Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

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TheCleverest
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Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

Hi bogleheads,

Background
This is a niche medical practice. It has been around for less than three years. There is very high profit margin and low overhead. There are no real tangible assets such as real estate, equipment, and office space. It is primarily a telemedicine platform. It is akin in my mind to a software as a service (SaaS). There are two current owners. They have multiple locations and a total of about 5 admin staff and 7-14 people generating bills. There is a handful of locations. There are very clear plans to scale to other states and more locations.

The unique aspect is that it takes about 24 to 36 months to receive payment. And these payments sometimes are reduced by 10 to 15%

I will soon be sitting down with the two owners to discuss buying in to become part owner of this business.

Currently after I see a client I will receive 50% of the bill. The other 50% presumably goes to the two owners and the minimal overhead of the staff.

The idea of me joining as owner is because I would help grow and cultivate another location of the business. However, they already know some key players in this location and have grown the business in a similar manner. Therefore, they would help facilitate these meetings. Even if they do not facilitate these meetings I am fully prepared to go out and meet these people myself.

These two owners definitely have more knowledge in the space as well as more connections. They also already have the staff in place. In addition, they already have certain key contracts to rent out space for the day which is very key for the business.

I do not believe there are similar companies out there where I can do a market analysis. This is a very niche market. Therefore, I do not believe that I can employ agreed-upon metrics such as EBIDTA to my approach. However, I could be wrong and I am open to hearing other ways. I have no background in business so I could certainly be wrong!

If I do not become owner I will still continue taking home the same percentage after each client.

If I wanted to break apart for them then I could theoretically capture 100% of the new market. However, I would miss out on scaling and other locations and other people already working for the business.

Again there is very minimal overhead expenses. There is only a handful of administrative staff which receive no benefits. In addition, most of the business is conducted via zoom meetings so no real estate rent or leases. No equipment either. There are about two days per month we’re conducting business face to face. The revenue generated from these days is about 25-50x ish (you get the point).

The business will be using my expertise (license to practice) and not necessarily my capital. Not everyone is licensed to do what I do but enough people are. I’m not rare. I could be easily replaced without a doubt.

questions
1. Is there a proper way to evaluate what would be a fair buy in for this type of practice? I don’t view it as a traditional SaaS, medical, dental, or veterinary practice buying because of the aforementioned reasons.

2. I’m still struggling to see what exactly I would be buying into. For example am I buying into the accounts receivable? The goodwill? The potential growth aspect of the agency?

3. The ultimate goal would be to be brought out by private equity. What would be the best business structure in order to have outside capital invest in a business and ultimately buy us out?

4. I assume if I go down this pathway then I will need specialized knowledge. Are there any CPAs, attorneys, or other professional services that you would recommend? I’m ok paying for this expertise.

5. (Most important!) I want to make sure that the bar is high enough to prevent additional people from buying into ownership and diluting profits but not too high that it’s prohibitive for me. Maybe I want my cake and eat it too. Any tips for this conundrum?

I want to be fair with them as well. They’ve treated me well.

Thank you for making it this far. I welcome all responses.
CPA without a cause
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by CPA without a cause »

As it relates to question #1, you may want to consider a CVA, "Certified Valuation Analyst." these are people with the experience/license to value businesses, and typically a few CPAs in smaller, local offices will have this designation. It will cost about ~15-25k, but it gives you a starting point to value the business. This CVA will need financials/tax returns for the business. I understand there is expected future growth, that may be hard for the CVA to factor in.

For #2, the value of your ownings would be a combo of the net value of assets>liabilities, plus discounted future expected cash flows (the discount rate is where the CVA i reference above would come in handy, they have charts/handbooks, etc. to determine a reasonable rate.

#3, if the CVA referenced in #1 is also a CPA (which they often are) they can assist with this, but you may also need a lawyer. An LLC structured as a partnership or S-Corp is likely the best way.

#4, see #1

#5, you would need a lawyer to draft a partnership agreement...you would likely also need your own separate lawyer to review it from your perspective
fabdog
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by fabdog »

I will soon be sitting down with the two owners to discuss buying in to become part owner of this business
It's not clear why they have asked you to invest with them. Do they need the funding for expansion? It seems like they already have several locations. As you note, one of your concerns is making sure others can't buy in and dilute you. It's also clear you do not have expertise/contacts that they can't get anywhere else.

