Part 3 Transcript: The Numbers That Determine Your Home Staging Business Value (How to Sell Your Home Staging Business)

This transcript was auto-generated and may contain errors in spelling or inaccuracies in the spoken words.

Shauna Lynn Simon (00:08.696)

Welcome back to How to Sell Your Home Staging Business, a Real Woman Real Business Podcast mini-series for home stagers who are starting to think about what it could look like eventually to sell their business. And they want to build a profitable business now and build a valuable and sellable asset so that they can leave that as a part of their legacy when they decide to leave this industry. I'm your host, Shauna Lynn Simon. And in the last episode, we talked about what actually makes a home staging business sellable.

And the big idea was this that a buyer is not looking at your business the same way that you are. You see the history and the relationships and all the effort, the late nights, the blood, sweat, and tears that you've put into this, the inventory investments, the agents you've nurtured, the clients you've helped, the jobs you've pulled together when everything was going sideways and you still managed to pull it off.

A buyer doesn't see all that. What they see is something a little bit different because they're asking, can I understand this business? Can I see exactly how does it make money? Can I see what would continue in a positive way, in a strong way after the current owner has stepped away? And can I see the value clearly enough in order to make a confident decision? So today we're going to be moving into one of the biggest pieces of that confidence, and that is your numbers.

For anyone who knows me, you might recall that I actually do have a bit of a numbers background. My original career path was actually in mathematics. I have a bachelor of mathematics degree and I worked as an analyst for several years before becoming a home stager myself. And while I would love to say that that makes me a financial guru, it's not necessarily the same thing, but I do admit that I do enjoy the data that numbers provide. And that's the same thing that your buyers are going to be looking at.

Now, I don't want you to get stressed out because I know a lot of people get really antsy and anxious when they start hearing about numbers because that might not be your biggest strength. And I absolutely understand that. So please know that I am not trying to turn you into a financial wizard here. We're going to keep it nice and simple for you, but you do need to understand this element of your business and how it applies to a potential buyer looking at your business. So I want to share something first that might sound a little bit obvious, but it actually gets missed.

Shauna Lynn Simon (02:25.696)

all the time. And that is that your revenue, as in the money that you bring in every month, every year, that is actually not the same thing as value. And what we end up getting caught up on is what we call essentially a vanity number. And that is that revenue number. We'll say, I'm bringing in X number of dollars in sales each month, each year. And we can get a little hung up on that without getting into the details of what that actually means. And I know that this can be incredibly frustrating because

Revenue is usually the number that people talk about first. They're going to say, How much revenue did you do last year? What was your biggest year ever? Are what are you on track to do this year? So don't misunderstand, revenue certainly matters. And if you and I are having a conversation about potentially selling your business, one of the questions I'm going to be asking you is tell me about your revenue over the last two to three years. So it does matter. Of course it matters. But there's a reason that revenue is often considered a vanity number. And that's because it's only the beginning.

Of the story. A business can have super impressive revenue and still not actually be profitable. I've seen it too many times, unfortunately. A business can be wildly busy and still be financially fragile. So you could have plenty of jobs on the books and your pipeline is full for the next several weeks or several months, but you can still be financially fragile because you're still anticipating every single job that comes in. You need that money to pay your next set of bills. A business can have a

Calendar absolutely full of installs and consults, and still leave the owner wondering, why does my bank account not look the way that I think it should? And if you've ever had that moment, just know that you're not alone. Trust me, we've all been there. Staging is a very unique business model. It's you know, you've got this project-based revenue, you've got fluctuating labor costs, you have your inventory purchases, you've got warehouse costs. And of course, your goal is always to be paying for a warehouse that's never actually.

Full, right? Like the whole thing is you want that warehouse to be able to hold your items, but ideally it's not full of items because those items are out actually making you money. You've got delivery and logistics that are part of the staging life. You've got, you know, services that may look similar on the outside to someone, but on the inside, they actually have very different profit margins, you know, behind the scenes. And so because of all of this, your financials may not naturally tell a very clean, buyer-friendly story.

Shauna Lynn Simon (04:49.432)

And that's okay for day-to-day operations for how you are viewing your financials currently, the lens that you're currently using to evaluate your financials, whether it's with your CPA or your bookkeeper or whatever that looks like. But it's really important to understand how a buyer is going to read them. And in fact, if we can start shifting how we see them to start seeing them through this buyer lens, it's actually pretty amazing what that will allow you to do today and the changes that you can make, the shifts that you can start making in order to build a more profitable.

