Why Owners Should Common-Size Their Financials

In today's economy, more people than ever are looking to buy and sell businesses. But how do you do it? Welcome to The Deal Board, presented by Transworld Business Advisors. Straight talk about real deals and real people.

Listen to stories, interviews, and expert advice to help your business sale, merger, or acquisition process. Now, here are your business exit experts, Andy and JT. And welcome back, everybody, to the Deal Board Podcast. And we are talking about what everybody loves to talk about, numbers, financials, and being able to see those financials and present those financials in a way that makes it easy for the buyers to understand.

Yeah, I've never heard this term before. Common sizing. Common sizing, but it makes a lot of sense. I mean, I think it's just talking about looking at the numbers in a different way for a lot of businesses.

and I think recognizing trends is important. I've talked about it over and over again that the value of your business is what it's going to make in the future to a buyer. The best way to predict that is the simple man's way of just looking at last three years of financials, maybe drawing some trend lines. But these days with AI, you can dive in a lot deeper with these financials.

And we're talking to our fellow business brokers out there. And when you're creating packages, we have to stop looking at just dollar amounts and start looking at things like percentages and trends and things like that. Well, you know, and you look at each different industry has its own benchmarks, okay, of revenue, your cost of goods should be this percentage. And of revenue, your labor should be that percentage and your fixed expenses and your rent, et cetera.

So when you are analyzing or valuing the business, you want to be able to look at those, not just for your own, but you want of benchmark them against what the industry standard is. And you may be performing at a better rate or a lower rate, and that's going to have some impact on value. Yeah, there used to be the CMA reports or the RMA reports. I forget what it was.

In valuation, when you looked at industry trends, and it's a lot easier to do that now, again, with things like Claude and ChatGPT, you can take some financials and do so confidentially, by the way. But no, But you could do so and look at your financials and look at these packages and benchmark against other deals. Right. And you know who uses benchmarking a lot?

The IRS. I had a friend who worked for the IRS for many years, retired, and he said they benchmark all the time. So they're looking at the food costs. They go to New York.

It's regional sometimes, as you said. And they'll look at the food costs of certain restaurants. And if it's completely out of whack, they know something's wrong. Something's going on.

Yeah. So benchmarking is a really great way of looking at businesses and understanding. And I think common sizing actually means making it simple for people to understand what's going on in a business. And, you know, if you're a seller and you're running a, let's just say, a basic bookkeeping system like QuickBooks, for example, it's very simple to add to the report.

Don't just show me the numbers, but show me a percentage. You can add that column and it'll break out all the percentages as compared to your overall revenue. That's piece one. Now you know what your percentages are.

And oftentimes working with an intermediary or broker, somebody like us, we have access to many other databases. You can do some of that through Claude and ChatGPT, as you said earlier. But we've got two or three different industry standard databases that we can put your business in and compare your ratios to what the industry tells us should be the best performers. Yeah, and you could look at your raw numbers over the last three years and look at those percentages and see if something's out of whack.

And you should be looking at these anyway, which we talked about all the time. You should be looking at your cost of goods sold, especially these days. I mean, there's tariffs, there's inflation, there's supply chain issues. Over the last five, six years after the pandemic, the world has been at such influx of being able to get raw materials and producing those materials and labor costs.

I mean, it's really something you should be looking at all the time. All the time. And not just, hey, I'm ready to sell it. You should be looking at it now if you're preparing to sell because there are some opportunities there for you to fine-tune some things.

That may increase your profit more. That goes back to that SDE EBITDA conversation that we had in one of the previous episodes. Because as you drive that number up, then your multiple also goes up, meaning ultimately your business is going to value for more. Yeah.

I mean, you might be experiencing more revenue these days. But are you outpacing inflation? Are you outpacing the cost of goods sold because of tariffs or because of transportation issues or because of anything? especially these days where fuel is going up and cost of everything is going up.

Well, it's interesting that some of the industries that we've served previously and some of the other businesses that Transworld is a part of in the United Franchise Group family, there was a long time there where the Sinorama people were being hit because almost all the products that they use, acrylic, vinyl, inks, et cetera, are petroleum-based products. So not just are you looking at hey is the cost of gas going up but anything that a petroleum product is going up as well Their cost of goods are going up Maybe their revenue has gone up but their margins are shrinking because the cost of goods is going up as well And I've seen it conversely where we actually have a business that's for sale, and it's a pressure-washing business.