Usually when someone has a money printing machine they are quite reluctant to give up a piece of it unless there is something else going on

I'd be very cautious

Mike
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BolderBoy
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by BolderBoy »

TheCleverest wrote: Sun Oct 02, 2022 10:46 pm The unique aspect is that it takes about 24 to 36 months to receive payment.
This would be a non-starter for me.

(I retired from a healthcare career)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
Topic Author
TheCleverest
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

BolderBoy wrote: Mon Oct 03, 2022 5:58 pm
TheCleverest wrote: Sun Oct 02, 2022 10:46 pm The unique aspect is that it takes about 24 to 36 months to receive payment.
This would be a non-starter for me.

(I retired from a healthcare career)
This is a great point. Fortunately I am describing what would be a side hustle. That means that I don’t really need the income. The cash flow isn’t an issue thankfully.
No use in being clever - have to be the cleverest
bsteiner
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by bsteiner »

The lawyer who handles your estate planning should have relationships with several appraisal firms and should be able to recommend one that would be appropriate for this if you want to have it appraised.
Topic Author
TheCleverest
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

fabdog wrote: Mon Oct 03, 2022 1:09 pm
I will soon be sitting down with the two owners to discuss buying in to become part owner of this business
It's not clear why they have asked you to invest with them. Do they need the funding for expansion? It seems like they already have several locations. As you note, one of your concerns is making sure others can't buy in and dilute you. It's also clear you do not have expertise/contacts that they can't get anywhere else.

Usually when someone has a money printing machine they are quite reluctant to give up a piece of it unless there is something else going on

I'd be very cautious

Mike
Fair point.

Technically, I’m not sure if I’ll be investing any money with them. They don’t need my capital. They need my specialization and location in this area. In addition, generally clients like me and I communicate differently than other people who have similar credentials. But you have a fair point - what am I bringing to the table?

Perhaps I’m being too humble - there are about 8 new people in my entire state with my background and credentials every year. Nationally there’s about 1000. Many they don’t know. Many don’t want to do this type of work. Many can’t wait 24+ months to get paid. Many are not in this geographic location either. Many aren’t in this age range nor have a specific background. Many are way too greedy in this space.

This isn’t a money printing machine. It requires one be to deposed and go to court which scares off a very large majority of people with a similar background.

But again you have a fair point.
No use in being clever - have to be the cleverest
chassis
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by chassis »

Know how you will liquidate your investment. Don't invest until you know how you will exit.

Spend time surfing the internet for valuations. The most common are revenue and EBITDA multiples.

Porsche IPO'd at 2x revenue and around 9x EBITDA. Pure software companies can be valued at 10x revenue. ThermoFisher Scientific (medical-related products) has a revenue multiple around 5x. Just throwing numbers around.

Don't fall for the spiel. Look at it through squinty eyes and question everything.
fabdog
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by fabdog »

Technically, I’m not sure if I’ll be investing any money with them. They don’t need my capital. They need my specialization and location in this area. In addition, generally clients like me and I communicate differently than other people who have similar credentials. But you have a fair point - what am I bringing to the table?

Perhaps I’m being too humble - there are about 8 new people in my entire state with my background and credentials every year. Nationally there’s about 1000. Many they don’t know. Many don’t want to do this type of work. Many can’t wait 24+ months to get paid. Many are not in this geographic location either. Many aren’t in this age range nor have a specific background. Many are way too greedy in this space.

This isn’t a money printing machine. It requires one be to deposed and go to court which scares off a very large majority of people with a similar background.
Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
SubPar
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by SubPar »

1. Lots of ways to skin a cat. Obviously, most of the valuation metrics are based on some multiple of normalized earnings +/- working capital, capital assets, etc., and I don't see why this would be any different. You very much could be facing a DLOM or other valuation haircut due to the niche nature of the business and variability and timing of cash flows, despite heady margins. Conversely, it could be as simple as buying in at the book value as CPA without a cause noted. This ultimately comes down to what you and your future partners think is fair. "Fair" is inherently subjective; in the accounting world, Fair Value represents the amount agreed upon by willing market participants in an orderly transaction (i.e., arm's length, non-fire sale, etc.). So, basically, fair is whatever someone is willing to pay for it.

