As you probably know, most companies are sold for a conservative multiple of their cash flows and profits.
But, did you know that some companies are sold for a high multiple of their revenues?
And, do you know what kind of buyers pay these “airy” prices?
And finally, do you know how to position your company to be valued and sold like this?
The answers to these questions are among the most interesting and timely value-creation stories we encounter in business.
Interesting because who wouldn’t want to see their company valued this way?
And timely because the supply and demand dynamics of today’s financial markets have created a unique opportunity for any company, no matter its size or industry, to pursue a revenue-based sale.
Think of the current business sale market, like that for co-ops in Manhattan or “tear downs” in Silicon Valley, in which otherwise average assets command premium prices.
In both cases, that market exists simply because there is a limited supply of homes for sale in these areas and a LOT of cash and credit rich buyers wanting to live there.
The supply and demand for companies – with certain kinds of characteristics – is similarly unbalanced.
The first of these characteristics is easy to overlook: the company actually has to be for sale.
And by this I don’t mean the tired cliche of “anything is for sale for the right price.”
Rather, I mean that it is for sale the same way a trophy home in Beverly Hills is – i.e. represented by a high-end realtor and marketed for sale with pomp and mystique, thereby creating that fine and valuable aura that the seller is doing the buyer a favor by offering that “once in a lifetime” opportunity to own something so prestigious and special.
Now because a business is a far more amorphous, complex, and organic than is a piece of real estate, so too are the particulars of how best to market it to attract high-priced suitors.
For a home, premium pricing drivers might include a great school district, or proximity to the ocean, or the sale values of neighboring properties.
For a business, the drivers might be a company’s market growth, or its technology assets, or the credibility of its financial forecasts (especially important), or the resumes and charisma of its leadership team.
Whatever they might be, the underlying principle is one that business owners, for reasons both admirable and not so admirable, often struggle to accept…
…that when it comes to the question of what is “fair value,” perception is reality.
The admirable reason for their struggle is that most business owners are the best human beings among us – responsible, hard working, and dedicated to their employees and customers.
But when they market their companies for sale, if this is all they are, they will often come across as flat and – dare I say – boring too.
And boring doesn’t sell.
The less admirable reason most companies don’t attract premium prices is that the banking and financial service sectors in our economy have a large vested interest in making business owners believe that a low, single-digit multiple of last year’s earnings is a fair price for their companies.
There is nothing wrong about this, per se, but if the seller doesn’t demand more – in ways both soft (via creative marketing as mentioned above) and hard (by just saying no to low ball offers) – then of course buyers won’t offer more.
But when sellers do ask for more, something beautiful happens…
…“Win-Win” deal structures and strategies are created where buyer and seller work together so that down the road, the purchased business can be re-sold at an even higher multiple, thereby justifying today’s high price.
So don’t be boring.
And respect the financial guys, but take what they say with more than a little grain of salt.
Because in this frothy environment, a business – just like a trophy home on the best side of town – can be sold for a lot more than traditional analysis might suggest.
Want to Sell Your Business for a Multiple of Revenues?
If you’re interested in selling your company in the next 3-6 months, then click here and complete this short questionnaire as to a few questions regarding your business’ current status, and key goals now.
And we’ll reach out with our thoughts to help you.