Have investment questions? Of course you do.
Now, you have answers. Dan Lubeck, founder and managing director of Solis Capital Partners and contributing columnist for "Investor's Perspective" in Smart Business Los Angeles and Smart Business Orange County, has found his way to our blog. Last week, he debuted "Ask the Investor" by responding to some common investment questions that come up when buying and selling a company.
E-mail your investor questions to Dan@SolisCapital.com and his responses will be featured in future blog posts.
Q: Why is there so much focus on EBITDA by potential purchasers of my company?
The Investor says: At the end of the day, the most important aspect of value is how much cash a company will generate over time. EBITDA, or earnings before interest, taxes, depreciation and amortization, is an easy way for investors and purchasers to understand historical cash generation for most types of companies (except for those that require significant, recurring capital expenditures). The historical EBITDA often is a good indicator of what the future EBITDA will be.
Other critical factors include quality of leadership, ability to defend the niche, market dynamics, proprietary technologies or processes, contacted business and any other items that help assure future EBITDA. The investor or purchaser will value a company based on a multiple of EBITDA. Companies with the highest certainty of the fastest EBITDA growth typically will receive the highest multiple valuations. In addition to expected growth, companies with higher historical EBITDAs often will receive higher multiple valuations merely because of size. For example, a company with over $10 million of trailing 12-month EBITDA generally will fetch one times EBITDA more than a company with $5 million or less of trailing 12-month EBITDA.
Q: Should I hire a broker or investment banker to help me sell my company?
The Investor says: The answer to this question is “maybe.” The fees charged by intermediaries are significant. However, there are scenarios when qualified intermediaries can add value in excess of their fees. For example, if your company has performed well for the past two to three years, you want to sell most or all of it, there are a large number of potential buyers and/or you have no idea who the right buyer will be, a sale process run by an intermediary potentially can generate a much higher value. Another scenario is where the intermediary has particular expertise and experience in your industry, and there is “story” required as part of your sale presentation.
There are many scenarios where an intermediary will not add value. For example, if you know the one or two likely best buyers, then you should be able to maximize value with the assistance of an experienced transactional lawyer (which you need regardless). Another example is where there is significant risk to your business if the word leaks that you are selling. In this scenario, you are likely better off working with your experienced transactional lawyer.
We use intermediaries about half the time when selling our portfolio companies. Often it’s a good idea to seek the advice of your CPA when making this decision. If you decide that you need an intermediary, please do not base your decision on the firm name. Be sure that the individuals that will be representing your company (often not the senior partner that comes in for the dog and pony show) have the talent, experience, time and drive to get your deal done.
Q: Can I sell my company even if I have not made any profit the last couple of years?
The Investor says: You can always sell your company. The question is: Will you receive a value sufficient to satisfy your personal objectives? Although your historical EBITDA certainly is a factor, the value will depend largely on what EBITDA you can prove for the future. If, for example, you have landed large new contracts, you likely will be able to get value for most of the EBITDA that those contracts will generate. I suppose the tougher question here is: Why are you selling your company now? If you have no choice, then you should prepare the best you can, potentially hire a broker to help you tell the story, and get the best value possible. If you don’t have to sell now and you think the future looks better, you likely will get more value if you wait.
Dan Lubeck is Founder and Managing Director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, CA. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world.
In September 2010, Google changed the way search results appeared. The new version, dubbed Google Instant, displays search results as the user types a query. In the old version of Google, the system displayed query suggestions in a drop-down box. Now the screen fills with search results.If you have not tried the new “search as you type” system, navigate to Google and enter a query. I tested the query for American Airlines, which I typically abbreviate to “aa.” Google displays AAA Official Site. The Triple A is the American Automobile Association. How do I get American Airlines? The solution is to enter the full query “American Airlines,” not the abbreviation “aa.” If you want to change your default Google settings, you can click on different links until you find the page that allows you to turn off Google Instant.
Most users just use the default settings. The result is that finding websites or information now requires some extra work. Granted, if you are looking for the American Automobile Association, Google Instant is a great benefit. But if you are looking for any other entry that includes a double “a,” you are going to be affected by Google Instant.
What’s behind this type of radical change to Google’s main search system? According to Google, “We are pushing the limits of our technology and infrastructure to help you get better search results, faster. Our key technical insight was that people type slowly, but read quickly, typically taking 300 milliseconds between keystrokes, but only 30 milliseconds (a tenth of the time!) to glance at another part of the page. This means that you can scan a results page while you type.” (Source:http://www.google.com/instant/).
The most obvious change is that you get to the right content much faster than before because you don’t have to finish typing your full search term or even press, “search.” Another shift is that seeing results as you type helps you formulate a better search term by providing instant feedback. You can now adapt your search on the fly until the results match exactly what you want. In time, we may wonder how search ever worked in any other way.