2. You'd be buying some portion of the balance sheet, which gives you a claim on current/future net assets (and thus, earnings) of the company.

3. One that has strong financials and a market for an eventual exit :) There are some downstream tax considerations in terms of how a capital event/exit is taxed, but that's pro/advisor territory and situation-specific.

4. Yes, you should absolutely navigate with both a CPA and attorney. Lots to consider here. There are tax implications of buying into the ownership and there are lots of ways to structure (e.g., capital vs. profits interest, etc.) that need to be ironed out.

5. Why? This seems kind of short-sided. If someone else is admitted to the partnership/ownership, wouldn't there be a tacit assumption they're bringing value to the table that'd be a net positive to your position in the company? This seems like a stingy take for someone who's admitting they're replaceable. Also, valuations can widely vary from year-to-year, so if people are buying in at valuations other than book, this may well be a moving target.
Topic Author
TheCleverest
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

CPA without a cause wrote: Mon Oct 03, 2022 9:37 am As it relates to question #1, you may want to consider a CVA, "Certified Valuation Analyst." these are people with the experience/license to value businesses, and typically a few CPAs in smaller, local offices will have this designation. It will cost about ~15-25k, but it gives you a starting point to value the business. This CVA will need financials/tax returns for the business. I understand there is expected future growth, that may be hard for the CVA to factor in.

For #2, the value of your ownings would be a combo of the net value of assets>liabilities, plus discounted future expected cash flows (the discount rate is where the CVA i reference above would come in handy, they have charts/handbooks, etc. to determine a reasonable rate.

#3, if the CVA referenced in #1 is also a CPA (which they often are) they can assist with this, but you may also need a lawyer. An LLC structured as a partnership or S-Corp is likely the best way.

#4, see #1

#5, you would need a lawyer to draft a partnership agreement...you would likely also need your own separate lawyer to review it from your perspective
This is extremely informative, thank you!

Could you please explain what you meant by “discounted cash flow”?

I presume this is a one time fee for the project?
No use in being clever - have to be the cleverest
Topic Author
TheCleverest
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

chassis wrote: Mon Oct 03, 2022 9:56 pm Know how you will liquidate your investment. Don't invest until you know how you will exit.

Spend time surfing the internet for valuations. The most common are revenue and EBITDA multiples.

Porsche IPO'd at 2x revenue and around 9x EBITDA. Pure software companies can be valued at 10x revenue. ThermoFisher Scientific (medical-related products) has a revenue multiple around 5x. Just throwing numbers around.

Don't fall for the spiel. Look at it through squinty eyes and question everything.
I see what you’re saving and I still don’t know which EBIDTA to use. I feel there aren’t many similar business structures but that be because I’m too narrowly focused on the type of business. I was hoping if I described it in broad terms someone could better articulate it for me.

I’ll check out the revenue analysis and lean on more knowledgeable professionals.
No use in being clever - have to be the cleverest
Topic Author
TheCleverest
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

fabdog wrote: Tue Oct 04, 2022 7:28 am
Technically, I’m not sure if I’ll be investing any money with them. They don’t need my capital. They need my specialization and location in this area. In addition, generally clients like me and I communicate differently than other people who have similar credentials. But you have a fair point - what am I bringing to the table?

Perhaps I’m being too humble - there are about 8 new people in my entire state with my background and credentials every year. Nationally there’s about 1000. Many they don’t know. Many don’t want to do this type of work. Many can’t wait 24+ months to get paid. Many are not in this geographic location either. Many aren’t in this age range nor have a specific background. Many are way too greedy in this space.

