Understanding the financials around your business can be a major challenge for many small business owners.
While they often are experts in running the ins and outs of operations, managing cash flow and other financial business functions is the No. 1 challenge for small businesses.
When the time comes to sell or grow that business, this challenge around finances places them at a disadvantage. Working with a trusted and experienced financial team can help you overcome this obstacle and ensure a strong transaction.
Such experts also can help answer any questions you have about your business and help you time merger and acquisition activity for the best possible outcome.
In this column, I will answer questions about financing, valuation and timing for small business owners and offer advice on how to move your company forward.
This is the first in a series of articles that will explore the most common questions I am asked by tire business owners.
1. How can I determine the right valuation for my business?
This is the most common question we answer from business owners. Determining a business's value can be proven using many factors, and as my colleague would always say, "Value is in the eye of the beholder."
A business can be worth more to one person than it is to another. Establishing a baseline value for a business, however, can be done by using several common methods, including:
• Discounted Cash Flow (DCF), which focuses on projected cash flows.
• Comparable Company Analysis, which benchmarks against similar businesses (generally publicly traded companies).
• Precedent Transactions, which looks at sales of similar companies.
Each method has strengths, and a combination often provides the most accurate picture.
It's important to note that while buyers use these models to value a business, it may not be completely indicative of your business' value. Each business is unique, and the market ultimately will decide what that value is.
2. What are the typical multiples for businesses in my industry?
Multiples are used to measure a company's financial performance and valuation by dividing one financial metric by another.
For tire and repair shops, diving metrics such as EBITDA (earnings before interest, taxes, depreciation and amortization), percent of net income to revenue, EBITDA to revenue and payroll to can give companies a clearer view into the value of their business and potential synergies that can be realized via an acquisition.
As a rule of thumb, small businesses will command lower multiples — somewhere between two to four times EBITDA. You can expect to see the multiples increase as the size of the business grows.
Aside from the valuation methods above, investors will look at your business dynamics. For example, what are your EBITDA margins? Tire and service stores should hover between 8% and 12%; e-commerce in automotive generally hovers around 15% or more; and wholesale distribution generally measures between 3% and 7%.
Other factors include customer concentration, vendor concentration and analysis of other key risks that an investor will take when acquiring your business.
3. Should I sell my business now or wait for a better market?
Timing a sale requires consideration of both the market and personal goals. Economic conditions and industry trends impact the sale price, while factors such as market stability, industry growth and consolidation, and your own business health play critical roles.
Waiting might mean a higher sale price, but if the market shifts unfavorably, opportunities can decline. Evaluating your personal and financial goals alongside market trends can help you make the best choice.
With interest rates near zero during the pandemic, multiples were sky high, and while there has been a course correction since then, valuations today remain fair. High value assets continue to demand high multiples.
The path to success starts with the right team
There is much to consider when the time comes to sell or grow your small business. Gaining a solid grasp of your financial situation is an important place to start, but you don't have to do it on your own.
This might mean hiring a senior accounting specialist or partnering with an investment banker who specializes in your industry. The right team can streamline financial decisions and ensure you meet your own business goals.
