I am currently rehabbing homes in the New Orleans market and have done so for several years. Our typical rehab is an historic home renovated from the studs out and will sell for between $200-400K. Gross sales in 2013 will be around $3MM. We are running about 34% gross margins and after interest, hard money, investor splits, and expenses we net about half of that for an EBITDA in the $500K range. Here is my question:
Can anyone here share their experience with capital structure in the sense of turning the corner toward making a saleable business out of this? We are not holding properties at this time and are not near big enough to become or sell to a REIT.
In the upstream oil business we would routinely buy mom and pop small businesses for a multiple of EBITDA based on the stability, scalability, and transferability of the revenue. That was generally in the 3-6x EBITDA range and was paid as part cash, part stock or with an earnout. Does anyone know of something similar in this business?
Any and all comments on this would be welcome. I ask because I am planning my exit strategy and also trying to figure out the best way to add equity investors to our equation.
Consult a business broker to see if he would list it for you. This is a novel idea.
Curious though what the storm had to do with things and how that may play out in the future. Also, how is inventory these days? It is no secret we were in a temporary sweet spot with many now suffering from a change in the market.
If you can stay on board as a consultant and train a newby you just might be onto something. Restoring historical buildings is less competitive than your typical ranch and requires more knowledge and skill, but is riskier IMO. Good luck.
@Chris Johnson The way I see it, the problem with most rehab businesses is that they operate (to borrow Robert Kiyosaki's quadrant) as an "S", not as a "B". So like a dentist that has his own practice, and wants to sell it, unless you are coming along with the company it will be a hard sell.
Jeff - I had thought of that but want to be positioned properly. Katrina changed the whole ballgame forever down here but things are steady now and doing well in the right areas. There is less competition in my niche than others as you rightly suggest. What we do is not for the TV crowd. We pull permits, have our own general contractor license, etc. That is why our margins are higher. I would be willing to stay on for a while to train a new owner, but I am not totally integral to my biz. That is what refer to as the earnout.
Chris M - We are pretty firmly in the B category. True, I am a certified appraiser and I still do make the final call on which properties we buy, but I am in NOLA now only 2 days per month and all is well. I will be working to better automate our biz and I feel good about it being able to continue in my absence. My formula is no secret.
Maybe I'm just confused but what would a purchaser actually be buying if you don't have inventory?
Well, congratulations for building your business rather than being the business. That is a great accomplishment.
A business broker may be a good resource. Also, here is a link to a small business that, while it did not succeed, did rehabs as their business. I'm not suggesting that public offering is the best way to go (it probably is not), but I would suggest looking at the format and structure of the document to help you in documenting your processes, historical success, and, hopefully, helping you achieve a good valuation.
Justin - We may have 3-4 properties at any one time, but that is not the value. He/she would be buying the cashflow generated by the established business model and all the employees, etc that are in place to make it work. The same as any business.
Chris M -
That is a good suggestion and I will examine that filing - thanks for the link. Having had some experience with SEC registration I am hesistant to go that route as it is very expensive and time consuming. Last time we needed 3 years of audited finanical statements and spent well over $100K just to get set up. I will likley go the biz broker if I can get this wehere I want it. I know several through my oilfield days.
If you were a prospective buyer - what things would you be looking at to make you pull the trigger?
ok, got ya. Seems like you have built a solid company around rehabbing. That's quite impressive.
Maybe speaking with some valuation firms could help guide you in the right direction as far as exit value/capital structure?
It's not clear to me what the value proposition would be to a potential buyer. Employees and a set of processes isn't going to be especially attractive without an established brand, intellectual property, a competitive advantage (other than your employees who aren't guaranteed to remain with the company), etc.
Perhaps you have these things, but if so, you haven't mentioned it.
As someone who has spent a decent amount of my career doing M&A for some very large companies, I'm not sure there is anything in a typical rehabbing business (again, without an established brand, IP, or a proprietary competitive advantage) that would make your business worth much more than the cash the business had on-hand plus inventory.