This isn’t a money printing machine. It requires one be to deposed and go to court which scares off a very large majority of people with a similar background.
Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
No use in being clever - have to be the cleverest
simplextableau
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by simplextableau »

This sounds like expert witness work in a niche medical subject area in support of plaintiffs' contingent fee tort/malpractice cases. A great gig if you can get it. Speaking as one who hires experts, when selecting, the focus is on the specific reputation of the expert, not the firm. So if you have a great reputation why do you need them?
chassis
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by chassis »

TheCleverest wrote: Fri Oct 07, 2022 11:01 pm
fabdog wrote: Tue Oct 04, 2022 7:28 am
Technically, I’m not sure if I’ll be investing any money with them. They don’t need my capital. They need my specialization and location in this area. In addition, generally clients like me and I communicate differently than other people who have similar credentials. But you have a fair point - what am I bringing to the table?

Perhaps I’m being too humble - there are about 8 new people in my entire state with my background and credentials every year. Nationally there’s about 1000. Many they don’t know. Many don’t want to do this type of work. Many can’t wait 24+ months to get paid. Many are not in this geographic location either. Many aren’t in this age range nor have a specific background. Many are way too greedy in this space.

This isn’t a money printing machine. It requires one be to deposed and go to court which scares off a very large majority of people with a similar background.
Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
Scenario two is far riskier because it relies on time, and third parties (VC).

What difference in present value over a 5 year horizon have you calculated? I'll bet scenario 1 has a far higher 5-year present value.

It's always better to have the money in your pocket, faster and sooner.
smitcat
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by smitcat »

TheCleverest wrote: Fri Oct 07, 2022 11:01 pm
fabdog wrote: Tue Oct 04, 2022 7:28 am
Technically, I’m not sure if I’ll be investing any money with them. They don’t need my capital. They need my specialization and location in this area. In addition, generally clients like me and I communicate differently than other people who have similar credentials. But you have a fair point - what am I bringing to the table?

Perhaps I’m being too humble - there are about 8 new people in my entire state with my background and credentials every year. Nationally there’s about 1000. Many they don’t know. Many don’t want to do this type of work. Many can’t wait 24+ months to get paid. Many are not in this geographic location either. Many aren’t in this age range nor have a specific background. Many are way too greedy in this space.

This isn’t a money printing machine. It requires one be to deposed and go to court which scares off a very large majority of people with a similar background.
Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
I have never had much luck with partners in a small business - but without partners it was always very good.
Topic Author
TheCleverest
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

simplextableau wrote: Fri Oct 07, 2022 11:16 pm This sounds like expert witness work in a niche medical subject area in support of plaintiffs' contingent fee tort/malpractice cases. A great gig if you can get it. Speaking as one who hires experts, when selecting, the focus is on the specific reputation of the expert, not the firm. So if you have a great reputation why do you need them?
Thanks for the honest feedback.

I do not have a reputation

It is not expert witness work.

But it does involve medicine and law.

An overwhelming majority of cases never go to trial.

This is more of quality of cases instead of high profile ones.

Does that change anything? Happy to hear your thoughts.
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Topic Author
TheCleverest
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

chassis wrote: Sat Oct 08, 2022 9:02 am
TheCleverest wrote: Fri Oct 07, 2022 11:01 pm
fabdog wrote: Tue Oct 04, 2022 7:28 am
Technically, I’m not sure if I’ll be investing any money with them. They don’t need my capital. They need my specialization and location in this area. In addition, generally clients like me and I communicate differently than other people who have similar credentials. But you have a fair point - what am I bringing to the table?

Perhaps I’m being too humble - there are about 8 new people in my entire state with my background and credentials every year. Nationally there’s about 1000. Many they don’t know. Many don’t want to do this type of work. Many can’t wait 24+ months to get paid. Many are not in this geographic location either. Many aren’t in this age range nor have a specific background. Many are way too greedy in this space.

This isn’t a money printing machine. It requires one be to deposed and go to court which scares off a very large majority of people with a similar background.
Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
Scenario two is far riskier because it relies on time, and third parties (VC).

What difference in present value over a 5 year horizon have you calculated? I'll bet scenario 1 has a far higher 5-year present value.

It's always better to have the money in your pocket, faster and sooner.
Good point.

I liked the recognition that there are two outside factors that must fall into place.