If American Airlines is affected by Google Instant, what about a smaller business? My testing reveals that Google appears to be focusing search results, particularly the first two or three letters, on larger firms. I did some spot-checking and could not discern a specific pattern. My conclusion was that a Google numerical recipe was looking at what the user typed and then consulting a list of results that were stored in various caches. The method seemed to deliver results for sites that receive high traffic. I tried to cross-match the results with online advertising, but the results were inconclusive. My research indicates that Google Instant seems to favor high-traffic sites and popular topics, such as the letter “g” displays hits to Google and Gmail, surely not an accident of chance? The query “ga” returns entries for games, which is a popular topic. (Popularity can be estimated using a number of different tools, but I rely on Google Trends at http://www.google.com/trends.) You can test the popularity of the queries in this column by typing the keyword in the search box and looking at the traffic reports. The public version of Google Trends does not show actual clicks per time interval, but you can approximate the relative popularity of terms by entering a multiword query like gaga, games. Google plots both lines. Lady Gaga recently passed a billion downloads of her videos, so you can see relative popularity easily. Games are more popular than Lady Gaga it seems. But when you enter “gag,” Google displays Lady Gaga.
But what about more obscure words and phrases? Consider the search for IP, an abbreviation of intellectual property. Google leaps forward with hits to Apple’s iPad. In order to locate documents about intellectual property, I had to run the full query “intellectual property.” The other fix I stumbled upon was to turn off Google Instant. Depending on your context within Google, you can turn off Google Instant via the “search settings” link at the top of a results page or click on the toggle “Instant is on” next to the search button. A click turns instant off.
Now what does this have to do with a small or midsized business getting found via a Google search? My opinion, which has been informed by my test queries, is that big companies and popular words and phrases have an apparent advantage. American Airlines, for example, will have to work harder to generate traffic to its website. But a more practical approach may be to invest in Google’s Ad Words to make certain that when certain queries are run, American Airlines turns up.
There are other approaches, as well, but some of these will require some time and effort to implement. Let me run down six suggestions for you to consider if the Google Ad Words approach is not suitable for your business.
First, you can sign up for Google’s local listings. The easiest way to get to the sign up page is to navigate to Google.com and run a query for “Google Places.” You will need a Google account to create a free listing. Keep in mind, however, that the free listing does not guarantee that your entry will appear quickly or that your listing will be permanent. The listing for my company, Arnold IT, has been under review for months even though I was an early participant in the program. Google will also offer for-fee options to increase your firm’s visibility. These are called Google Tags and provide a preferred listing in certain results lists. Tags are free for some registrants, but I have heard about fees for tags as a forthcoming feature.
Second, you can increase the flow of original content to your blog. That content can then be distributed via really simple syndication. Google offers a blogging service at www.blogger.com, but Google does not appear to favor users by blogging platform. Google is paying considerable attention to websites and blogs that produce original content on a consistent and timely schedule. My blog at www.arnoldtit.com/wordpress is indexed frequently even though my business is not listed in Google Local. Google’s different units and services are not tightly coordinated in my experience.
Third, you can look at advertising options on Facebook. For some businesses, Facebook offers advertisements that can be targeted to specific demographic groups. Some of the Facebook advertisers with whom I have talked report considerable success with Facebook’s display advertisements. However, some advertisers of more general products and services have found that ads are less effective than mounting a Facebook content campaign. You may want to test Facebook advertising and experiment with increasing the content flow to a Facebook page about your business.
Fourth, you may want to take a close look at your present website. Content, not graphics and high style, is more important than search engine optimization tricks. If your website is more like a motion picture trailer, you may want to think about adding more product information or more detail about your firm’s success stories. If your website has not been updated in months, you should invest in getting more substantive information into the website. My recommendation is that content is more important today than at any other time. But Google is keeping track of the frequency of updates to a website. One time content updates are less useful than regular content additions.
The problem of getting a business found via an Internet search is growing more complex, not easier. The emergence of mobile device usage across different age groups and business functions is changing search. Small form factor devices like mobile phones or tablet computers make it difficult to type 1990s style queries in a search box. On my BlackBerry, entering a query in the provided mobile browser is essentially an exercise in frustration for me. To address this problem, some businesses are creating “apps” that allow one click access to content. Before you dive into an Android or Apple iPhone app, you want to do some hard thinking. App development is not a silver bullet and any type of programming can chew through a marketing budget like a hungry raccoon raiding a picnic basket.
In my own business, I am focusing on the basics. I am updating my website and publishing new blog content on a daily basis. As I look toward the rest of 2011, I may have to open my billfold and invest in Google’s for-fee advertising programs. The Web is changing as user habits shift from the desktop to mobile computing. The good news is that change brings opportunities.