Revenues have come down, but its profitability has gone up. And you kind of look at that and go, well, that seems - it's oxymoron. It doesn't make sense. But when you start diving into what he's done, how he's trimmed back on labor a little bit, how he's increased on his advertising.

but he's gotten smarter on what he's buying for inventory. You can see, yes, he went down in revenue, but he went up in profit. That's attractive to a buyer. That is attractive to a buyer.

Speaking of attractive to a buyer. Do we have one? We do. Well, we have a listing of the week.

Yes. So then that's for you as a buyer to go and see new opportunities that are available for the Transworld. And we have one specially featured for you today. Yeah, check this one out.

It's a really good one. At Transworld Business Advisors, we help entrepreneurs buy and sell businesses every day with over 1,000 expert brokers around the world. Want to learn how it works? Head to tworld.

com or give us a call at 800-205-7605. Hey, JT, do you know what time it is? Money time? Almost.

It's time for Listing of the Week. Hey, everyone. I'm JT Harp right here in greater Cincinnati, northern Kentucky with Transworld Business Advisors. And I'm really excited to share this one.

It's a rare towing and recovery powerhouse opportunity with asset value that's honestly unmatched. This established Midwest leader in the industry comes with over $3.5 million worth of top-tier tow trucks, heavy recovery rigs, and specialty equipment, all ready to roll on day one. They've got diverse revenue streams that keep things steady.

Light, medium, and heavy duty towing, accident recovery, plus a solid truck and equipment leasing division. That all means consistent demand, resilient cash flow, no matter what the economy throws at you. The support is rock solid too, with long-standing contracts, a highly experienced team that knows the business inside and out, and inbound leads continually pouring in from both commercial accounts and municipal sources. This is a true turnkey platform that you can step into, take the wheel, and be completely positioned for immediate success with plenty of room for continued growth.

Opportunities like this don't come around often. Strong assets, proven cash flow, and built-in stability. It's the kind of business that can build serious wealth for the right next owner. Once again, I'm J.

T. Harp, right here in greater Cincinnati, northern Kentucky, with Transworld Business Advisors, your business brokerage leadership firm. Please give us a call today at 513-725-7283, and we'll send you over the executive summary and walk you through why this over $3 million investment opportunity stands out from the rest. Looking forward to hearing from you.

All right, so welcome back. That's a great listing of the week. And if you're the buyer in the market looking for opportunities, you have that agent's name and contact details, reach out at Transworld Business Advisors, tworld.com, and they can help you with that particular business.

What are buyers looking for these days? Yeah, what's the lens that buyers are going through? They're not just looking at the revenue, the top line. That's always the driver.

In fact, a lot of the ads that you'll see online, they'll say, here's how much it's doing in revenue. But revenue only tells a part of the story. What buyers also want is margin. I've ran into a lot of private equity groups and a lot of deals where they really don't care about the revenues.

They are looking at the gross margin. How much is left over? I mean, you know, especially in things like construction, especially in things like distribution, especially in things like food costs, restaurants. Cost of goods is a big deal.

And if you're not managing that, you may have a real big problem. Right. So we have a listing right now in one of the offices and it's for a restaurant. And the guy was a doctor.

He's opened a taproom, a brewery. And now he's got this ale house over here that he's got as a restaurant. Does maybe a million and a half in revenue. He loses money every year.

This guy is not a restaurateur. He's a doctor who liked making craft beer out of his house and now turned it into a business. What that business is going to need from an opportunity side is someone that comes in that knows the restaurant business, can drive operating costs down, whether it's food costs down or labor costs down. That business should be profitable right now, and it's not.

Yeah, there's a lot of tools out there for them, too. There's some AI tool that scans all the food distributors, and it gives you the best price that week for the individual items that you want to buy. So there's like a lot of food, but things like Cisco. Cisco just bought Restaurant Depot.

Restaurant Depot was a place where people went for cheaper goods, especially these small little mom and pop restaurants. So there's a lot of flux out there. So operating expenses as a percentage of revenue at a gross margin are super important to buyers. Got it.

Those are things that you may need somebody on the outside as a seller coming in, taking a look at those numbers and making suggestions to you on how you can control those expenses. There only two ways to be more profitable in any business Andy right Those are two things Yeah Drive sales cut expenses That it So if you can look at both of those as you thinking about bringing your business to market it may make your business very valuable Yeah. And for that doctor who's that's running, I guarantee you he's not managing the labor costs.

