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for Companies with $500,000 to $50 Million in Revenue

(214) 396-8100

10 Questions Buyers Should Ask Sellers

At its core, the entire process of searching for and buying a business is centered on asking questions and gathering information. How else can a buyer make an educated decision about whether or not to buy a particular business?

While there are literally hundreds of questions buyers will ask throughout the process, here are 10 key questions every buyer should make sure they get answers to.

  1. When does the business recognize revenue? 

When you're reviewing a business’ financial statements, it’s important to understand how revenue is accounted for. You’ve probably heard terms like cash accounting, accrual accounting or GAAP – but what do they mean? What it all boils down to is simply understanding when a business records revenue. Do they record revenue when they complete the work, invoice the customer, receive payment, or maybe some other method? There’s not necessarily a right or wrong answer to this question, but it is critical to understand how it’s done.

  1. Does the business have any problems with collections?

Always ask for the business’ accounts receivable aging report. This will give you a clear indication of whether or not the business has a problem collecting revenue from its customers. If there is a substantial amount of revenue that is beyond 60 days outstanding, the owner should be able to explain why that’s the case. Understanding A/R aging and collections is a key piece of being able to determine the amount of working capital a business needs.

  1. How much revenue do the top five customers account for?

This is referred to as customer concentration, and it’s extremely important to analyzing a business. Understanding a business’ customer concentration helps you evaluate risk. If a business has one customer that accounts for 50% of its revenue, that equates to much more risk than a business that has five customers accounting for 50%. If those two businesses were to lose their top customers, the first company would be in serious trouble, while the second would be able to recover much easier. However, customer concentration is not a full proof tool. There are circumstances that can mitigate the risk of a large customer, such as a guaranteed contract or a long-term relationship. Nevertheless, it’s important to ask this question.

  1. How frequently is equipment replaced?

In businesses where equipment and other assets are relied upon to produce the company’s revenue, it’s critical to get a feeling for the remaining usable life the equipment has. Depending on the type of equipment, age might not be as important as you’d think, so make sure you research how long these assets typically last. Along this same line, find out how the owner has maintained the equipment – has there been a regular maintenance schedule, or are they just repaired when they break down?

  1. How does the business generate sales?

This is a significant piece of information you need to understand about any company. Where does the money come from? Is it regular recurring contracted revenue? Is it repeat, loyal business? Is revenue heavily tied to referrals? Is revenue project-based and every job has to be estimated and sold? Is revenue largely seasonal and driven by the calendar? Is revenue driven by an aggressive outbound marketing program? By understanding what drives revenue, you can determine if the business has a replicable model that will continue to drives the top line.

  1. How are employees compensated?

You need to make sure you’re clear on how employees get compensated. Actually, the first thing you need to know is if they are employees at all, or contractors. Are they paid hourly or salaried? Do they get commissions, bonuses or raises? Is there health insurance or retirement benefit plans offered? What about expense accounts, auto allowances or other perks? Not only do you need to understand these specifics so you can analyze the business properly, but you also need to know what the employees will be expecting when you take over the business.

  1. Does the business have high employee turnover?

This information can help you determine several things about a business. Do the employees appear to be happy working there? Does the nature of the work the business does just drive people off quickly? Is it difficult to find talent for this type of business? Does the business need more staff to help lessen the burden on everyone? There’s so much information employee turnover can help you uncover about a business. It’s also important to keep in mind that every industry and every business has it’s own unique employee challenges, and a high turnover rate doesn’t necessarily point to a problem with the company.

  1. What is the owner’s role in the business?

Whether or not you plan to replace the owner yourself, or you plan to replace the owner with a new hire, you have to clearly understand what responsibilities the owner has in the business. You need to know more than just how many hours they work. What is their daily routine? What weekly, monthly, annual duties do they have? What do they do that no one else in the company is trained for? How much do they micro-manage the operation.

  1. What type of deal structure is the owner open to?

Before you even begin to look for a business, you should know exactly how you will fund the purchase. You should know how much cash you can inject, your ability to qualify for a loan and whether or not you’re going to require a seller to carry a note. Since you already know what you can and can’t, or will and won’t, do, it’s important to know where the seller falls on these topics. If you’re adamant that the seller should carry a note but this particular seller will not, then walk away. If you’re willing and able to pay all cash for a business and that’s the seller’s request, then you can be confident moving forward.

  1. Why is this business for sale?

This is certainly the simplest question to ask, but it’s definitely not the least important. In a perfect world, every business owner would be 80-years-old, selling their absentee-run business they started 40 years ago so they can retire. But that’s rarely, if ever, the case. With that said, there’s really not a wrong answer to this question, but there are answers that don’t appear to make sense. It’s up to you to use your best judgment to determine if a seller is sincere about why they are selling, or if there is a problem with the business they are trying to avoid.