Business because now we're looking at things through a very different lens. So when a buyer is looking at your numbers, they're not actually just looking at your numbers. They're going to be interpreting them. It's like reading a storybook, essentially. So they're going to be asking, you know, is this predictable revenue? Is this predictable profit? Is this scalable? Or is this something that's considered a little risky? Does this business actually produce real profit or does it just produce activity?

And that is a very different lens than the one that most owners use when they look at their financials. So a lot of owners, we're gonna look at our numbers for tax purposes, right? Or we maybe want to see how much came in, how much came in this month. Can I see whether or not I can pay the next bill? Maybe you're gonna check to see whether or not you had a better year than last year. So often I, you know, when I talk to stagers, they'll do a comparison and say, Well, I did 20% more this month than I did the same month last year. Buyers gonna look at your numbers as more of a roadmap. So they're trying to understand.

How the business works. Does it actually work? How does the money come in? Where does the money go once it comes in? What does it cost to deliver each of your services? And then what's left after some of those direct costs? How heavy is this business to operate? Are there places where it could be operating a little bit leaner? And this one is big. You know, how much profit depends on the owner's unpaid or underpaid time? This part is huge because keep in mind, a buyer.

is generally going to be buying your role as the owner. So they want to understand how much that profit depends on you not getting paid or underpaying the value of what it is that you're doing. Because if your numbers feel inflated because you haven't accounted for your true labor, that's going to be a huge red flag for them. That is what your financials are going to help them to understand. And this is what I mean when I say that your numbers are telling a story. So the question is whether they are telling the right one.

Shauna Lynn Simon (07:14.742)

Now, when a buyer looks at your profit and loss statement, also known as a P&L, they are not necessarily expecting it to be perfect. Okay. So that's not what we're going for here. They know that small businesses are not perfect. They understand that staging businesses especially are going to have some seasonality. They know that you may have what we would call reinvestment years where you just bought a ton more inventory than normal. They know that the markets shift.

They know there may be a weird year where something, you know, completely unusual out of the norm happened. I don't know. I don't remember a little pandemic a few years back, for example. They get all of that. What they need though is to be able to follow the logic of your financials. And that means they need to understand where the numbers are coming from. They're generally going to ask you if you're selling your business, a buyer is generally going to ask you for the last three years of financials and sometimes what we call a trailing 12 months.

Depend on your business and depend on some of the changes in your revenue year over year. Sometimes that trailing 12 months, which is basically the last 12 months from the current month, regardless of where your fiscal year starts or ends, they want to see the month by month P&Ls for the last 12 months. Sometimes you can do the last six months, nine months. You know, again, sometimes it's not always a perfect science of like this is what they're gonna ask for. But so let's say that for the two of the three years of your last three years, you spent about $10,000 on marketing.

Over the course of the year. Then in one of those years, you spent $50,000 on marketing. So you spent five times the amount one year than you did the other two years. What your buyers are going to want to know is they're going to want to understand why. And you need to be able to explain that. So perhaps for two of the years, marketing expenses were actually just miscategorized. Maybe you had, and what I mean by miscategorized is, you know, perhaps they were accidentally put under a different heading.

Under operations costs or something else that they weren't categorized properly. It could be that they were categorized properly, but you had some one-off expenses in one of the years that you used in order to grow the business exponentially. Maybe you invested significant money in revamping your website, hiring a marketing person, doing some meta ads or whatever that looked like for you. And you spent $50,000 on marketing, but it massively grew your business, like exponentially.

Shauna Lynn Simon (09:32.406)

So they're all gonna be okay with that jump from $10,000 to $50,000 in marketing if they can see that you reap the results of that or that you reap some rewards of it. So this brings me to my next point, and that is that buyers need to be able to trust that the numbers are categorized consistently. So in a staging business, that line between the cost of delivery, overhead, inventory investment, owner compensation, and growth spending, those lines can all get

really blurry really fast. So what a buyer needs to understand is what's considered normal expenses, what's considered unusual, what is owner specific. So owner specific means any that expense would not exist under new ownership. That is specific to you as in only because you are the owner do you have that particular expense. And then what would likely continue after the sale then? So what are the things that they're going to be responsible for if they were to buy it.

