The saddest lament of entrepreneurs and owners of private companies seeking to sell and exit their companies is that they want their businesses to be valued on their future potential, and not its CURRENT profitability.
Given that the typical, offered purchase multiples for smaller businesses – as in those with less than $5 million in EBITDA – can be as low as 1 or 2 times last year’s tax return profits, this is understandable.
In fact, we often see purchase offers based on multiples of MONTHLY earnings – not exactly the “happily ever after” exit dreamed of when these businesses were founded!
Yes, getting a business valued and sold based on factors other than its earnings while by no means impossible nor uncommon, is HARD.
The lucky ones that do so – and there are literally hundreds of businesses every month that sell for very high multiples of profitability, for multiples of revenue, and even companies that are in a pre-revenue stage that sell every day just on the value of their technology, their people, and their work processes – focus laser-like on the below:
They Are Technology Rich. Companies rich in proprietary technology in all its forms – patents, processes, and people – are far more likely to be valued on factors other than profitability and correspondingly attain purchase prices beyond a few times current year’s earnings.
As an example, the likelihood of a medical device company being sold or taken public is twenty times greater than that for a services - or a low-to-no proprietary technology company - doing so.
They Have Gold at the End of their Rainbows. Businesses that sell for high multiples communicate exciting and profitable future growth.
Their managers demonstrate understanding of the big 21st century “macros” - i.e. how technology evolutions and globalization will impact positively and negatively their industry, market, customers, and competition.
Concurrently, these managers understand the micros well too, especially how their business’ human capital will adapt and grow as change happens.
All this translates into well-developed stories that if their businesses aren’t making it now, there is gold (and a lot of it!) at the end of their rainbows.
They Are Great Places to Work. Businesses that sell are usually characterized by that good stuff that we all seek in our professional environments.
They are culturally cohesive. If they don’t have low employee turnover, they at least have well - defined career progression paths. And their compensation policies align and pay well with desired performance.
Quite simply, they are great places to work and are reputationally strong within their industries.
They are Process and NOT People Dependent. Businesses that are overly dependent on charismatic owners or a few dynamic salespeople or engineers rarely sell because the majority of their value can simply walk out the door tomorrow and never come back.
Important aside: for those entrepreneurs that harbor the desire to sell but not the ambition to build a meaningfully sized, process-based organization should then focus their exit planning almost exclusively on technology and intellectual property development.
If they are unwilling / unable to do this, then they should put the idea out of their head for now and invest this energy into more meaningful pursuits.
Like my favorite - making absolutely as much money today as one possibly can.
They Have Good Advisors. Businesses that do everything right but have messy financial statements because of poor accounting, messy corporate records because of poor or non-existent legal counsel, and messy “future stories” because of poor exit planning and investment banking advice, simply do not sell.
Sure, they may get offers, but invariably these deals fall apart in diligence and at closing.
And as anyone that has ever been through a substantial business sale process knows, almost nothing in business is as time and energy-draining as is getting close to a business sale and not getting it done.
They Get Lucky. Luck remains a fundamental and often dominant factor that separates the businesses that successfully sell from those that don’t.
The best entrepreneurs and executives don’t get philosophical nor discouraged by this but rather they embrace it.
They try new things. They follow hunches. They make connections.
They start from the pre-supposition of “accepting all offers” and work backward from there.
They and their companies can be best described as “happy warriors” – modern day action heroes ready for the fight. When they get knocked down, they smile, wipe their brow, and get right back in the fray.
And you know what? Our happy warriors, living and thinking and working like this day after day channel some mystical power and draw great luck and more to themselves and their companies.
Yes, companies that sell are the good and lucky ones.
Follow the advice above and fortune just may smile on your company and those you invest in too.