover more about your performance and your value. It's all lurking within your financial statements. Talk to the right people so you are bringing the best possible light to your financial statements. The value of your business and your exit ultimately from this business really depend upon that.”

Related LCT article: What Strong Motorcoach Financial Performance Looks Like

Related Topics: accounting, Anne Daniells, business deals, finance, financial planning, ILCT 2019, industry education, mergers & acquisitions, profits, revenue growth, revenues, succession

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