No, so I do understand that financials are not everyone's strength. And some people like I can almost like hear your eyes rolling back in your head right now. I get it. Personally, as much as I'm a numbers person, I actually despise bookkeeping. But financials are not the same as bookkeeping. You don't have to be able to balance your books. You can pay someone else to do that, but you need to understand the story that they're telling. You need to be able to read those statements and understand what they mean. And you need to be able to understand where.

Items are categorized and what makes up each bucket that of line item in that P&L. So for example, let's talk about revenue. So if you look at your revenue and you see that one service brings in the most money, your first instinct might be great, that is my strongest service. And oftentimes for most stagers, that's your vacant staging, right? You're gonna say, like, that's gonna be it's the highest ticket item that you're usually selling. Not in all businesses, but in most businesses, that's sort of the highest ticket item that you're selling.

From a staging perspective. So great, that's my strongest service. But a buyer is going to ask a deeper question or deeper questions, I should say. Is it profitable? Is it efficient? Is it scalable? Does it require the owner to personally execute this and hold everything together? Does it create strong margins? Or is it simply the service that keeps everyone the busiest? Because those are not the same thing as being your best and most profitable service. You may have a service that brings in a lot of revenue.

Shauna Lynn Simon (11:51.778)

Like a vacant staging job, for example, but it eats up a ton of labor, creates scheduling chaos, requires your personal involvement, requires a ton of inventory. So if you're low on inventory, you're buying new inventory in order to satisfy that project. And at the end of the day, it's leaving very little profit. And this is important for you to know as the seller because it's going to change the story that your buyers are seeing. So the larger projects might bring in the largest amount of revenue.

But they tie up your staff potentially for days. And that labor adds up. So perhaps if you spent that time providing smaller, quicker services, you would actually be more profitable. And I'm just using this as an example. This is please don't take this as I need to go and revamp all my service offerings immediately. That's not what I'm saying. And I, you know, I'm not even saying that this is the case, that that's your least profitable service. I'm saying that you need to know if it is profitable or not and how profitable it is in comparison to your other services.

And this will allow you to be able to make better decisions. So maybe it's about adjusting your pricing or tightening up your processes a little bit. Maybe you reduce certain types of jobs in terms of how many you'll offer in any given time frame. Maybe you shift your marketing to promote a more profitable service or a service that someone else on your team can offer instead of you. Maybe you change how you estimate your labor on these projects.

To ensure that you've got that accuracy for it so you can actually be seeing your true numbers. So maybe you stop celebrating being busy and you start measuring healthy. What is the health of not only your business, but each individual service? Because busy does not always mean healthy. A packed calendar that can hide a whole lot of chaos behind the scenes, right? It can hide underpricing, it can hide inefficient labor or overly labor-heavy businesses.

It can hide weak margins. It can hide inventory that is not producing enough return. So if you look at the total dollar value of your inventory and you think this has value, but a buyer, they're gonna look at your inventory and they're gonna say, does all this inventory actually make us money or is much of it just taking up space? And I'm gonna have to come in here and revamp everything. Like how much of this am I going to need to replace? Here's the other thing about your financials from a buyer's perspective. They're not just buying what happened last year.

Shauna Lynn Simon (14:13.08)

or what happened in your best year, they're trying to understand and predict what the business can produce going forward because that's what they're buying. They are buying the future of the business. In fact, they really don't care that much about your past years, except for what that history might say about the future, because they're not seeing any of your past profits, but they definitely want to see future profit. Your past profits, that's your money. You've got that money, you've spent it, you've banked it, whatever you've done with it.

They're not getting that money, but they are going to get future money from your business. And that's what they care the most about. And this is also why gross profit matters so much. So gross profit helps to show whether the actual economics of a particular service works. Now, if you're not familiar with what gross profit is, gross profit is what the business generates after COGS. COGS stands for "Cost Of Goods Sold". Now, in a service-based business, the cost of goods sold is actually.

your labor, any direct costs, the fuel costs for getting the items out to the project. So it's all before what we consider overhead. Your overhead is your fixed expenses, like your warehouse rent, your insurance, those types of things. Whereas your COGS, the expenses that are related specifically to offering that service. So the revenue of the service versus the direct expenses for offering that service, that is your gross profit. So that revenue minus those expenses

That is your gross profit. And that shows whether your pricing and delivery model actually work. So it says essentially in simple terms, whether or not your individual services make money. Now I can tell you that every company out there at some point has had what we call a loss leader. So or a loss leader. So for example, I used to work at Walmart when I was a teenager. And I can remember that my mom would always ask me to pick up her cans of coffee from Walmart because it was so much cheaper.