I admit behaviorally I am drawn to the higher potential upside rather than the faster money. I feel that If I am helping to grow this geographic location and putting in the time then I do not want to have my sweat equity be captured by someone else. I do enjoy building this. I enjoy working with the founders. I do feel like I add more value as part owner rather than a mere employee. My main job I am a mere employee. Becoming owner would allow me psychologically to “build something”. I have identified some areas where I can help mold the company and move them in to a better direction. WhileI don’t have as many contacts with a certain group of professionals I do have more contacts with people who would become potential employees.

To put it in perspective the percentage difference between option one and option two is around 20 to 40%. Electing to go with option two would allow me to have some positive cash flow still.
No use in being clever - have to be the cleverest
chassis
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Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by chassis »

TheCleverest wrote: Sat Oct 08, 2022 10:57 pm
chassis wrote: Sat Oct 08, 2022 9:02 am
TheCleverest wrote: Fri Oct 07, 2022 11:01 pm
fabdog wrote: Tue Oct 04, 2022 7:28 am
Technically, I’m not sure if I’ll be investing any money with them. They don’t need my capital. They need my specialization and location in this area. In addition, generally clients like me and I communicate differently than other people who have similar credentials. But you have a fair point - what am I bringing to the table?

Perhaps I’m being too humble - there are about 8 new people in my entire state with my background and credentials every year. Nationally there’s about 1000. Many they don’t know. Many don’t want to do this type of work. Many can’t wait 24+ months to get paid. Many are not in this geographic location either. Many aren’t in this age range nor have a specific background. Many are way too greedy in this space.

This isn’t a money printing machine. It requires one be to deposed and go to court which scares off a very large majority of people with a similar background.
Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
Scenario two is far riskier because it relies on time, and third parties (VC).

What difference in present value over a 5 year horizon have you calculated? I'll bet scenario 1 has a far higher 5-year present value.

It's always better to have the money in your pocket, faster and sooner.
Good point.

I liked the recognition that there are two outside factors that must fall into place.

I admit behaviorally I am drawn to the higher potential upside rather than the faster money. I feel that If I am helping to grow this geographic location and putting in the time then I do not want to have my sweat equity be captured by someone else. I do enjoy building this. I enjoy working with the founders. I do feel like I add more value as part owner rather than a mere employee. My main job I am a mere employee. Becoming owner would allow me psychologically to “build something”. I have identified some areas where I can help mold the company and move them in to a better direction. WhileI don’t have as many contacts with a certain group of professionals I do have more contacts with people who would become potential employees.

To put it in perspective the percentage difference between option one and option two is around 20 to 40%. Electing to go with option two would allow me to have some positive cash flow still.
Try to build a discounted cash flow analysis if you are familiar with that.

Scenario 1 has a series of cash flows, hypothetically with no terminal value, or you can choose a fixed endpoint. Scenario 2 should carry a low-ish discount factor (8%) because it is similar to normal business risk, in comparison to Scenario 2.

Scenario 2 has a series of cash flows, then a terminal value if you sell. Scenario 1 should carry a high discount factor (20%) because of uncertainty of the exit and resulting terminal value in 4-7 years. Sale of a business is one of the riskier things in the lifecycle of a company. Don't forget to account for transaction fees for accountants, lawyers and intermediaries (investment bankers) in the VC transaction. Alot of lawyer hours will be burned up in a transaction, speaking from experience.

I think you will find the numbers point to Scenario 1, unless the 4-7 year terminal value is quite high in Scenario 2. It sounds like your heart is pointing to Scenario 2.
smitcat
Posts: 13304
Joined: Mon Nov 07, 2016 9:51 am

Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by smitcat »

TheCleverest wrote: Sat Oct 08, 2022 10:57 pm
chassis wrote: Sat Oct 08, 2022 9:02 am
TheCleverest wrote: Fri Oct 07, 2022 11:01 pm
fabdog wrote: Tue Oct 04, 2022 7:28 am
Technically, I’m not sure if I’ll be investing any money with them. They don’t need my capital. They need my specialization and location in this area. In addition, generally clients like me and I communicate differently than other people who have similar credentials. But you have a fair point - what am I bringing to the table?

Perhaps I’m being too humble - there are about 8 new people in my entire state with my background and credentials every year. Nationally there’s about 1000. Many they don’t know. Many don’t want to do this type of work. Many can’t wait 24+ months to get paid. Many are not in this geographic location either. Many aren’t in this age range nor have a specific background. Many are way too greedy in this space.

