Regardless of where you are in your business life cycle, understanding what drives your business value is essential. A professional business valuation makes this possible.
Often, I meet owners who are thinking about driving off into the sunset in their own RV. Sadly, after a lifetime of hard work, many find their dealership has little value, just when they need to fund retirement.
At other times in your career, life-changing opportunities will arise. Maybe a key competitor dies suddenly, and you can buy his business for a bargain. Or more happily, growth means you need to invest in a new facility. Your business value will determine whether you can get the required financing.
At any time, business owners also can face one of the “Three D’s”: Death, Disability or Divorce.
Twice this year, I had clients who died suddenly and unexpectedly. One ran his business profitably, with key staff in place to keep his company thriving, and the family was able to divest the business quickly and at top dollar. The other business owner barely was making a wage, leaving the family trying to sell a struggling company while devastated by the loss of their loved one.
Typically, business owners never get a valuation until a life-changing moment arrives. However, a company’s value cannot be changed the way putting a fresh paint coat on a house improves its value. In fact, you cannot change business value in a year.
Business value is based on the whole business history. As a result, understanding, monitoring and maximizing what drives your company’s value is essential.
Value is based on two components: cash flow and risk. Cash flow is the most important factor, and risk is various influences that affect how likely the cash flow is to continue indefinitely. Here are the top six factors that drive business value.
No. 1: Cash Flow, Cash Flow, Cash Flow
Without cash flow, you have a hobby.
Running a business is an investment, and cash flow is the return on the investment. No one wants an investment without a return. So, you want to strive to meet or exceed industry net amount benchmarks.
“True” cash flow typically is hard to see. Most good accountants help owners manage the bottom line and their tax liability. As a result, we normalize earnings before evaluating the cash flow, which means:
- Remove all one-time and unrelated revenue and expenses:
- Good examples are one-time consulting fees or the gain on a forklift sale, which are not ongoing operating items.
- Remove all “discretionary” expenses:
- Many expenses are tax-deductible but are not necessary to generate revenue; they essentially are profit/cash flow distributions. Meals, entertainment, travel, family vehicles, family cell phones and such would be added back to income.
- Adjust all necessary expenses to market rates. The most common items are:
- Owner and family member wages—some owners take wages, some pay family members above or below market rates for the work performed, etc.
- Rent when the business or owners own the premises.
Normalizing clarifies the business’ “true” cash flow, enabling the company to compare results with benchmarks.
With respect to rent, when the company owns the facility and undercharges itself rent, the result often is an underperforming business. Undercharging rent means the business lives down to the expense. This approach leads to undercharging the company’s products and services, and that underperformance is invisible until the business is valued or sold. At the time, rent is adjusted to market rates, cash flow has been eroded and you have a hobby.
Charging yourself market rent is like putting the fresh-baked cookies in the cupboard rather than on the counter. Everyone will make better decisions if the benefit is out of site.
If you are a dealer who owns your facility, be sure to charge business rent market rates to safeguard your investment value and the real estate.
Risk, the other value component, is assessing the likelihood the cash flow will continue. Lower risk means a higher value. The most important factors to mitigating risk, and the factors you can control, are financial performance plus your staff and organizational structure.
No. 2: Financial Performance
Consistent upwardly trending curves: Cash flow is essential, but not all cash flow is created equal. A business with consistent upwardly trending revenue and net cash flow is much more attractive than one with inconsistent results over the years.
Financial statement reliability: When a banker or investor examines the company’s financial statements, presenting reliable information is important.
The more adjustments in the normalizing process, the less reliable your statements. Work with your accountant to show discretionary items separately so they are easy to spot.
Although uncommon in RV dealerships, unrecorded revenue (cash sales) is excluded from the value calculations, so be sure to record all the dollars. Paying a little more tax to use the true business value is worthwhile.
No. 3: Staff and Organizational Structure
Skilled staff in key roles: As we all know, good employees make or break an organization. They are the company’s face to customers, so the higher the staff quality, the more likely cash flow will continue.
Most dealerships are seasonal, so hiring seasonal staff is good business, but generally, having long-term skilled people in key roles increases your business value.
Management replaceability: Would your company continue to produce cash flow if you went to Hawaii in busy season? The more easily an investor could take over your business without a hiccup in cash flow, the higher the value.
In larger dealerships, this means having a manager who can step up and run the company in your absence. In smaller dealerships, it means cross-training staff so a new owner could step in.
The following three factors always are considered, but sometimes owners have little power to change them. How your dealership is positioned to weather these effects will affect value.
No. 4: Time Established
Because value is based on history, determining whether cash flow could continue for a fledgling dealership that has not survived any storms is difficult. As a result, younger businesses typically are considered riskier and worth a diminished amount.
No. 5: Competitive Environment
Generally, the RV industry limits the dealers in a given geographic area, so you know who your competitors are, have limited product lines, and have a protected territory.
I recently met a dealer who had a competitor across the street, so buyers would park at one dealership and visit both. Although each tended to serve different customers—one had entry-level product lines, and the other had higher-end lines—the dealer with deeper pockets could put the other out of business. The scenario increased the riskiness and decreased the value.
No. 6: The Industry and the Economy
The industry and economy impact all businesses. These factors are considered in business valuations.
During the pandemic, we saw stark examples. Restaurants with cash reserves and low debt were able to adapt, whereas others closed. An organization’s financial strength affects how it can weather bad times and take advantage of good ones.
This has been an amazing year for the RV industry. The question is how long this upward trend will last. Many factors considered in a valuation are intuitive to most dealership owners. How those elements fit together drives the value.
Some inexpensive valuation options are available. We recommend owners have a valuation done about every five years so they can make adjustments throughout the business’s life cycle. Those changes will ensure your greatest investment’s value is maximized no matter what happens next month, next year, or 10 years from now.
Carrie Stacey is the owner of Stacey & Associates, a company specializing in business valuations, mergers and acquisitions, consulting, coaching and benchmarking, geared at dealerships. She is a certified valuation analyst and a licensed CPA in the U.S. and Canada. She spent a decade as the owner and general manager at powersports dealerships in Idaho and Canada. She also worked as general manager at both marine and RV dealerships. Additionally, early in her career, Carrie spent a number of years in professional sales.