 

How to Sell Your Montessori or Learning Center School

Montessori schools combine the passion for learning, children all while still making a profit.

Montessori school owners that are interested in selling their business have many issues to consider: What is the value of the school?  What is the value of the Real Estate and how does that value affect the value of the school? How will the sell of the school affect the students and Guides (or teachers)?  How do we navigate the mind-field of issues? While this article can’t address all of the real-world issues surrounding the idea of selling your business.  But what I am wanting to do is to start the conversation about the process and how to avoid the major pitfalls.

Montessori schools vary in corporate structure and profit philosophy.  Some are non-profit while others are for-profit. A survey from 2009, 42% of the 4,000 plus schools in the U.S. were For- Profit businesses. If you have a for profit school keep reading.  If you own a non-profit school, we need to discuss the idea of converting the school to a for-profit entity so that it can be sold. Please call us or call your CPA to discuss this process.

But how do you sell a Montessori school?

First, what is the value of the school?

montessori-classroom

The first step in this process of selling a Montessori school or Learning center is to find out how much your business is worth. Here are some basic formulas that you can use to estimate the value and get a rough idea of what the value of the school is worth. Keep in mind, however, there is much more to putting an accurate value on your business than these simple guidelines. A professional business broker can analyze your entire business operation and give you a true market valuation.

  • 75 to 3 times SDE
  • 75 to 4 times EBITDA
  • .53 to 1 times Revenue

Another interesting note is that the average Montessori or Learning school SDE is 21.94% of revenue and EBITDA is 14.67% of revenue.  This can help you understand how your business profit margins relate to the averages school.  See the article on how to calculate your SDE here!

What is the value of the Real Estate and how does that value affect the value of the school?

Real Estate is often owned by the owner of the school.  If you do NOT own the real estate then just skip this paragraph.  While we understand the importance of having and controlling a facility that is designed for the purpose of the school we also understand the impact of owning the real estate has on the sell of the school. Businesses are valued independent of the real estate. This means that you value the business and then get an appraised value of the real estate and add the two numbers together…. EXCEPT…. you must make adjustments… So let me explain.

When you have the value of the real estate you will need to deduct fair market rent from the SDE or EBITDA above.  When you sell real estate with an ongoing business you are basing the value of the real estate on the highest and best use of the real estate as if THIS business is the best use of that real estate (otherwise you need to sell it separate to someone other than the buyer of the business). So what this means is that the business must pay for the real estate.  That said we need to either deduct fair market rent or the debt service of the purchase price of the business from the SDE of the business. The reason is because whomever purchases your Learning Center or Montessori school must pay for the real estate. The money that the buyer has to buy the real estate comes from the business. I will note that if you pay yourself rent that this rental amount can be included in the calculation for debt service or fair market rent.

Once you have the Fair Market rent or Debt Service deducted from SDE then you are able to calculate the value of the business…. Then add that value to the appraised value of the real estate.

How will the sell of the school affect the students and Guides (or teachers)?

If you are NOT concerned about the students or the teachers then you may not have a school to sell.  I am sorry to be so blunt but my experience with working with numerous Montessori and Learning center owners is that the one trend of quality schools (among other things) is their passion for the students and the teachers.  Please understand that as passionate as you are about the students and teachers is one of the very things that makes your school sellable.  That said the buyers that we have and the buyers that are attracted to these types of schools are just as interested in this part of the school’s culture as you are.  In fact, many buyers suggest that without this passion that they are not interested in purchasing the school. 

But, to address your concern about the teachers. 99.9% of the time the teachers are more secure after the sale of the school because the buyer doesn’t want to lose the teacher.  Where you may feel that you can find a replacement. 

What are other items that affect valuation?

Teacher Retention

A high employee turnover rate is a major concern for potential buyers of a learning center. Not only do buyers see hiring and training new staff as a risk and hassle, but in schools there is the issue of student relationships that are affected. We understand a small turnover and even turn over with aids in the class room.

Owner’s Involvement

Nothing can hurt the value and marketability of a Learning School faster than an owner that is too involved in the day-to-day operation. If you are a full-time teacher or prepare the lunches everyday… then you may need to work on getting out of the class room or lunch room prior to selling the company.  I am not suggesting that there is never a time where the owner is the substitute teacher or cook or janitor… That is business ownership.  What I am talking about is if you are in the class room everyday then you need to hire a Guide or teacher for that class room.

The State Department of Family and Protective Services Violations

While it is not uncommon for schools to have been “written up” by the Texas (or Oklahoma) Department of Family and Protective Services… It is very important to make sure that prior to selling the school that you have addressed every outstanding issue as well as dealt with repeatable offenses. A buyer will want to see the violations and understand how they were addressed. 

