#SMB Value Tip:
Not all Revenue is created Equal

Cash or Accrual bookkeeping track revenues differently

-Cash is the ACTUAL cash revenue in the bank for the period
-Accrual shows the BILLED revenue (uncollected)

Accounts Receivables helps bridge the gap

Let's explore...👇 1/x
Depending on the biz size, accounting may elect for Cash or Accrual books

Many #SMB use Cash books due to its ease of use & practical nature

Larger firms may use Accrual books due to its advanced ability to track assets & liabilities, & match revenues with expenses

#SMB Value tip:

How to remove excess or non-operating compensation or increase compensation in the financial statements during the normalization process

Its better to normalize earnings of a potential acquisition b/c you, as the new owner, can change this

👇 1/x Many times owners pay themselves over or under a replacement compensation (mainly due to tax reasons)

Many Owners may be paying family members higher than normal compensation rates

These items should be adjusted to 'normalize' the financial statements

#smb #investing
Want a quick "back of the napkin" forecasting tool to estimate future capital requirements?

Use the Sales-to-Capital ratio

Total Capital = NWC + PPE, net + Goodwill/Intangibles
(For private co with accel depr use gross PPE)

Explanation... 👇 1/x
What is it?
Sales to capital (S/C) ratio looks at how much revenue a company generate per $1 of capital

$1mm of revenue using $600K of capital equates to a 1.66x Sales to Capital ratio

Why does this matter? 👇

1/X @realEstateTrent A response to to your tweet re: rising rates & RE cap rates

Any investment, business or real estate, requires the investor to discount the future cash flows based on the required return

Here is how investors determine the required return (aka discount rate) 2/X A discount rate matches cash flows (CF)

• A CF to equity holders only = use equity discount rate
• A CF to Invested Capital (or NOI in Real Estate) uses a weighted average cost of capital (WACC) of debt & Equity

Let’s see how the equity & debt rates are calculated…

A Sources and Uses analysis for any company can be helpful when analyzing a potential investment
#SMB #investing #valuation

Let's look at $ADBE 👇(1-5) 1/5 $ADBE 's
Sources: Primarily cash flow from operations. Debt is used for acquisitions.

Uses: A capital light business so little on Capex. The main uses are M&A and Buybacks.

Let's review why $ADBE buys back so much stock, but first we need to look at returns on capital

#SMB Finance Tip

Want to tie up less Capital in your business?

If your cash conversion cycle (CCC) is POSITIVE, then that means you need Working Capital funded by the Owner to operate the business.

Let’s explore 👇🏼 1/9 The CCC is a comprised of 3 things:
1. How quickly sales turn to cash aka Days Sales Outstanding (DSO)
2. How quickly inventory turns to cash (Aka DIO) (exclude if a service biz)
3. How quickly you must pay suppliers/ vendors, payables (aka DPO)

The formula 👇🏼

Value tip: Look at both ROIC for TANGIBLE and TOTAL capital

The difference is acquisitions/goodwill. The fundamental economics of a business don’t change if a high/low premium is paid

$AMZN
5 yr avg ROIC
Tangible: 15.7%
Total: 10.8%
Cost of Cap= 7%
👇🏼

#valuation #investing 1/ Company’s will pay high premiums for a good biz. Classic example is Kraft-Heinz. Both CO’s had high ROIC Tangible Capital combined at 30%.

BUT the TOTAL ROIC after the merger was 6%.

Went from 30% to 6%. Why?

They paid too high a price.

Do you have Business Partners?
#SMB #ETA

How Much Is Your Share Worth If You Die or Disabled?

Multiple Owners NEED a Buy-Sell Agreement to Facilitate How An Owner Is Bought Out If Certain Events Happen

7 Tips From The Perspective of A Biz Appraiser

(Not a lawyer)

🧵👇 1/n A Buy-Sell Agreement is the policies governing how ownership will change hands among multiple owners of a biz based on certain events called, Trigger Events, like death, divorce, disability, or an owner who wants out

Want to Buy a Private Business?

When you look at financials here are some tips:

• Ask for Tax Returns even if it’s a Schedule C
• Don’t take SDE at face value
• Analyze Owner Comp
• Confirm Market Rent
• Analyze Expenses

#SMB #investing #fintwit

🧵👇 1/5 Ask for comp tax returns of any sort. If it’s a sole proprietorship they may report a schedule C on their personal return. Ask for it. If they are lying to the government they will most definitely lie to you.