Andrew Finn

Businessman, mostly investing in LMM PE @G64Ventures; co-built @waitbutwhy @arborbridge (acq), bought/holding @collegeplannerpro @myapartmentguardian, viva golf

[Andrew Finn @finnscave]

@stefanvonimhof @patrick_oshag Hard to imagine a more mismanaged asset to date…deep deep value

[CoFounders Nik @CoFoundersNik]

Buying your first business is scary.

You’re anxious to get in the game but you can’t afford to miss.

You want to “buy a great business at a fair price”, but how do you know what a fair price is?

Here's my guide to valuing any business.

Especially your first!
-

1. Your Goal

You’re buying a business!

People are going to look up to you! You're building generational wealth! And of course, you're going to be sooooo rich!

Maybe.

Right now, you only have 1 goal:

Minimize your downside risk

I know, “downside risk” isn't the sexiest thing to focus on but, with a purchase, things can go bad.

How bad?

- Lose your house
- Declare bankruptcy
- Significant reputational harm
- Relationship problems with your spouse
- Self confidence issues

Not saying you can't bounce back. You can but our goal is to avoid this road at all costs.

So be excited, dream big and create a compelling vision for yourself and your new company!

But approach this process with due respect.

2. You aren't a fund

Even if you’ve raised enough cash, you don't have a track record yet.

Sure, you may have lots of operational “experience” (or whatever you said to convince people to give you money) but the reality is still the same.

This is your first business.

Go into the valuation process skeptical and paranoid.

Avoid phrases like “synergies” or “vertical integration” or “operational efficiencies”. You don't have any of those yet.

Underwrite the business based on its current state. Not what it did 3 years ago. Not what you think you can do. What it's doing right now.

On your next purchase, after you've proven what you can do, go for it! But on this, your first, don't play with fire.

Look at the business as it is.

3. Multiples don't matter

Throw out EVERYTHING you've ever heard about multiples!

“But that's what everyone uses! How can I just throw it out??!”

Listen, multiples represent what other people have paid (past tense) for a business in your (preferred) industry.

Only two types of buyers use multiples to set the purchase price:

⏺️ Sophisticated Industry Operators
⏺️ Idiots

You aren't a Sophisticated Industry Operator yet and you sure as heck don't want to be an idiot!

We don't care about what other people paid. We care about what you can pay.

So set the price based on what the business can reasonably support.

4. What does matter

Cash Flows

There are 3 basic parts:
⏺️ Money Inflows (Revenue - Known)
⏺️ Money Outflows (Expenses - Known)
⏺️ Your new debt obligation (Debt - TBD)

Cash Flows = Revenue - Operating Expenses - Debt Payments

Here are a few of the many proxies for Cash Flows:
- EBITDA
- NOI
- Profit
- Taxable Income

Identifying the best proxy for this specific business is THE most important step in the process.

You will use this number to base your proforma and valuation off of.

Don't be prideful here.

Find a CPA, financial whiz, mentor or investor to help you calculate the right number.

Start by answering these two questions:

QUESTION #1
How would the business perform if I took over today?

You don't care what it did a year or two ago. You only care what it's doing right now!

**A note on seasonal businesses**

What if the business is seasonal and how would I know that?

If more than 30% of sales happen within a certain month or 60% of sales happen within a certain quarter then you have a seasonal business.

Not the end of the world but something you need to fully understand.

If their busy season happened in the last 6 months then you can proceed. If it happened longer than 6 months ago, WAIT and see how they do!

Continue your process with the seller but set the close date for AFTER you see how they do.

QUESTION #2
With the current owner gone, Is there anything I need to cut or add?

Owner perks are a thing!

Identify anything the previous owner is running through the business and evaluate it.

At the same time, dig in to understand what the owner is currently doing.

I have yet to see a deal in the SMB space where the owner was truly hands off. They are always playing some role.

5. Set your Value

You have your Cash Flow number. Now, let's assign a value range.

Assuming you are already working with a bank, gather this information:
⏺️Loan rate
⏺️Loan Term
⏺️Loan Amortization period
⏺️Your Debt Service Coverage Ratio (DSCR)* range
⏺️Cash down requirement
⏺️Your preferred Cash down

DSCR
Most banks will lend at a 1.2 DSCR but this is too slim for you as a first time buyer. There is very little cushion. Model your proforma off of at least 1.6 DSCR.