Than anywhere else. So I'd often, you know, at the end of my shift, grab this coffee for my mom. And she would ask me, she's like, I don't understand how Walmart could sell this coffee for this cheap when it's so much more expensive everywhere else. And I would say to her, because of course I was taking economics at the time, this is in high school and I was taking an economics course. And he said, Well, mom, it's a loss leader. And what that is, is it's an item that gets them in the door in order to sell them on a bigger item. So the coffee, they're not making any profit, or not much anyway. They're either not making much profit or not making any profit. Sometimes they're even

Shauna Lynn Simon (16:37.288)

losing money on that particular item because they expect that someone's not coming in and just buying coffee. Chances are if someone's going to come in and buy coffee, they're also going to pick up some other items. And that's where they will recoup that loss. But if the coffee gets them in the door and they're going to spend another one, two, $500 while they're there, then that's been worth it for them. So the same thing might go for your services. For example, you might not make much money on your consultations, but if every consultation turns into a bigger service that's more profitable, then it's worthwhile.

If you are mainly selling consultations, then you have to make sure that it's profitable. Does this make sense? Hopefully it does. Okay. So before we even get into all the overhead of running the business, does your relationship between price and delivery make sense? So you the delivery expenses versus what you're actually selling this for, does that actually make sense? Again, this is your gross profit. Are you charging enough for what it costs to deliver the work? Is your labor being estimated?

properly for this. Because that's the thing. We can fudge those numbers sometimes, right? We can estimate a project based on half the amount of labor that you actually need. But if the project comes in higher than that, then it was even if it looked profitable on paper before you executed it, ultimately it's not actually profitable once you add in all that labor or not as profitable, maybe a little less efficient, right? So if the profit margin here is really thin, this is known as your gross margin, by the way. If that's really, really thin, a buyer's gonna start assuming that

Pricing has not kept up with costs, or that the labor is inefficient, or the business is doing work that looks productive but doesn't actually produce enough margin. And when we have a super thin margin, that is incredibly risky. So that can make a buyer pretty nervous. Like, yeah, I've been on my soapbox about this whole pricing thing for years about making things, you know, profitable. But I promise this isn't just a nice to have if you're selling your business. It's necessary to know if your services are actually profitable. Not just when you're selling, but

Every day that you're operating the business. Okay, so now your net income, this is what's left after all expenses are paid. It's what you're normally looking at in a standard P&L. So your net income is all revenue for all services, less all expenses, including that overhead expense. And that whatever you have left after that, that's your net income. And so a lower net income can actually sometimes be explained pretty well. Maybe you invested heavily in inventory.

Shauna Lynn Simon (19:02.232)

Maybe you had what we call some of those one-time expenses, like the marketing expense we talked about. Maybe there were owner-specific costs or some personal expenses that you ran through the business. For example, sometimes business owners will run the expense of their personal vehicle through the business because it gives them a better tax break. I'm not saying to do this, go talk to your CPA about whether or not that's the right move for you. But just as an example, you may be running those car payments through the business. And that's considered an expense that a new owner wouldn't have, right? Because that's for your

Personal vehicle. I'm not talking about any sort of fleet vehicles that you have. I'm talking about your personal vehicle. Maybe you had a growth year where you invested a ton in training, additional training supports for your team, maybe additional marketing, some additional systems were put in place, some new software was brought in. You've spent some money on some team development. And all of that was in a growth year that you did intentionally that you're now reaping the rewards of, but that year looks a little bit flatter because you had those extra expenses.

