How to Prepare to Sell your Business

February 13, 2016 by Adam Hoeksema Leave a Comment

I often talk to business owners who are hoping to sell their business someday, but are not taking any steps toward creating a business that can be easily sold. If you want to sell your business it is wise to start preparing years in advance. Here are a few key tips to help you prepare to sell your business.

Make sure the business can run without you
Get a business valuation
Hire a CPA
Check industry benchmarks

Now let me dig into more detail with some great resources for each of these tips below:

Selling a Business

Can your business run without you? – It will be incredibly difficult to sell your business if the business relies completely on you personally. You need to start getting yourself out of the day to day operations so that you can demonstrate that if someone else bought the business, it could still run profitably without you.
Know what your business is worth – I have talked with a lot of business owners that really don’t understand what drives their business value up or down. A lot of times people think it is simply the value of the assets, or maybe it is based on sales. Every business is different, and a lot of factors go into placing a value on your business. If you want to sell someday I suggest that you start using a tool like BizEquity or Equidam to get regular business valuations done.
Get your financial statements in order – you really need to focus on accurate accounting years before you look to sell your business. When a potential buyer is looking to purchase your business they are going to ask for at least the last 3 years of financial statements and they are going to want to know details so that they can understand how they might be able to improve the business or benefit from synergies with another business that they already own.
How do you compare to others in your industry? – Finally, you should know how your operation performs compared to industry benchmarks. I really like BizStats which will provide industry benchmarks for free for 1oos of industries. For example here is an example income statement benchmark for a Real Estate Agency. This shows that a sole proprietorship real estate agency could potentially see a 52% net profit on sales. If you are only reaching 12%, maybe you need to take a deeper look at what is and is not working with your business.

These are 4 important steps you should take if you want to prepare to sell your business. Good luck!

Data Shows Your Financial Projections are Probably 5x Too Optimistic

December 7, 2015 by Adam Hoeksema Leave a Comment

Entrepreneurs are optimistic.

As I was chatting with one of my banker friends last week, he made a comment that over the last 10 years he had only seen a couple of financial projections from a business owner that projected that the company would lose money. He speculated that in reality a majority of those businesses actually lost money at least for a year or two.

He was probably right.

As outlined in this report by the American Enterprise Institute the average person believes that companies earn an average profit margin of 36%. In reality the average profit margin across 200+ industries is between 6 and 8% as seen in the graph below:

3 Ways to Determine Whether Your Projections are Too Optimistic

So if you have completed a set of projections with our tool – ProjectionHub – now you need to do a reality check and see if your projected profit margins are reasonable. There are 3 key things I think you should do:

Step 1 – Check your Bottom Line

The first thing you need to do is calculate your projected profit margin. You can do this in ProjectionHub after you create a set of projections then go to the Dashboard and view the Income Statement Report.

You will then be able to find the numbers you need to calculate your profit margin. Profit Margin = Net Income / Total Sales. So if you have $100,000 in sales the first year and $15,000 in net income, then your profit margin would be $15,000/$100,000 = 15%

Remember the average profit margin across 200+ industries is only between 6 and 8%.

Step 2 – Check your Growth Rate

Next you should check your monthly sales growth rate. There is a question on Quora that is helpful here. The question is aimed at web-based startups, but I think it can be helpful for your business no matter your industry. The question is “What is a typical user growth rate for a hot web startup the first year?” The answers are very helpful. You can see Facebook’s average revenue growth rate per week for 2004 through 2012. I think your goal should simply be to calculate your growth rate and make sure it is less than Facebook’s growth rate. There are a lot of startups that create projections that make it look like they will set the world on fire in 3 years. Facebook was not a billion dollar business overnight and yet it was one of the fastest growing businesses ever, so just do yourself a favor and don’t embarass yourself by projecting a sales growth rate faster than Facebook for your coffee shop, mobile app, or consulting firm.

Step 3 – Compare to Industry Ratios

A great way to determine whether your projections are reasonable is to compare to industry average ratios. BizStats is a great tool to find this information. For example, below you can see the average key ratios for a business in the Restaurant Industry.

As you can see the average profit margin is 6.33%. It sounds so easy to open a restaurant and make such a great profit, but that is not the norm. You can have a nice business with a 6% profit margin, but before you risk your life savings to start a new restaurant, it is important that you know what you are getting yourself into.

If you haven’t created a realistic set of financial projections yet, I encourage you to give our tool (ProjectionHub) a try here and make sure that you go through a reality check to make sure your projections are 5 times too optimistic.

If you have any questions or need any help along the way please don’t hesitate to reach out to me directly – Adam Hoeksema – adam@projectionhub.com

95% of Startups Miss Their Projected Results

June 30, 2014 by Adam Hoeksema Leave a Comment

According to a Harvard Business School study and a Wall Street Journal article 30 to 40% of VC-backed startups completely fail, lose all of their investor money and are forced to liquidate. 95% do not ever reach the level that they initially projected when raising capital.

This is an important stat for angel investors and VCs to know. I believe this is an unacceptable stat. There is no reason for this to be the case. Investors should demand more realistic financial projections. I understand that no one can tell the future, but with the data available on the web these days startups should be held to a higher standard. A simple search on Quora can give you a great outline on how to create realistic forecasts for your startup. Not to mention most companies that are raising VC money already have a lot of sales and traction and data to base their projections off of.

Unrealistic projections are costing investors billions of dollars a year, I think ProjectionHub can help solve this problem by holding entrepreneurs to a higher standard. We are currently working on developing a scoring model to grade whether our user’s projections are actually realistic.