This isn’t a money printing machine. It requires one be to deposed and go to court which scares off a very large majority of people with a similar background.
Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
Scenario two is far riskier because it relies on time, and third parties (VC).

What difference in present value over a 5 year horizon have you calculated? I'll bet scenario 1 has a far higher 5-year present value.

It's always better to have the money in your pocket, faster and sooner.
Good point.

I liked the recognition that there are two outside factors that must fall into place.

I admit behaviorally I am drawn to the higher potential upside rather than the faster money. I feel that If I am helping to grow this geographic location and putting in the time then I do not want to have my sweat equity be captured by someone else. I do enjoy building this. I enjoy working with the founders. I do feel like I add more value as part owner rather than a mere employee. My main job I am a mere employee. Becoming owner would allow me psychologically to “build something”. I have identified some areas where I can help mold the company and move them in to a better direction. WhileI don’t have as many contacts with a certain group of professionals I do have more contacts with people who would become potential employees.

To put it in perspective the percentage difference between option one and option two is around 20 to 40%. Electing to go with option two would allow me to have some positive cash flow still.
If and when you become a legal partner in a business, you will enjoy any of the benefits and profits of that business up to your partnership agreement percentages.
You will also be held accountable for any business liabilities and debts in the same fashion. I am not sure how far along you are with your due diligence but what do some of these things look like so far....
- 3/5 years of complete financials for the business
- do you have at least 3 years of tax returns for the business
- details on any litigations, debts, notes
- aging reports with details accounting for any bad debt uncollected
- full detailed plan for a future sale/exit strategy
Topic Author
TheCleverest
Posts: 66
Joined: Sat Dec 26, 2015 10:14 am

Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

chassis wrote: Sun Oct 09, 2022 8:16 pm
TheCleverest wrote: Sat Oct 08, 2022 10:57 pm
chassis wrote: Sat Oct 08, 2022 9:02 am
TheCleverest wrote: Fri Oct 07, 2022 11:01 pm
fabdog wrote: Tue Oct 04, 2022 7:28 am

Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
Scenario two is far riskier because it relies on time, and third parties (VC).

What difference in present value over a 5 year horizon have you calculated? I'll bet scenario 1 has a far higher 5-year present value.

It's always better to have the money in your pocket, faster and sooner.
Good point.

I liked the recognition that there are two outside factors that must fall into place.

I admit behaviorally I am drawn to the higher potential upside rather than the faster money. I feel that If I am helping to grow this geographic location and putting in the time then I do not want to have my sweat equity be captured by someone else. I do enjoy building this. I enjoy working with the founders. I do feel like I add more value as part owner rather than a mere employee. My main job I am a mere employee. Becoming owner would allow me psychologically to “build something”. I have identified some areas where I can help mold the company and move them in to a better direction. WhileI don’t have as many contacts with a certain group of professionals I do have more contacts with people who would become potential employees.

To put it in perspective the percentage difference between option one and option two is around 20 to 40%. Electing to go with option two would allow me to have some positive cash flow still.
Try to build a discounted cash flow analysis if you are familiar with that.

Scenario 1 has a series of cash flows, hypothetically with no terminal value, or you can choose a fixed endpoint. Scenario 2 should carry a low-ish discount factor (8%) because it is similar to normal business risk, in comparison to Scenario 2.

Scenario 2 has a series of cash flows, then a terminal value if you sell. Scenario 1 should carry a high discount factor (20%) because of uncertainty of the exit and resulting terminal value in 4-7 years. Sale of a business is one of the riskier things in the lifecycle of a company. Don't forget to account for transaction fees for accountants, lawyers and intermediaries (investment bankers) in the VC transaction. Alot of lawyer hours will be burned up in a transaction, speaking from experience.

I think you will find the numbers point to Scenario 1, unless the 4-7 year terminal value is quite high in Scenario 2. It sounds like your heart is pointing to Scenario 2.
This is incredibly helpful. Thank you.

I will look up discounted cash flow.

As you pointed out and have rightfully noted my behaviors instincts lean me to pursue Choice #2 when in reality the numbers might have Choice #1 be financially better.