So these are all things that can be explained as long as they are documented and well understood. So this is something I would suggest you're doing right now for any business, because at the end of the year, you also want to know for yourself, not just for a potential buyer, but why were some of these expenses a little bit different this year? So document any of those anomalies or things that are giving almost a bit of a false low net income at the end of the year. But if the core work itself is not profitable,

As in, if you haven't had some of these personal expenses running through things, these one time expenses, these extra investments in inventory, if you're saying like this is how we normally run and you're still not profitable, that's gonna be a whole lot harder to defend to your buyers. Cause who wants to buy that? No one wants to buy a job that costs them money, right? So now before you panic or start thinking that you need to overhaul every financial report that you've ever produced, let me be very clear about something else here. Clean books does not mean perfect books.

Clean books just means that your financials are consistent, intentional, and most importantly, understandable, that they are easy to read for someone from the outside looking in. That's it. It's not about impressing the IRS or the CRA. The goal is just to make the business legible for a buyer. And also, please hear me on this one. You do not want to adjust past financials if you have already filed your taxes. Okay. That makes a buyer very nervous.

Shauna Lynn Simon (21:24.588)

Because your tax returns are going to need to align with your P&L's. So you cannot fix going backwards, but you can fix your current year's books, as in you haven't filed taxes yet. And then going forward. So now you can also see why I often say that ideally you want a two to three year runway before selling your business, especially if your financials are a bit of a weak spot in your business. So starting now or your next fiscal year, but I suggest honestly starting now if you can.

That might mean certain things like separating personal and business expenses. So making sure that you're not running anything personal through the finances of the business. It might mean using more consistent categories for certain expenses. I see it all the time in staging businesses that inventory lands in a few different categories. You want to make sure that you have one category and that you know whether or not you are marketed as an expense or a depreciating asset. Those are two different ways to account for things. Again, this is not a bookkeeping.

class today. So I'm not going to get too far into these things. The point is that you just want to understand how this is working. So it might mean just confirming how that inventory is treated. It might mean identifying your true owner costs as in what are the costs that are specific to you as the owner. It might mean documenting some of these one time events like the extra marketing expenses or some extra investments into inventory. And it might mean being able to explain why one year just looks a little different from another.

Buyers, again, they're gonna understand seasonality, reinvestment years, growth phases. They get all of that. They understand the market shifts. They don't like inconsistent categorization or unexplained wild swings in one direction or another. They don't want numbers that don't match the story. And they really don't want the owner saying, I'm

Really sure what that number means. I mean, sure, you can say, like, let me get back to you on that. But before you've listed your business for sale, ideally you understand exactly what those numbers look like and what they mean. Think of it this way: your home seller leaves a small repair unattended to. Like, let's say you ask them, like, you know, that light switch plate there is cracked. Can you replace that before selling the house? And they're like, I really don't want to bother with it. Like, it's just such a small thing. From a buyer's perspective, a buyer comes in and they're like, gee, if they can't fix something small like that, how do we know they fix the big stuff? So it's the same sort of thing with your books.

Shauna Lynn Simon (23:36.544)

As soon as buyers start to see some inconsistencies to things, it starts making them get really nervous about the big picture of what else are they hiding in here. And listen, if you have said, I'm not really sure when you're looking at your numbers, you're you're not alone in that. This is very common. A lot of entrepreneurs were never taught how to read their numbers, especially in the way that I'm talking about today. You were taught to send things to the bookkeeper, talk to the accountant at tax time, and just

Kind of hope that nothing overly scary shows up, right? But when you're preparing your business for a potential sale, you need to become fluent enough to be able to lead the conversation. Because if you cannot explain your business, a buyer is going to fill in those blanks for you. This is your narrative, and you really don't want buyers to try to fill in some of those blanks because let's be real, they don't normally fill those blanks in in your favor. The speculation and their imagination can run absolutely wild. Okay, so now let's talk about.

Business valuation, because that's a really important topic that I really want to make sure that we get to today. We're gonna keep it at a fairly high level here, but I want you to understand how your business is actually valued. How do we come up with the numbers for the list price? Because I will tell you, I have this conversation with stagers often where they're like, I came up with this number. But when I ask them to back up how they came up with that number, they don't have a solid way of pricing that out.

And that is very concerning for a buyer because I will tell you that there is actually a standardized formula that most buyers are expecting you will have used. So I'm intentionally saying though that we're gonna do this at a high level because there's just a ton of nuance here. And this is not the part where we try to turn this podcast episode into a full valuation workshop, but you do need to at least understand the basic idea. So, first of all, most staging businesses, this is probably not a surprise after everything I've talked about in this episode, but they are not valued based on your revenue.