Without those things, it would be almost as easy to launch a new competing business as it would be to buy yours (you say yourself that your formula is no secret, indicating there is nothing proprietary about your rehab business).
Maybe I'm missing something...
This is an interesting thread. However, I don't see anything proprietary about the business. (I stole that line from Shark Tank, one of my favorite shows).
If you are able to make a deal and sell, I would be very interested to hear the outcome. Good luck to you.
This business could have value to a buyer, but not at 3-6x EBITDA. Still, selling for .5-1.5 cash flow might be worth it to you. On the other hand, if it takes so little of your time, why not keep it?
When you value a business for sale, you have to ask what it would cost the buyer to get them to the same position without your business. For a company with some proprietary IP, that IP may be the key factor. If you try to replicate it, it will take money (both money spent and lost revenue from not having the IP) and you may run into patents that limit your ability to replicate the IP.
For some companies, its customers. That's "brand". If you have a long list of repeat customer, that has real value vs the buyer having to build that list (and the relationships behind the list) from scratch. That list can be turned into revenue that the buyer would never get if they had to build the list themselves. This could also be true even for a mom-and-pop retail store. A good clientele adds value to the store that it would take time for a new store to build.
Some companies have value in employees. Employees with specific skills and knowledge can give you and edge vs. competitors. I've been in both on both the acquired and acquiring side and seen "stay bonus" paid to keep key people on board long enough for their knowledge to be transfered to others.
Companies can have assets. When you buy an oil E&P company, you're buying reserves and production. I've been in on this, too, and recall folks being tasked with computing exactly how much oil was in every flowline and test station. This would apply to a retail store, too, in the form of inventory, real estate, leases or possibly suppler contracts.
By you own admission, there's no IP in your company. Someone could replicate what you do without you or your company. You have no proprietary stream of raw materials (houses to rehab.) You have some employees, but having (or being) your own GC is something I've seen with every truly successful fix and flip operation. You don't appear to have a list of buyers that will take you product as it comes out of the pipeline. That's not even really something that exists for the retail SFR market, as far as I can tell, because buyers make very few of these purchases over their entire lifetime. Perhaps you do have some assets.
So, I'll be honest, I see zero value to your business, as a business. The knowledge in YOUR head has value. Someone may well want to hire you to train them to be a fix and flipper. Selling education and training is VERY common in this business. But the value to that is probably not the number you're looking for. If someone wanted to compete with you, and already had the knowledge, they could do it with no assistance from you at all. They could find the deals, hire employees and contractors, fix the houses and sell them. Sorry, but I just don't see where there is salable value in your business.
Rob K mentions Shark Tank. If you haven't seen that, find some episodes and watch. That's a real education in how small businesses get valued. Then, think about your business like you would have to if you were in front of the investor panel. What would you tell them to convince them of the value of your business.
Jon Holdman, Flying Phoenix LLC
As a buyer, I'd want at least six months (ideally 9-12) transition time in which you get me trained and known to all the players.
Then I'd pay book value up front, with any on top of that (up to 1.5 like Jon said) out of future profits. As in, you get all my profits for the first 18 months or 1/2 for 3yrs etc.
This is with me knowing rehabs in a different state. If I was already in N.O., I doubt I'd pay anything more than inventory- if at all.
If you get something like this going in Hawaii, let me know...
Chris Johnson - it is going to be a hard sell and I can tell you from experience. We have been approached twice this year about selling our company to a large purchaser. One simply wanted us and our knowledge - they were interested very little in our brand, people or business model, they thought they had all the answers already and simply wanted someone to run it for them. The 2nd was different, but they clearly saw a lot less value in the business. They valued a company like ours at 2x to 2.5x while we would sell for nothing short of 10x. That is the benefit of being good at what you do, enjoying what you do and being profitable at what you do. You get to set the price...doesn't mean anyone is going to bite though. They just don;t place a value on this type of model and we do hundreds of deals a year.
Good luck to you though - sounds like you have a good business model.
We have had many conversations like this with our partner.