Many times schools are “grandfathered in” on certain codes with the city or the state.  Some of these codes will not be continued to be “grandfathered” for the buyer.  This will mean that cause extra expenses for the buyer that must be taken into account when valuing the Montessori school.

Hopefully these few tips can help you get an understanding of the value and marketability of your Montessori school or Learning Center.  Selling a School or learning center can be complicated.  This is why getting a professional business broker involved early in the process is crucial to decipher the intricacies of your specific situation. The sell of a school is complicated but can be easily navigated if you work with an experienced and professional business broker.

Today’s market conditions for these types of businesses, along with more and more financing available for acquisitions, make this a tremendous time to consider selling your school. Whether that’s in the something that you are interested in for today, or you still need some time to get the school ready to sell, a professional business valuation is a great next step. That’s why we always offer business owners a no cost, no obligation business valuation before doing anything else. Feel free to contact us today and we can get that process started for you.

 

What is SDE (Seller’s Discretionary Earnings)?

How Much Money Does a Business Owner Really Make?

One of the most difficult aspects of acquiring a business is understanding how much money a business owner is truly making. If the 5.6 million-word tax code doesn’t make it difficult enough, business owners and their accountants sometimes add to the confusion with their creative bookkeeping techniques.

You’ve probably heard a dozen terms that describe the profit of a business – Cash Flow, True Owner Net, Seller’s Discretionary Earnings (SDE), Seller’s Discretionary Cash Flow, Owner Benefit, Adjusted EBITDA. These terms essentially all answer the same question – how much money does the owner really make?

What you have to understand and accept first, before even looking at a financial statement or report, is that the objective of a business owner is to make as much money and pay as little tax as possible, and that accountants and CPAs find ways to help business owners accomplish this goal. This can make your attempt to determine true cash flow a little more difficult, but always keep one thing in mind – business owners have to prove what they claim.

Recasting

The first step taken in determining a business’ cash flow is to recast the financials. Recasting financials is a fancy term that simply means correcting, normalizing or adjusting them, to provide a more accurate picture of what the business is truly producing in regards to profit. When financials are recasted, the goal is to find expenses to add back into the net profit of the business – we call these items add-backs or adjustments.

EBITDA

business-earnings

Start with EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This simply refers to a business’ profit before any interest, certain taxes, depreciation and amortization are deducted as expenses. Depreciation and amortization are non-cash expenses, meaning they are booked as expenses and come off the bottom line, but there isn’t actually any expense being paid out by the company in real cash. As for interest and certain taxes, they are added back because the new owner will not be incurring these same expenses.

 

Owner’s Salary and Benefits

Don’t forget about the owner’s salary, or any payouts to partners or other family members that are shown as expenses. These items are added back too. This also goes for other legitimate business expenses that benefit the owner, such as health insurance, life insurance, 401(k) matching or other employment costs. Keep in mind, while these salaries and benefits are legitimate adjustments, there may also need to be a counter-adjustment to cover any replacement salaries for positions needing to be filled after certain roles are vacated by exiting family.

Fringe Benefits and Other Personal Expenses

credit-cards

As a rule-of-thumb, anything that is a personal expense is an add-back. It’s typical for owners to run some expenses through the business that are actually more personal in nature than business. This commonly can include items such as meals, entertainment, travel, family cell phone plans and personal vehicles, for example. Keep in mind that some of these items could be a combination of both personal and business expenses, so only and add back the portion of the expense that is truly for personal use.

Discretionary Spending

In addition to personal expenses, there’s also discretionary spending to account for. These expenses can include charitable donations, excessive legal fees or season tickets to a local sporting venue – specific items that are categorized as legitimate business expenses, but are not mandatory to operate the company successfully. Hence, discretionary, meaning a new owner can choose not to spend this money and the business will not suffer.

Non-Recurring Expenses

Another major add-back can be the one-time, non-recurring or extraordinary expenses. Maybe a business owner paid cash for a new piece of equipment instead of capitalizing it, maybe there was a major repair that had to be done to the building after a storm, or maybe the business relocated and incurred moving expenses. These are examples of legitimate business expenses that were unique and only appear once in several years of financial records. Those items are added back in because they skew the normal cash flow picture of the business.

Once the financial statements have been examined and all of these different types of adjustments have been identified and added back, the recasting is complete. Now there is a very clear understanding of what the business’ true cash flow is. Think of it as a pot of money at the end of the recasting rainbow – then it’s up the new owner of the business to determine how they want to run the books, and allocate those funds as they see fit.

location

Sigma Mergers & Acquisitions LLC: 18170 Dallas Parkway, Suite 203, Dallas, Texas 75287
Dallas Business Broker, Mergers & Acquisitions Dallas / Fort Worth / Texas

214-396-8100 Office
972-838-5202 Fax