So it's not, I did $700,000 in revenue last year. Therefore, my business is worth X, whatever multiple of $700,000 you want to figure out. That's not how it works. Your business is also not usually valued based on your net income. So you know that number at the end of each month or the end of each year, because net income can be distorted by a lot of very normal small business realities that we already discussed, things like inventory purchases, depreciation, owner compensation, owner specific or one time expenses, growth investments, et cetera.

Shauna Lynn Simon (25:53.27)

It is also, and I want you to hear me on this one every stage or are you listening? Your value, your business value is not based on your inventory. So you cannot be saying, I've got about a million dollars worth of inventory, therefore, my business must be worth again, insert some number, inflated as it might be, there. And we're going to cover this further in the next episode. So stay tuned for that one. We're going to cover exactly how your inventory is treated in the valuation, but I want you to understand.

That your valuation is not actually based on how much money you have spent on that inventory. So instead of looking at revenue or net income or inventory value, the standard practice for small owner-operated businesses is to value them using something called seller's discretionary earnings, also known as SDE. And this is what is used as a general practice for staging businesses, may also be referred to as EBITDA, We'll cover that in a moment, but that's a very

Fancy term that's generally used for massive corporations. So for right now, we're going to keep it at SDE. And I'll get into a bit in a moment of what that is, because it's important if you're selling a business that you do understand. Some people might use that term interchangeably with SDE. So at the very simple level, SDE, sellers discretionary earnings, is trying to answer this question. What is the real economic benefit of owning this business? Because as much as people are getting into the home staging business, similar to how most of us did, because we're super passionate about it, we're

Great at this. Yes, all that matters, but they also, if they're buying a business, they want to know they're not buying debt. They're buying something that's actually going to make them money. So many home staging businesses are still owner operated in some way. The owner may be involved in sales, design, consultations, client relationships, logistics, team management, or all of the above. And the way that owners pay themselves, the way that they invest in the business, the way that they track their inventory and categorize expenses.

All of that can dramatically affect what profit appears to be on paper. So SDE kind of eliminates all the guesswork on that because you can't really inflate your numbers. So it's not about inflating your business or pretending that certain expenses don't exist. It's just about getting realistic about what expenses are specific to you as the owner and wouldn't exist under new ownership. It's not about making things look better than they are. It's about revealing what the business actually produces for the owner. And so this is where something that we call add backs.

Shauna Lynn Simon (28:17.742)

comes in and add back is an expense that may reduce your net income on paper, but may not reduce the true earning power of the business in the same way. So for example, certain owner-specific expenses, those can be added back in. As in we're going to take your net income and we're going to add different items to it. It sounds like we're inflating it. We're not. This is a very legal practice. This is literally how we calculate this. So for example, we might be adding back some one-time expenses, some

non-cash expenses like depreciation might get added back, but and this is very important, not everything gets added back in. Okay. There are very specific things. So things like your operating expenses, your warehouse rent, your insurance labor, those all still matter. And it can be reasonably assumed that these would exist under the new ownership. So you can't add those back in. The same would go for most of your software expenses and any marketing that drives revenue. So this is not a game of how do we add back everything and make the number as

Big as we possibly can. That's not the goal. The goal is simply to separate what does this business truly require to operate and from what exists because of this specific owner, this specific moment in time, this specific accounting treatment, like your depreciation. And so if you do not know where some of these add back items are hiding in your business, you're going to be leaving money on the table because you're not showing the true value of the business. So now I think you're probably starting to understand why I'm saying not that you can't run personal expenses through the business, but that you need to make sure they are clearly categorized.

So that you can add them back in. You need to be able to identify clearly for a potential buyer how you added those things back in. So now before you start thinking that you'll call a bunch of things an add back to inflate that business, just keep in mind serious buyers are going to look at your financials and they're gonna do their own calculations. So your numbers should line up with what they would come up with. Again, this is a pretty straightforward formula. As a mathematician, I will tell you that numbers don't lie when you follow the formula correctly.

