Often when we are looking at a deal or maybe even potentially trying to value an off-market company that came through proprietary deal flow, we are trying to figure out if it is a good deal.
What components should I look at to determine the risk and the growth opportunities?
How do I evaluate the add backs that come out with the discretionary earnings of the company?
My partner at Quiet Light, Joe Valley just came out with a book called the EXITpreneur’s Playbook. This book is really intended obviously for sellers or potential sellers of online businesses in order to reverse engineer their pathway to success by selling their online business for top dollar.
When I was writing Buy Then Build, I did consider potentially writing a book on exiting a business as well since I’ve done that a couple of times. And I f thought the market was a little too crowded for that space – those books have been written.
With the EXITpreneur’s Playbook, Joe did two things that have not been done yet.
1: It is a book geared towards online businesses only.
2: He goes into extreme detail in terms of covering the four pillars of value, as well as the three levels of add backs that go into evaluation.
By reading this book as a buyer, not only can you get into the seller’s mind and understand what they are trying to achieve, it’s also a great textbook for trying to understand the process.
It answers questions like:
What are all these different add backs?
Is that truly an add back?
What are things that maybe aren’t included that should be because it will give me instant equity in a business?
What is instant equity? Let me share with you, I had an off-market deal or proprietary deal. It was one of these where the seller lived in a different state. Let’s just say they lived in Florida. But the business was in, I don’t know, let’s say it was Georgia. It was in Atlanta. Every week that owner of that business flew from, let’s say Miami to Atlanta, stayed in a hotel for three or four days and then flew back every single week.
In this situation, when the person buys the business, if they eliminate that expense as an owner-operator, all of that could be added back into the business. When it came to me, the owner hadn’t added back any of those things. I thought about buying the business almost entirely because I knew that there was that add back there that I would get the benefit of. This is called instant equity.
In this scenario, I’m able to buy it based on an earnings amount that is below the actual earnings number that I’m going to get. At the time, I was doing too much. I owned multiple companies in three different verticals and I was out of bandwidth. So, I couldn’t jump on the deal despite the appeal.
The thing is a lot of times we are looking at add backs, it goes beyond the traditional EBITDA calculation of adding back interest, depreciation, amortization and taxes. Instead, you figure out the EBITDA number and then you must get into the owner add backs to give you that adjusted EBITDA. Keep in mind, sometimes items can get hidden in add backs provided within the financials, so you need to really evaluate them and it’s ok iy if you end up in a little bit of a gray spot.
The EXITpreneur’s Playbook is a great way to not only get into the mind of the sellers, but also evaluate the four pillars of value. This book helps break down the three different levels of add backs. It brings clarity to how add backs may be determined? Moreover, it helps you identify any missing add backs that will result in some instant equity for you as a buyer when you go out to acquire your first business.
Listen, at the Acquisition Lab, we’ve got the largest vetted community of financial buyers looking for a business to acquire. If you are interested in buying a business in the next 12 months to 24 months, please consider checking us out. We’ve got instruction, we’ve got coaching, we’ve got community, and we’ve got tools.
Also, don’t forget to pick up a copy of The EXITpreneur’s Playbook. Gino Wickman, author of Traction calls it a “Must-read for all online entrepreneurs”
Get your copy today at EXITpreneur.io.