Specializing in one product or service allows you to focus on delivering that thing better than everyone else. It enables you to hire (or train) specialists in your field, improving the quality of your work, which leads to happier customers. And satisfied customers buy again and refer their friends.

That’s why specialists often grow faster even while they are spending less on marketing, leading to better profit margins and, ultimately, a more valuable company. Specializing in a specific product or service has tremendous benefits, but what if your customers expect you to deliver a range of offerings?

That’s when the second form of specialization can help: focusing on a specific industry.

The Benefits of Becoming an Industry Expert

Specializing in serving a specific industry confers several benefits. First, offering your products or services to one industry allows you to learn the language spoken in that sector. Every industry and profession has a unique language, and being able to speak the jargon can benefit your company. Knowing your industry’s lingo can indirectly communicate to your customers that you are experienced, knowledgeable, and able to navigate the space.

Furthermore, focusing on one sector ensures you stay current with industry trends, which will result in being able to identify new opportunities for your customers sooner than a competitor who serves multiple industries.

Most importantly, specializing in one industry allows your employees to become experts in a sector. You may be an expert in an industry, but chances are, they’re not (particularly when you first hire them). Focusing on a sector accelerates how quickly your staff can become fluent in your industry’s lexicon, which allows you to delegate customer relationship management faster and more successfully.

Specializing in an Industry Led to a 20x Increase in Revenue

For example, look at the story of UK-based founder Raman Sehgal. Sehgal started a small marketing agency called ramarketing in 2009. By 2015 the business had grown to the Pound Sterling equivalent of around $500,000 USD in revenue, but the company was losing customers as fast as they were winning new ones.

Frustrated with his company’s lack of progress, Sehgal decided to do a complete analysis of his business. He found that ramarketing’s most valuable customers (low maintenance, sticky, high gross margin, etc.) were in the pharmaceutical industry. Sehgal decided to pivot his business to solely serve clients in the pharmaceutical supply chain. 

Beginning to serve one industry created a sequence of positive events for ramarketing. 

Becoming an industry specialist allowed ramarketing to stay up to date with industry trends, learn the lingo, and ultimately improve the quality of their work. An increase in customer satisfaction led to more referrals and a strong reputation in the sector.

His employees began to understand the intricacies of the industry. In the pharmaceutical space, there are many rules and laws to adhere to. Understanding the regulations allowed Sehgal’s employees to better serve their customers.

Subsequently, the business boomed. 

 The Proof Is in the Pudding

Sehgal’s once stagnant marketing agency grew from $500,000 in turnover in 2015, to over $10 million by 2022, which is when Sehgal accepted an acquisition offer from NorthEdge Capital of more than 10x EBITDA.

In Summary

Sehgal’s bold decision to specialize in the pharmaceutical industry led to a 20x increase in revenue and, ultimately, a lucrative exit.

Narrowing your product or service line is the most common way to increase your company’s value but specializing in one industry carries many of the same benefits.

By JoAnn Lombardi, VR Business Sales/Mergers & Acquisitions, President

In a perfect world, business owners sell their companies when banks are anxious to lend, the economy is strong, their industry is booming and the business is enjoying record profitability, with the future looking even brighter. Naturally, a perfect convergence of all of these variables would enable you to maximize the value of your business – allowing you to sell it at the highest price and on the best terms.

But most business owners don’t sell when market conditions are perfect. Instead, they make the decision for more personal reasons, such as to retire or to free up cash to pursue other investment opportunities. Unfortunately, many businesses are sold when the owner dies unexpectedly or is otherwise unable to run the business. These unplanned events increase the chance that the business will realize a lower selling price than it would in better circumstances.

Questions to Ask

Before you make the decision to sell, you need to ask yourself several questions. First, how motivated are you to sell? Selling a business is an arduous process that can take a year or more from the initial valuation to finding a buyer to finalizing the deal.

Second, have you adequately prepared your business to be sold? Most experts agree that owners should plan for the sale of their business at least three years in advance. You may even want to plan for an eventual sale as you’re still establishing and building your business.

But even if you have no current plans to sell, managing your company as if it will be sold is likely to result in a more efficient, financially-viable business. For example, your business plan should evaluate growth opportunities, market position and business goals; and explain how progress in reaching these goals will be measured. Not only is your business plan an important tool in unlocking the current value in your company, but it also serves as an initial prospectus for prospective buyers.

Internal and External Factors

Keeping an eye on economic cycles and how they affect the merger and acquisition market is important. The market for privately-owned companies can be just as cyclical as that for publicly- traded companies. Economic recessions, for example, generally mean there are fewer buyers. General economic weakness can also result in a drop in your business’s profitability and a perception among buyers that your business is a risky acquisition.

Also be aware of your business’s growth cycle and plan to sell when sales growth has reached a peak. Of course, this isn’t always easy to calculate, and typically requires the help of outside advisors. Further, you are better positioned to sell if your company boasts valuable patents, brands, proprietary products or a lucrative market niche.

Businesses are typically valued on a multiple of earnings. Therefore, your business’ earnings must be transparent and documented. Many deals are funded with bank debt, and most lenders won’t finance a transaction without stable cash flows that can be verified through an audit. Buyers also usually look for breadth of management because it reduces the company’s dependence on the departing owner and allows the buyer to learn the business from an experienced management team.

There are also a number of relatively minor things you can do to enhance the perceived value of your company and make it more attractive to purchasers. Cleaning up and organizing office, factory and warehouse spaces are an inexpensive enhancement. Repairing or replacing equipment may cost a bit more, but will help you attract buyers seeking a turnkey operation. Finally, consider disposing of unproductive assets or old inventory that buyers don’t want to be burdened with.