So if you try adding back things that are not legitimate add backs, your buyers are not only gonna have questions, but the level of perceived risk is going to see them that much higher because they don't trust where the numbers came from. So at its simplest, SDE is calculated by starting with your net income. So that's that money that you've got left over on your P&L after all profits or all revenue and expenses. So revenues minus expenses, that's your net income. And then we're gonna add back certain expenses that are owner-specific, one-time discretionary or non-cash. So the basic formula looks like this.

Shauna Lynn Simon (30:40.392)

SDE, sellers discretionary earnings = net income + owner compensation. So what did you take out of that as your salary over the last 12 months? Add that back in, then eligible add backs. So again, those one time expenses, those discretionary expenses. So again, this does not mean that you get to add back everything that you didn't like was on the books.

The goal is simply to identify what the business truly produces for one particular owner, not to artificially inflate the value. So, as I mentioned earlier, you might also hear people talk about EBITDA So EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization. So you can tell essentially that's what we're doing with the SDE. It's just a little bit more straightforward of a formula. EBITDA is commonly used in larger business valuations, but in smaller

Owner operated businesses like most home staging companies, SDE is often a much more relevant way of calculating it because it also considers the financial benefit of one owner operator. So if you hear someone using a bit to language, just don't panic. The important thing is to understand that what they're actually trying to measure is what does this business produce before certain financing, tax, accounting, and only specific factors are considered. So for most staging business owners, I want you to focus less on memorizing the valuation jargon.

And more on this bigger question. Can you clearly show that the business actually produces money for the owner and what that money looks like? Okay, so once you have established your SDE, now we get to actually calculate your business value. So the business value is often discussed using what's called a multiple. So at the simplest level, your SDE times that multiple equals your estimated value. Simple idea, right? Lots of nuance still.

Because the multiple is not random and it's not just based on what you want the business to be worth. Different industries often have different multiples, and those multiples are going to be a range. So it's not to say, like if you're in a staging business, your multiple is automatically going to be X. That's not the case. Instead, it's going to be your multiple is anywhere between X and Y, generally, because of this business. The higher multiple is based on how well your business presents. So that multiple reflects how confident a buyer feels.

Shauna Lynn Simon (32:54.114)

About the business continuing after the sale. So they're gonna look at things like can this revenue continue? Are the financials clear? Is the business dependent on the owner? Are the systems transferable? Are the client relationships stable? Do they have a relatively low concentration risk? So concentration risk means, well, most of my business comes from one particular client or two particular clients. Let's say if you've got two clients that make up 50% of your revenue.

That's a pretty high risk for a buyer. You want to keep that number to ideally less than 10%. They want to also know that there's going to be room for growth. If you feel like you've plateaued and there's nowhere else for you to go in this market, someone doesn't necessarily want to buy that. So these are all factors that you need to be able to show a buyer that proves your multiple. So when we talk about cleaning up your numbers, we're not just talking about bookkeeping. We're talking about reducing that uncertainty. Clear numbers help a buyer to understand what the business actually produces.

And a clear and transferable business helps a buyer feel more confident that those earnings can continue. So when a buyer sees any sort of risk, that risk usually shows up somewhere in a lower offer to you, in perhaps more aggressive terms, in a seller note. So a seller knows where you're financing part of the purchase, an earnout, which is not necessarily recommended, but an earnout is essentially that you're going to get a percentage of profits going forward until a certain amount of time.

Maybe it's a longer transition period. So they want you involved in the business longer after the closing, or it could simply just mean more hesitation and less likely they're even going to come to you with an offer. So your job is not to magically make the business worth more on paper. It is your job though to make real value easier to see and the risk easier to understand. And this is often where a lot of sellers tend to hurt themselves because you've got value in the business, in your relationships, your inventory, your reputation.

You've got revenue. You've got all of these things. You may even have systems, even if those systems are not fully documented yet. We'll talk more on that in a future episode. But if the financial story is unclear and the buyer has to guess, then the buyers are going to really guess in your favor as the seller. They're going to protect themselves. They're going to discount things for that uncertainty. They're going to ask far more questions. They're going to slow down on the process and potentially even walk away from it because they just can't tell what it is that they're buying. They don't have that confidence there.

Shauna Lynn Simon (35:08.174)

So that's why this work actually matters. So if you are a home stager and you're thinking about eventually selling a business someday, here are a few questions I want you to start asking yourself now. Do you know which services are actually profitable? Not which ones bring in the most revenue, which ones are actually profitable. Do you know whether your busiest work is also your healthiest work? Do you understand what it really costs to deliver your services, each of your services?