Here’s why.

Have you ever heard of the J-Curve?

The basic theory is simple. Buying a business is expensive and takes an initial injection of capital to fund.

At the same time, performance will slip. Revenue and profit will drop as you and your new team spend time building relationships.

This is normal but means less time selling or on operations.

As a result, your margin and cash position will drop.

You will eventually recover your cash position but it will take time.

If you plot this cash position over this time, it drops, then recovers and looks like a “J”. Hence the name.

Like this:

Cash drops from $350k down to $56k over the first quarter.
⏺️ $292k down to buy the business
⏺️~ -$1k in Cash Flows

This is modeled off of a 1.6 DSCR.

Are you comfortable with a $56k cushion?

The Model

Once you’ve done all of the work above, let's plug it in!

This is the tool I use to set my range of comfortable valuations.

Here is a screenshot

It's an easy process:
Step 1. Enter Purchase Price, your Cash Flow Proxy,

Step 2. Enter loan Term, Amortization Period and Rate

Step 3. Enter the your DSCR range (max 1.2)

Step 4. Evaluate your Returns and iterate
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TLDR;
Your main goal is to minimize your downside risk
You aren't a fund
Multiples don't matter
Cash Flow is all that matters
Base your valuation off of Cash Flow

I hope this helps and if you have any questions, leave them below.

[Andrew Finn @finnscave]

Feels pretty relevant that we have 48% more people in the country than we did in 1980, beginning of millennials.

Makes sense house prices will be nuts in areas that were already established and have had ~0% housing stock growth…affordable is always going to feel “frontier”.

[Andrew Finn @finnscave]

@moseskagan The hardest part is just actually believing that mispricing occurs on the low end of markets

[Andrew Finn @finnscave]

@jmwass Pretty unbeatable high, I'd imagine

[Andrew Finn @finnscave]

@EricJorgenson @balajis @scribemediaco Let’s goooooo

[Andrew Finn @finnscave]

That said, my entire business and professional livelyhood is built with one of my oldest friends...so exceptions do apply. Mostly on point with the "only do business with friends after 40".

[Ian Cassel @iancassel]

So good

“Before you are 40, never do business with friends. After 40, only do business with friends.” - Chris Davis

[Ian Cassel @iancassel]

So good

“Before you are 40, never do business with friends. After 40, only do business with friends.” - Chris Davis

[Andrew Finn @finnscave]

@JamieWall2 Rugby is just the worst run sport. It’s almost comically self destructive to create a set of rules that would allow for a game of this magnitude to be ruined. So depressing.

It has just become a private school headmaster’s disciplinary fantasy where rules trump common sense.

[Andrew Finn @finnscave]

@DailyMunger @EndresenHeather @Slackwatercap @bentigg Think you've either got to go with:
1) Beg, borrow, bribe seller to seller-finance like 90%, or
2) Raise all equity, accept that this won't be the last deal you ever do, but you can still make some decent money

[Andrew Finn @finnscave]

@DailyMunger @EndresenHeather @Slackwatercap @bentigg That's a sticky tweener there my friend

[Andrew Finn @finnscave]

@Suhail It is the future. Submit.

[Andrew Finn @finnscave]

@ZZ_le_Piu In theory but I think you’re always kind of crapping your pants that it all goes to hell and that bill comes due. Sleep at night factor is so much less, save the $ for a rainy day factor so much more

[Andrew Finn @finnscave]

All things equal, how much is it worth for a business to have negative working capital v heavy working capital requirements...an extra 1x? 2x? Feel like heavy WC businesses just crush your ability to ever take money out of the business, no matter how well it is doing.

[Andrew Finn @finnscave]

Yellow cards for everything is killing rugby. Need to totally reimagine how they do cards.

[Andrew Finn @finnscave]

Samsung TV Plus should be considered malware

[Andrew Finn @finnscave]

@umichrugby LFG

[Andrew Finn @finnscave]

Sales bros making it for Friday golf either means the economy is flying or absolutely tanking, no where in between.

[Andrew Finn @finnscave]

@patrickdichter So in a highly levered deal, you can be a C-Corp for the debt pay down years, then convert to S-Corp for the cash earning years, right? You just lose QSBS eligibility?

[Andrew Finn @finnscave]

@moseskagan So what is the answer? How do you decide which to do? Is there a standard of if its X% into the usable life, buy a new one?