Would there be a rough back of the napkin guide to what the terminal value would be in order to make it worth it?
No use in being clever - have to be the cleverest
Topic Author
TheCleverest
Posts: 66
Joined: Sat Dec 26, 2015 10:14 am

Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by TheCleverest »

smitcat wrote: Mon Oct 10, 2022 6:06 am
TheCleverest wrote: Sat Oct 08, 2022 10:57 pm
chassis wrote: Sat Oct 08, 2022 9:02 am
TheCleverest wrote: Fri Oct 07, 2022 11:01 pm
fabdog wrote: Tue Oct 04, 2022 7:28 am

Those are super helpful clarifications. So if you aren't necessarily being asked to stump up huge capital (or maybe none at all) but provide expertise they have a hard time obtaining.. that's different. Not clear how the equity piece would be different than a side hustle payout, except maybe instead of being paid up front for your expertise you get a bigger share on the back end if any given project is successful.

This sounds like litigation support/expert witness type of activity... which as you noted really requires not just the credentials and expertise, but the ability to communicate that in an understandable/relatable way... so a very niche opportunity... not clear standard business analysis folks will be a ton of help

Mike
Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
Scenario two is far riskier because it relies on time, and third parties (VC).

What difference in present value over a 5 year horizon have you calculated? I'll bet scenario 1 has a far higher 5-year present value.

It's always better to have the money in your pocket, faster and sooner.
Good point.

I liked the recognition that there are two outside factors that must fall into place.

I admit behaviorally I am drawn to the higher potential upside rather than the faster money. I feel that If I am helping to grow this geographic location and putting in the time then I do not want to have my sweat equity be captured by someone else. I do enjoy building this. I enjoy working with the founders. I do feel like I add more value as part owner rather than a mere employee. My main job I am a mere employee. Becoming owner would allow me psychologically to “build something”. I have identified some areas where I can help mold the company and move them in to a better direction. WhileI don’t have as many contacts with a certain group of professionals I do have more contacts with people who would become potential employees.

To put it in perspective the percentage difference between option one and option two is around 20 to 40%. Electing to go with option two would allow me to have some positive cash flow still.
If and when you become a legal partner in a business, you will enjoy any of the benefits and profits of that business up to your partnership agreement percentages.
You will also be held accountable for any business liabilities and debts in the same fashion. I am not sure how far along you are with your due diligence but what do some of these things look like so far....
- 3/5 years of complete financials for the business
- do you have at least 3 years of tax returns for the business
- details on any litigations, debts, notes
- aging reports with details accounting for any bad debt uncollected
- full detailed plan for a future sale/exit strategy
All fair points.

Thankfully the debts are minimal. In my mind this is what makes the business so hard to evaluate. High income with low overhead and debt. As long as we avoid the “home run” rare projects where we spend inordinate amounts of time then we are assured of a more steady stream of less lucrative (but still financially healthy enough) position.

I can ask for the tax returns.

I would help craft the exit plan but generally speaking we’d be looking for private equity to acquire the group. We’ve had some informal discussions with people in our space who also do business acquisition and acquiring.

You touch on a good point about protecting against liability. This should be too concern since the clients are litigious, the defendants have deep pockets, and we’re constantly dealing with experts in law.

The
No use in being clever - have to be the cleverest
smitcat
Posts: 13304
Joined: Mon Nov 07, 2016 9:51 am

Re: Business Evaluation - Medicine, SaaS, PE, Dentist, Vet

Post by smitcat »

TheCleverest wrote: Mon Oct 10, 2022 10:47 pm
smitcat wrote: Mon Oct 10, 2022 6:06 am
TheCleverest wrote: Sat Oct 08, 2022 10:57 pm
chassis wrote: Sat Oct 08, 2022 9:02 am
TheCleverest wrote: Fri Oct 07, 2022 11:01 pm

Mike, you are correct.

I’m hesitant to claim I’m unique but I do feel like this is a less commonly known set up.