Do you know which expenses are required to operate the business and which are considered more owner specific or one time? Can you explain why one year looked different from another? And if someone asks you how you arrived at the value of your business, could you explain the logic clearly enough that you're not guessing, apologizing, or scrambling? Now, if the answer is not yet, that's okay. This that's where a lot of business owners tend to start. Starting out, I want you to stop looking at your financials only through the lens of tax filing and start looking at them through the lens of value.

Because even if you never sell, this information is still information that you should want to know. Wouldn't you want to know which services are actually profitable? Wouldn't you want to know where money is leaking? Wouldn't you want to know whether your busiest work is actually producing the kind of profit that you thought it was? Wouldn't you want to know whether the business is creating value or just creating more work for you? That is one of the reasons that I love this conversation though, because preparing your business for sale is not only about that potential eventual exit.

It's about making you a better owner now. It's about giving you a stronger business now. It forces you to look at what is really happening in the business, not just what it feels like on a busy week or on the day-to-day. So your takeaway for today is this: revenue is not value. Net income is not telling the full story. And valuation is not just a number that someone pulls out of thin air. For many staging businesses, valuation starts.

With what the business actually produces for the owner. And then that number gets shaped by how much confidence a buyer has that those earnings can continue. So in a staging business, for the most part, that multiple. So I mentioned it's the calculation is SDE times a multiple equals your value. That multiple, often between two to three, but I've seen less than two. I don't think I've ever seen higher than three. But I mean, hey, the industry is still young, so who knows? But for the most part, it's usually in that range of two to three. If you feel like

Shauna Lynn Simon (37:27.126)

Everything still needs your eyes on it before it can go out. You don't really have systems and processes documented. So it's not overly transferable. Some of your relationships are a little bit shaky. You're not nurturing them very well. You don't really have a consistent lead generation system. All these things are really low. You're gonna be towards the lower end of that multiple. But if you've got a lot of these things in place, that's when you can be at the higher end of that multiple. So remember that your job is not to manipulate your numbers. Your job is simply to understand them well enough to be able to tell the truth.

Clearly. So you don't necessarily have to be doing all of your bookkeeping or anything like that. I'm not looking to turn you into a bookkeeper, but you do need to be able to identify how certain things are being categorized. Now, listen, if you want to get an idea as to where your business currently stands and how sellable it currently is, download our Is Your Home Staging Business Sellable ebook. Use the promo code SELL100, to get that book.

for free. So you can grab that book at slsacademy.com/sellready and use promo code SELL100 to get it absolutely free. That's just a special bonus for listening to this podcast. This ebook is going to help you to start looking at your business through this sell ready lens, even if you're not planning on selling anytime soon. And if this episode really has you realizing that your numbers may not be telling the true story,

As clearly as they could be. This is one of the areas that we do go deeper into inside the sell your staging business bootcamp. So inside the boot camp, we look at exactly how buyers are going to interpret your financials, what clean books actually mean for your staging business, how to think about SDE, where adbacks may be hiding, and what can be pushing that valuation down. So if you want to learn more about the boot camp and join us in our next set of live sessions, our next live cohort, go to slsacademy.com/sellyourbiz

That's "Sell Your Biz." But for now, start with the free ebook. In the next episode, we're gonna talk about one of the biggest mindset shifts for home stagers who are thinking about selling. And that is that your inventory is not the business. And this is great news for someone who doesn't own a lot of inventory or any inventory at all. But I know it's gonna be a little bit of a massive mind shift for anyone who does own, especially a significant portion of inventory.

Shauna Lynn Simon (39:43.604)

It's a fantastic conversation to have. It's a very important conversation to have, but it's going to feel a little uncomfortable. And I apologize in advance for that. But trust me when I say it's actually a good thing because buyers are not going to value inventory the same way that you do. But I promise you that's actually going to work in your favor. You just don't know it yet. And if you understand that before you sell, you can be making some better decisions about what you own, what it produces, and how it supports the value of the business. Go get that free ebook, slsacademy.com/sellready. Use the promo code SELL100.

And I will see you in the next episode. Until next time, happy staging.