He's not sending the waiters and servers home fast enough. Home between breakfast, lunch, and dinner, whatever, right? And they're not managing the food costs. Right.

Those are always the two biggest expenses in the restaurant industry. And then they got to look at trends because, again, if we're in a 3%, even at a reasonable inflation of 3%, you have to keep moving your revenue targets up to make sure that you're covering it because they're going to look at the trends over time. Yeah. And that's why you're going to want two or three years worth of data, financial data, for them to be able to see.

Are you trending up? Are you trending down? Are you staying flat? Right.

And if you're thinking about bringing a business to market, you don't want to be going down. Right. Flat is okay. Up is better.

So when should you check? Every year? Well, it should be once a year. Okay.

Yeah, that's a little too late to be able to do anything with it. I would say at minimum, you should be looking at it at least quarterly. Yeah, you should be looking at it quarterly. And that means that having a really good system in place to make sure you can track inventory as well.

Right. Because a lot of times people are hedging these kind of increases in costs by buying in bulk. Right. And so if you buy in bulk and you immediately just charge that off the cost of goods sold, your margins are going to look bad.

Right. So you're going to want to make sure you have an accurate point of sale system and inventory system so you're understanding that your books and records are accurate. Right. And you should also make sure that in all businesses today, especially as you're preparing to come to market, that you're recording all revenues in and all expenses out.

Yeah, I mean, it's not the 1970s or 80s anymore. You really should have a full computer system that, I mean, I know you're tracking this quarterly and you might have to make some adjustments. So that's why you might track this quarterly, but really it should be almost weekly. If you're running a restaurant like that, you know, that example of the big brewery and it's a million and a half dollars, that's a lot of food coming in.

That's a lot of beer and prepared foods going out. they should know their KPIs way before that. Right. And in this particular case, unfortunately, he's got that.

All of his books are run together. So he's got the brewery business over here, and he's got the pub over there, and he's got a third place, which is a tap room, and they're all under the same entity and all under the same P&L. So we have to go through. We're pulling everything apart to be able to show just that one particular business because he doesn't want to sell the whole thing.

He just wants to sell the place where he's bleeding. Oh, even better. Yeah, great. You know, but again, that's having the right systems in place.

And I think if he knows what his operating percentages are, then you can position that to a buyer to say, here's the opportunities where you can fix. If you come in and you know the restaurant industry and you can dial in these two or three different places where the previous guy was not able to, this is what the effect is going to be on the margin. And you can model that type of stuff, especially today, as you were saying, put that into ChatGPT or Claude or whatever. And you said something earlier I just want to circle back to.

If you're going to use those, use a paid version. Yes. Don't use the stuff that's going to make that public information now where everybody has access to it. No, there's a lot of tools out there these days to run your business.

And I think of my own brother who runs a construction business, and he also has a finished business, a wood finished business manufacturer. And they've been able to take all those costs and expenses and throw it into ChatGB. And chat has actually given them recommendations of where to raise their prices, what products they're losing money on, what jobs they're losing money on, why is it happening, labor costs, things like that. It's become their business coach.

Yeah. That's pretty incredible. It's incredible. So you should be doing that because the buyers are going to want to know.

That's right. And all of this is to just give the buyers more confidence. That's really what going through this whole process and looking at common sizing your financials, running your financials on a regular basis. Common sizing, again, as we said, was just not looking at the numbers, but also showing the percentages.

Industry benchmarking them, doing it on a quarterly basis. By doing that, you're going to be really in touch with the numbers. And when the buyers do come along, that's going to give them more confidence. Yeah, it positions your business for a stronger sale because, for instance, private equity deals are down over the last three years.

They're down because of uncertainty in the marketplace, whether it be cost of goods sold, whether it be shipping, whether it be tariffs. And the way to combat that is to have your business showing that you've been able to maintain margins, showing that - and common sizing it is being able to show it in an understandable manner. Right, right. Make it a fifth-grade level.

Right. Where everybody can digest it easily. Even big businesses. Yep.

That's right. That's right. So it's a good exercise for you to go through, get the assistance of someone who knows the industry, knows the business brokerage process, and they can help you with this, whether it's through a BOV or it's being able to come back and share with you the database industry benchmarks for you. So speaking of getting that business to the point where you can sell it and then getting the deal done, that will take us to this episode's deal of the week.