Our questions becomes what can we do to firmly move from an S to a B and what aspects would make the business sell for a higher multiple?
I would like to see some feedback on:
- What is a construction company worth if 30% or less of the business comes from owner ran projects?
- What is a real estate brokerage worth if 30% or less of the commission comes from your own investment production?
- What is a property management company worth if 30% or less of the management fees from property owned by the owner?
If a flipping business sells at a multiple of 0.5 to 2x of profit, what volume do you have to do and systems do you have to have in place to achieve 1.5x profit. If there is a package business that offers all of the above do you think that would maximize the multiple?
How much owner volume do you think is acceptable? I could see a potential buyer get extremely leery to buy a property management company where the Seller owns 50% of the properties that push the revenue.
Originally posted by @Chris Clothier :
Chris Johnson - it is going to be a hard sell and I can tell you from experience. We have been approached twice this year about selling our company to a large purchaser.
Chris Clothier -
While I don't know much about your business, given what I suspect, I would put your company in a completely different category than the OP.
1. You have a brand. This is valuable, even if every employee bails after the buyout.
2. You have loyal/repeat customers. This drives down cost of acquisition, which is a competitive advantage.
3. You have at least one existing revenue stream that will continue in the absence of your current management (the property management income). Guaranteed income is generally worth a multiple equal to the time period it is guaranteed for, even if the absence of everything else. So, if it's reasonable to assume that the existing PM income is good for 2-3 years in the future, you can value that income stream at a 2-3x multiple.
It doesn't surprise me that you've been approached as a buy-out target; unfortunately for the OP, he doesn't appear to have the same value in his particular business.
J Scott All 3 are good points, but the basic premise of how do you value a business still remains. Our businesses may not be very similar beyond that we both buy, renovate and sell, but it is going to be hard to determine a value either way. What an owner thinks it is worth may not be what someone else thinks it is worth. You are right about our brand and demand for our product, but I think that underscores the point that without those, it may be even harder to affix a value and get a buyer.
Either way, I'm sure we all wish @Chris Johnson a lot of luck as he tries to figure out what to do next with his business in New Orleans. I was fairly impressed by the simple fact that he is not in NO but for a few days a month and keeps a consistent, healthy business. Maybe that will help him show a buyer that there is value there.
@Chris Johnson , I'm afraid I have to agree with most others, a service business is what you're stuck with at the moment. You also mentioned "earnout", this is the best approach and the most likely canidate is your foreman or on site manager who is running the show when you're not there.
I've done business valuations and in the analysis of your receivables, you will have lost sales or longer holding periods for one reason or another of the projects in the pipeline, doubtful accounts and discounts to receivables, so even saying 1.5X earnings needs to be looked at.
Jon is spot on, the system in place has worked for you, it's also been under your managment. You're not a franchised service with only one shop, if you had ten locations across the country and repeat business we could talk about blue sky. The only blue sky here is over your head, you're it!
You can look at the industrial stats in Standard and Poors and Moody's to find average performance and profitability ratios, selling yours above that may be possible, but it's not going to be bankable.
A buyer will need either cash or borrow or a combination. As Jon mentioned, what's the cost to replicate what you have or something very similar? Any inventory and equipment?
To borrow on the deal you need hard assets, unless you have large equipment, cranes, dozers maybe large vehicles, that have a market value. Small equipment and tools in a shop may go for pennys on the dollar, it's what you can negoiate, but a lender won't be valuing small assets for financing for any buyer. So what you may end up with is the reality of a little more than a salvage value, might be better to piece it out. Generally 50% is loanable with a decent buyer and one with experience as well.
Blue sky on a small service operation is not a bankable asset. Anything paid will be brought cash in hand by the buyer. Seems that's where you place most of the value and it will be difficult finding a buyer at a $M who could not duplicate what you do for much less.
If a buyer with cash is considering this investment, it will be compared to others. Your service has no real branding for repeat customers I'd think, not knowing what your niche is, but such as a resturant. Other alternative investments considered by your buyer, in a service industry will likely have a better qualified customer base. You're also runs on the local RE market, while NEW is large, it's not endless and there is competition as well. All to say, what would a buyer be looking at that entry level?
