NOVEMBER 2018 • FOGHORN 25 BUSINESSMATTERS could borrow up to $8 million on this cash-flow, providing $3 million more operating leverage than the asset-based loan of $5 million. Ideally you could grow your business faster by seizing opportunities and investing properly instead of skimping. You can also have a “hybrid” valuation model where older assets move to a cash-flow based valuation and are added with newer assets with operating margins that aren’t matured valued on asset-based. Debt Your boats will represent the majority (up to 90%) of both your fixed assets and the foundation of your business. That’s why we keep them in such great shape and they endure. Debt can be a well-known trap for business- es: owners typically start with personal guarantees tying their homes and other personal assets to the business. This impacts sleeping at night. Some subscribe to the “if I owe the bank money, I potentially have a problem. If I owe the bank a lot of money, they potentially have a real big problem. Who are they going to get to run the business?”And then they borrow away. Personally, I like to sleep at night and try to pay down a mortgage, not roll over debt or use it like an ATM. Too often, I have seen someone try to buy an operation with an attractive fleet of vessels worth high seven figures, only to learn that the operator has borrowed most of that value. If they sold, not enough is left after paying off the loan to justify the deal. You want to pay down that debt to create equity in your business for your retirement or “dry powder” for borrowing capacity. Sales Multiple and Interest Rates The old saw in the industry was that we were all buyers at 5x EBITDA and sellers at 7x. I’ve seen valuations increase a couple of clicks now with operators selling for 7.25x, then 7.75x and now over 8x. Even mediocre public companies today have EBITDA multiples of 11-14x. These are monster multiples driven by historic low interest rates. Imagine Karl Andren buying Trusted to deliver excellence rolls-royce.com Kamewa Waterjets from Rolls-Royce Manoeuvrability and Efficiency Unchallenged Highly Functional, Galley and Foodservice Environments New Builds, Remodels and Retrofits Galley Design and Sales 22125 17th Ave SE Suite F-113 Bothell,WA 98021 p: 425.881.1010 www.galleydesignandsales.com G•D•S New York Circle Line in 1979 when the prime interest rate was at 19 percent! For a simple home 30-year mortgage, the eight percent that we remember from the 1980s cost 53 percent more in monthly payments compared to today’s four percent mortgages. (Karl’s 1979 mortgage would cost 332 percent more monthly!). Freeing up this cash-flow has increased valuation multiples. Yet while bootstrapping a business for growth, I’ve always cared more about a larger loan amount than a lower interest. Sales Multiple Imagine if EBITDA was 10 percent of sales and a multiple of 8x; your business would be worth 80% of your annual revenue. Strong operators can