It will definitely be more difficult to determine what is realistic for technology startups than for small businesses in well established industries. For example, a financial forecast for a salon is always going to follow a similar pattern, a restaurant should always be able to keep labor costs and food costs within a certain percentage of sales.

As an example, we hope to work with an industry data benchmarking partner like BizStats to help provide our users with realistic percentages for various expenses based on their specific industry. By improving the accuracy of forecasting, we believe we will help save investors and business owners billions of dollars each year by keeping them from investing in unrealistic financials.

How High Should Your Gross Profit Be?

September 28, 2013 by Adam Hoeksema Leave a Comment

Are you selling a lot of product, but can’t seem to make a consistent profit? Are you having a hard time covering your overhead costs each month? The problem may very well be that your gross margin’s are simply too low.

What is Gross Profit?

The first question is what exactly is gross profit. It is pretty simple, Gross Profit = Sales – Cost of Goods Sold.

Gross Profit Margin = Gross Profit/Sales

So what is a reasonable gross profit margin?

At ProjectionHub we help business owners create financial projections without the need to have a PhD in Excel. We have had thousands of business owners use our web application to create financial projections, so based on their projection data, we can share what the average business reports for their gross profit margin.

Average Gross Profit for a Product Business – 65%

Average Gross Profit for a Service Business – 72%

Our hope is that this gives you a frame of reference. If you are trying to run a business with 25% gross profit margin, and you are struggling, now you know why. It is just difficult to make the math work to run a profitable business when your gross margin is significantly lower than the average.

How to improve gross profit?

If you want to improve your gross profit margin, you really only have 2 choices.

Raise your prices
Lower your cost of goods sold

If you can’t raise prices, and you can’t lower costs, you need to consider whether this business can really work, or not. Create a set of financial projections with our tool, and determine what volume of sales you would need in order to break even.

10 Key Startup Statistics | Read About Top First Year Business Goals for Your Startup – ProjectionHub

September 6, 2013 by Adam Hoeksema Leave a Comment

See How You Compare with These 10 Key Startup Statistics

At ProjectionHub we help entrepreneurs create financial projections and goals for business without using Excel. Over the last six months, we have had thousands of business owners use our tool to create their financial projections. Out of the thousands of users, we chose 800 accounts to generate real startup statistics. We took this aggregate data and found some interesting trends and numbers that we wanted to share. Approximately 80% of our users are startup companies, so here are 10 key startup numbers for you to compare to your startup as well as a business startup
timeline for them. Check out some of our first year business goals and see your business or startup stacks up!

Startup Capital

1. Average Investment – $448,000

2. Average Business Loan – $304,000

3. Average Loan Term – 50 months

4. Average Interest Rate – 8%

Days to Get Paid

5. Average Number of Days to Get Paid for Products – 16 days

6. Average Number of Days to Get Paid for Services – 22 days

Margins for Startups

7. Average Gross Margins for Products – 65%

8. Average Gross Margins for Services – 71%

Startup Sales Growth

Over 36 months of projections the average monthly growth rate for sales was as follows:

9. Average Monthly Sales Growth Rate Products – 17%

10. Average Monthly Sales Growth Rate Services – 5%

3 Financial Ratios Your Banker Will Look at in a Loan Application

July 26, 2012 by Adam Hoeksema Leave a Comment

New entrepreneurs, or business owners who have never dealt with a lending institution before often think that securing a business loan is as easy as demonstrating that you have generated a profit in the past, and your business plan “shows” that you will increase your profits if you get a loan. Unfortunately, it is not that easy. Maybe it should be that easy, but in reality the bank is going to look at a number of other key ratios. Although ratios don’t make sense to the average entrepreneur, the bank will rely heavily on just 3 ratios to get a good picture of your business, so it is important for you to understand how to calculate them and more importantly what they mean and how you can improve. So here are the 3 important ratios that you must understand:

Leverage Ratio – Your leverage ratio is calculated by dividing your total business liabilities by total business equity. Some suggest that a leverage ratio over 4 to 1 would significantly reduce your chances of securing a traditional bank loan. The basic idea is that your lender doesn’t want you to simply borrow in order to grow the business. You need to put something in as well. So how do you improve your leverage ratio? Pay off your debts and your leverage ratio will come down, or simply increase your cash balance without borrowing.
Loan to Value Ratio – Your loan to value ratio is calculated by the total dollar amount of the loan divided by the appraised value of the collateral. Most lenders will require the appraised value of your collateral to be higher than the loan amount. The lender is looking at this ratio to see how much breathing room they have. If the business is to default on the loan and the bank ends up with the collateral, the bank wants to make sure they can sell the collateral for a value high enough to recover the entire balance of the loan. You should simply provide the bank with collateral that is appraised for more than the amount of the loan.
Debt Service Coverage Ratio – This final ratio is a bit more complex, but still incredibly important when applying for a loan. You can calculate your debt service coverage ratio by dividing your annual net income by your annual debt service. Debt service is a fancy way of saying your loan payments. Again this is simply a way for the bank to determine how much breathing room they have. This ratio tells the lender how many times you could make the loan payment with your net income. If you could make the loan payment 10 times with your net income each year, you have plenty of breathing room. If you can only make the loan payments 1.25 times per year, the bank is going to be nervous that if there is any negative downtrend with your business, you won’t be able to make your loan payment. This is simply a ratio that you should be aware of, so that you don’t request a loan that is larger than you can handle.

If you have a good handle and understanding of these three ratios, you will be able to go into the bank with confidence that your loan request is reasonable based on industry standard ratios. Once you create a set of pro forma financial statements based on your proposed loan, go through and calculate these ratios, and you will be far ahead of the average business owner. Good luck!

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