I have two choices (philosophy majors please forgive the oversimplification)
1. Continue to trade my time for money is receive a % of projects I complete. While this gives the most direct and “quickest” payout it is not the most lucrative. In addition, it does not allow me to employ my expertise or connections to the fullest extent.
2. Forgo the maximal % per project. Instead, focus on building up one geographical location, bring on new people, ultimately strength the brand and then 4-7 years down the line exit likey via VC. During those 4-7 years I will likely continuing getting a % per project albeit a smaller amount. However, I will have additional revenue streams from other people.

Thinking more about this from the perspective of the current owners they would like me to join in order to grow the size of the company and ultimately get a larger exit valuation. Instead of giving someone equity for money I’m giving them knowledge/expertise. They need the latter more than the former.
Scenario two is far riskier because it relies on time, and third parties (VC).

What difference in present value over a 5 year horizon have you calculated? I'll bet scenario 1 has a far higher 5-year present value.

It's always better to have the money in your pocket, faster and sooner.
Good point.

I liked the recognition that there are two outside factors that must fall into place.

I admit behaviorally I am drawn to the higher potential upside rather than the faster money. I feel that If I am helping to grow this geographic location and putting in the time then I do not want to have my sweat equity be captured by someone else. I do enjoy building this. I enjoy working with the founders. I do feel like I add more value as part owner rather than a mere employee. My main job I am a mere employee. Becoming owner would allow me psychologically to “build something”. I have identified some areas where I can help mold the company and move them in to a better direction. WhileI don’t have as many contacts with a certain group of professionals I do have more contacts with people who would become potential employees.

To put it in perspective the percentage difference between option one and option two is around 20 to 40%. Electing to go with option two would allow me to have some positive cash flow still.
If and when you become a legal partner in a business, you will enjoy any of the benefits and profits of that business up to your partnership agreement percentages.
You will also be held accountable for any business liabilities and debts in the same fashion. I am not sure how far along you are with your due diligence but what do some of these things look like so far....
- 3/5 years of complete financials for the business
- do you have at least 3 years of tax returns for the business
- details on any litigations, debts, notes
- aging reports with details accounting for any bad debt uncollected
- full detailed plan for a future sale/exit strategy
All fair points.

Thankfully the debts are minimal. In my mind this is what makes the business so hard to evaluate. High income with low overhead and debt. As long as we avoid the “home run” rare projects where we spend inordinate amounts of time then we are assured of a more steady stream of less lucrative (but still financially healthy enough) position.

I can ask for the tax returns.

I would help craft the exit plan but generally speaking we’d be looking for private equity to acquire the group. We’ve had some informal discussions with people in our space who also do business acquisition and acquiring.

You touch on a good point about protecting against liability. This should be too concern since the clients are litigious, the defendants have deep pockets, and we’re constantly dealing with experts in law.

The
"Thankfully the debts are minimal. In my mind this is what makes the business so hard to evaluate. High income with low overhead and debt. As long as we avoid the “home run” rare projects where we spend inordinate amounts of time then we are assured of a more steady stream of less lucrative (but still financially healthy enough) position."
Being one of a few owners your ability to decide which directions to take will have finite limits often overlooked by a new business owner.
Any business can change in a very short period of time.
A business owner serves a much different role than any service provider role.

"I can ask for the tax returns."
They should match the 5 years or so of detailed financials that you already have. The accuracy and detail of these financials tells you mor3e about the people and business you are looking at than any discussions. Finding incomplete and/or inaccurate data suggests many possible problems.

"I would help craft the exit plan but generally speaking we’d be looking for private equity to acquire the group. We’ve had some informal discussions with people in our space who also do business acquisition and acquiring."
I have lived through this more than once - selling never goes the way you expect it to. It takes 3X the effort and hours to properly prepare and takes 3X the length of time to complete if you are lucky. Value is rarely near what an owner thinks it is.
Business value will parallel other similar business transactions within a similar area - using previous sales is a key.

"You touch on a good point about protecting against liability. This should be too concern since the clients are litigious, the defendants have deep pockets, and we’re constantly dealing with experts in law."
There is usually defined limit on how much profit you can achieve - there is usually no limit on the liability you can incur. profit takes months and years, and liabilities can take seconds or minutes. Utilizing the proper insurance in the proper amounts can limit much of the risk if well designed and implemented. While our E & O insurance was very costly it was an integral part of our finances and plans.
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