Maximizing Your Selling Price

Selling your business can be a time-consuming and complex process, but you’re likely to maximize your selling price by planning the event well in advance and by engaging qualified advisors at VR Mergers & Acquisitions to assist you. While a deal can often be put together quickly, maximizing value means that selling your business may take time. Remember, you don’t want to feel pressured to take the first bid, or to accept terms that are less than favorable.

By JoAnn Lombardi, VR Business Sales/Mergers & Acquisitions, President

VR Mergers & Acquisitions customarily use the cost, income and market approaches when valuing a business. But where do less scientific metrics – like industry rules of thumb – fit into the valuation paradigm.

The International Glossary of Business Valuation Terms defines “rule of thumb” as:

“a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.”

Rules of thumb serve as useful sanity checks for controlling interests valued using more technically sound methods. However, VR staunchly believes that they should not be used as the sole method of valuation for several fundamental reasons:

They’re unsupported. Not to be confused with the market approach – which derives valuation multiples from customized empirical data and in-depth statistical analysis – rules of thumb are based largely on folklore or word of mouth.

For instance, suppose an owner hears “through the grapevine” that a competing business sold for 80% of revenues. Although the formula may be worth noting, the firm has no means of verifying the rumor’s accuracy or underlying details. When you have your business valuated by a professional, you will get a complete examination of what you should be selling your business for, where the buyer will know exactly what they’re receiving.

They’re oversimplified. Valuation formulas also fail to account for differences between industry participants, such as non-operating assets, niche markets, management quality, operating risks or geographic location. Simply stated, they don’t consider many of the underlying factors, risks and attributes specific to a business that directly affect its overall value.

Moreover, ambiguous rules of thumb leave many unanswered questions. To illustrate, VR asks you to consider the prevalent rule of thumb for manufacturers of three to five times earnings:

• Does the term “earnings” refer to net income; earnings before interest, taxes, depreciation and amortization (EBITDA); or something in between?
• Does the formula assume an asset or a stock sale?
• Does it include real estate, inventory and intangibles?
• Does it generate a cash equivalent price, or did underlying transactions involve extended payouts, such as earn-outs or seller financing?

They’re outdated. As demand fluctuates, old transaction data may lose its relevance. Pricing multiples are affected by general economic conditions as well as industry forecasts and trends. For instance, an influx of new competitors, revolutionary technology or industry roll-ups might have an impact on pricing multiples.

They’re not credible in court. Historically, courts have rejected rule-of-thumb value determinations if used as a stand-alone valuation method.

If you’re looking to sell your business or, at the very least, determine what your company’s value is worth, make an appointment to consult your VR M&A Advisor in your area. They will be able to guide you away from the incorrect assumptions of “rules of thumb,” and directly to the hard, accurate numbers that a comprehensive business valuation provides.

By Lindsay Polyak, Partner
Tax Credit Collective

In 2020 and 2021, an astounding number of small businesses began feeling the impacts of government mandates around COVID-19 regulations. Unfortunately, small businesses took a major hit then and many are still feeling the ripple effects of those mandates two years later.

The silver lining (and perhaps the government’s way of rewarding employers for continuing to pay their people during hard times) is The Employee Retention Credit. Most likely you have heard the words “employee retention credit” or “ERC” floating around. The good news is your business may qualify and you still have time to claim this credit!

As a firm whose sole mission is to assist small businesses in claiming specialized government incentives, we want to break down the ERC to answer questions you may have:

What is the ERC?

In an effort to help businesses retain employees and keep them employed during the COVID-19 crisis, the (CARES) Act created the Employee Retention Credit (ERC) for 2020 and later legislation extended it through 2021. The ERC is a refundable payroll tax credit for “qualified wages” that were paid to retained employees between March 13, 2020 and September 30, 2021. It is still retroactively available to many businesses.

Who qualifies for this credit? 

• Any business that was impacted by a partial or full shut down due to government orders/mandates during 2020 OR any business that saw a 50% reduction in gross receipts during any 2020 calendar quarter, as compared with the same quarter in 2019 OR
• Any business that saw a 20% reduction in gross receipts during quarters 1-3 in 2021 as compared with the corresponding calendar quarters in 2019 OR
• Any business that was impacted by supply chain issues related to port closures, mandated shutdowns, inability to obtain supplies, parts, etc.
• Types of Businesses that frequently qualify: Service businesses, marketing firms, medical practices, dental practices, med spas, restaurants, nonprofits, retail or wholesale, hotels, assisted living facilities, oil & gas, manufacturers, travel-related businesses, construction firms, and more.

What’s the potential value? 

The Employee Retention Credit is cash back to the business from the government which has a maximum value of $26,000 per employee retained during qualifying periods.

What if I got a PPP loan?

Most of our clients received PPP loans. Employee Retention Credits must be calculated with wages paid to employees not using PPP funds (i.e. before PPP loans were funded and after the forgiveness period[s] ended).

How can I claim this credit for my business?

The ERC can be a complicated tax credit with rules about no-double dipping into other incentives. Each business wanting to evaluate the ERC deserves a thorough 3 phase process by a tax credit expert:

• Phase 1- Determining eligibility and calculating the amount of credits available by quarter; (Tax Credit Collective does this at no charge.)
• Phase 2- Finalizing the credit calculation and amending the quarterly payroll tax returns (941s) for eligible quarters;
• Phase 3- Providing audit defense if and when the IRS questions a taxpayer’s claim of the IRS.

In summary, the Employee Retention Credit has provided billions of dollars of relief for small businesses, and your business may still have an opportunity to benefit from these tax credits. It’s complicated and time-consuming and has an audit risk associated with it, so it bears a comprehensive analysis by a firm with expertise in tax credits and incentives.

Lindsay can be reached at lindsay@taxcreditcollective.com or 833-346-2368