Not trying to repeat what others have said, but deeper into reality.
Now, if you have contracts to take on all REO rehabs for five banks for the next three years, we can talk blue sky. That is something that future business could be based upon.
Let's figure out the best way to dump it.
You said "earnout" that is really the key. An employee or partner buyout. I really think you're dead in the water competing with similar investments for real cash buyers (I could be wrong, but not likely).
If you can bring in a partner and allow them to earn an equity position at a contract price you'll not only make more but the deal will be more likely to close in the future.
Admit a partner, finance their position and at the same time allow them to eat while working. You won't pull this off in 6 months unless they do have capital. A longer period to finance the transistion is more likely, say three years. At that time, your company will not be selling, but refinancing. Your refinanced funds are based on the business, not a sale price, refinancing for operating capital. Restructure the business, you retire, your parachute includes continued salary or dividends or whatever benefits. Golden handcuffs with the obligation of benefits being paid can keep you in a position prior to other creditors as well.
How long would it take you to reveiw an appriasal and a deal? Not long! In 6 months you could be at least out of the office.
I'd say the best potential buyer is under your nose working with you. They will most likely see the business as being more valuable to them than any outside buyer. If you listed with a business broker, that is where they would start, getting an investor with someone there in the business.
BTW, this is usually the spin off for any smaller company.
Steve, same really applies. The valuation of public sales in RE is rather low due to the fluctuations in RE markets, which is more volitile than say people getting hungry and going to Ryans. Historical data for the past 5 years can provide close projections for a pro forma 2 years out, maybe 3. Beyound is guessing with the gut. It's negoiated.
Accounts receivables with current contracts 1.5, hard to get 2x @ 12 months out, less historic fallout. That is blue sky picking up existing accounts.
Contracts in force depend on the term remaing, strength of the party, history and cash flow generated basically, it's not always at a premium. Consider, to collect and maintain the account requires management, admin and expenses for RE managers.
This could go on forever..... what the market will bear.....
Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com
First off I would like to thank everyone for taking the time to post your comments on this topic. There is some really good feedback here from people who seem to know what they are talking about, most of which underscores my own thinking.
I have tried to look at this from a buyers prospective and I come up with many of the questions that you all have raised. Starting a biz like this can be difficult and making it mostly autonomous is even harder, but there is only so much value in that. In my other line of work I see a lot of very small oilfield service companies that may do $1MM+ revenue on little more than that in assets. It turns out a lot that the purchasing manager at a larger company is an old school friend or hunting buddy of the owner and 50% of the sales come from that one account. We pass on those as it is cheaper to just do it ourselves and you cant count on that work to stay long term. Not that there is not value in a solid book of business.
Chris C - I am not surprised that you guys have been approached to sell. As J Scott says, I believe that you have a good brand and some solid revenues there. Also I see value in your customers, many of which I understand are repeat. 10x is rich though. Have you considered going public in the future - if you want those headaches....? If you are not satisfied with the multiple that you are offered, our operation surely has far less value per revenue dollar.
Bill has a lot of good points as well to ponder. We sold a small construction biz years ago through an in house financed buyout and I always felt like we just let the business provide the cash flow to fund its own purchase. It didnt really feel much like a sale somehow.
I am not necessarily looking to sell now. I am just planning for an exit at some point and wondering how that might go. I have a tendency to see an income stream and want to monetize it. In this case maybe that just wont work. I think maybe John K notes the only viable option - keep it going, bank the income or convert it to rentals. I am already keeping a few rentals a year anyway. In 5 years or so I might have a pretty good portfolio.
Thanks again for all your comments.
From an investor perspective, I would value it as very little. Find the right buyer and its worth whatever they will pay. I buy businesses for their distinct product lines, intellectual property and their capital assets - typically at .25 cents on the dollar or lower book value. It's kind of like buying a resale business that has no fixtures and no inventory. What are they really buying?
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