Yeah, and it's a good one. So listen up. We'll be right back. Hey Andy do you know what time it is What time It time for deal of the Week Ring the bell Well hey everybody JT here and this is the Deal of the Week And I've got AJ from our office in St.

Charles, Illinois. AJ, thanks for being with us. No problem. Thank you for having me, JT.

Absolutely. And you got a very interesting Deal of the Week, something that I think if most people, after they hear the Deal of the Week story, they're going to say, well, how do I get one of those myself? Yeah. So tell us a bit about the deal that you put together, how that came together and what you did.

So my local B&I group, I have an M&A attorney in that group. He reached out to me earlier this year and he's like, hey, AJ, I'm stuck on a deal. The seller happened to pass away in the middle of the negotiations. They had an offer.

The sellers had an offer at $2.8 million. the buyers, they were from Asia. They were trying to expand their footprint here in the States.

They dropped the offer to 1.8 million. They dropped the offer by a million dollars. After the guy passed away.

And after the guy passed away, because he was a big part of the transition. So the buyers like, hey, we don't feel comfortable. And this is where the attorney reached out. They negotiated for a month back and forth and they could not come to an agreement.

Wow. Okay. So the attorney calls you and says, hey, can you get involved? What happens next?

So I go to the attorney like, hey, let's schedule a call with the seller. We got on a Zoom call. We talked. I looked at her P&L before the call.

And I give her my two cents like, hey, let's get the valuation done. And I told her for sure you should not sell the company for $1.8 million. I know I can get way more in the open market.

And we did the valuation. The valuation, of course, came in close to $4 million. There's also real estate involved. but the sales were dropping.

She was down 10%. We did the valuation and I told her like, Hey, look, this is the valuation. You could try to negotiate on your own. Or if you want to retain my services, I can come in here, help you negotiate and charge you 10% success fee, anything over 1.

8 million. So if I get you, let's say 2 million, I would charge you $20,000 based on I got you extra $200,000. After the call, she thought it over. She tried negotiating on her own for about a month, month and a half.

Oh, so she went back to the buyer alone. She did. And she's like, hey, AJ, I'm not getting anywhere. So I want to hire you.

I did recorded a call with the buyers. My first Zoom call was three and a half hours. There was a Language barrier, so interpreter was required. Back and forth, back and forth.

Few more Zoom calls, few more calls. Probably spent six, seven hours negotiating. And I got my client extra $550,000. So from $1.

8 million to $2.35 million. Excellent work, AJ. Okay, so then you got 10% on the overage.

10% on the overage, the easiest, $55,000. I made JT. Okay. And so how many hours total you think you got in the deal?

I probably spent seven, about seven to eight hours of negotiating time. I mean, deals did take three to four months. We had some issues because it wasn't an international transaction. But yeah, my personal time, seven to eight hours.

And the beautiful thing is the buyer was happy, the seller was happy, the attorneys were happy, and we had a nice celebratory champagne toast afterwards. words. Well, that's a pretty good hourly rate, six to seven hours, seven or eight hours for 55 grand. I think everybody wants to be a business broker after hearing your story.

Yes. I need more of these deals, JT. Well, it sounds like you want a key. You want to stay really tied into those M&A attorneys in that B&I group.

That membership is more than paid for itself, I'd say. That is correct. Yes. That's fantastic.

Well, AJ, if somebody else has a situation like that and they want to get in touch with you, what's the best way to contact you? So they can go to tworld.com slash St. Charles.

They can call me at 630-544-0611, 630-544-0611, or they could simply Google me. I'm on Google, LinkedIn, so they could easily find me. And what's your best email? Best email is AJ's wall.

That's A-J-A-Y-S-W-A-L at T-World.com. Very good. All right, AJ.

Hey, thanks for sharing with us the deal of the week. 55.8 hours. That's a pretty good deal.

Yes, sir. Thank you, JT. Congratulations. You bet.

Thank you. Yes. Okay. And how's that for a deal of the week?

A really good one. It's a great example of people getting deals done and making sure their businesses are ready to sell. That's what we do here at Translators. Yeah, that's what we do here on the deal board.

And we'll be back next time to talk about more deals. Yes. More listings. That's right.

And we like to see it as good deals. Good people. Good people. Thanks for being with us.

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