Adding Value -- By Getting Out of the Business
When you started your business, the chances are pretty good that someone handed you a copy of Michael Gerber’s The E-Myth and said, “Read this.” Ever since, you have appreciated the importance of building systems into your business so that it can run without you. But there is another benefit to systematizing your business and documenting your processes: It will help you get paid more when you’re ready to cash out.
Take, for example, Robert Verdun’s Computerized Facility Integration, LLC (CFI), which has sales of about $20 million a year. Verdun and his team help big companies manage their investments in real estate; clients include Dow Chemical and Pfizer.
Verdun is not looking to sell, but he was willing to allow me and my colleague, John Duguid, managing director of Gallium Corporate Finance, to look at his company and give him advice about how he could prepare CFI to be sold if and when the time ever comes.
When we got to know Verdun’s business, we realized just how well Verdun had standardized the squishy business of moving offices. “You don’t just move a person,” says Verdun. “There are many people involved. We have to take into consideration movers, construction, permits, artwork, IT, security, capital planning, and more.” Verdun says his company can save its clients about $300 to $500 for each move it takes on. ”Most big companies move more than 40 percent of their people every year,” he says, “so it adds up quickly.”
Verdun has cross-trained his staff so that most of his people can do more than one job in the company. That way, in the event of an employee departure, a cross-trained staffer can slip into the open spot, follow the instructions the company provides, and get the work done.
Not only has this helped Verdun scale his company--which was number 3,052 on the 2011 Inc. 5000 list--but it will also help him get out cleanly when he’s ready to sell. Most service businesses are overly reliant on a couple of key personnel, which is risky for a buyer. When it comes time to sell, most acquirers of service businesses are reluctant to offer a decent multiple upfront. Instead, they prefer to pay the principal(s) the bulk of their money in an “earn out.” This requires the seller to hit certain targets over the next year or two (or even three) in order to get paid for the sale, effectively shifting the risk from the buyer to the seller.
For example, I know one multinational advertising agency that has a standard formula for acquiring marketing businesses: 10 x earnings, three of which are paid on closing, with the other seven available--potentially--if the owner(s) hits a series of targets in the future.
Imagine you’ve worked your entire adult life to build an advertising agency up to a million dollars of EBITDA and a buyer comes along and offers you $10 million for your life’s work; only to take most of it away in the fine print by putting $7 million at risk in what amounts to a potential bonus for three years of your life spent as a middle manager in a multinational conglomerate.
Most CEOs would rather get paid on closing, which is what Verdun is poised to do when he’s ready to sell. “Assuming CFI’s business systems, processes and key employees stand up to buyer due diligence,” says Gallium’s Duguid, “the necessity of having Robert stay on is significantly reduced, and his mergers and aquisitions advisor would be resisting an earn-out.”
Yes, your systems will help you scale up, but the hidden reason to focus on systems has nothing to do with running your business. Instead, it has everything to do with being able to make a clean break when you’re ready to hit the eject button.
JOHN WARRILLOW | Columnist | Sellability
John Warrillow’s new book, The Automatic Customer: Creating a Subscription Business In Any Industry will be released on February 5, 2015. John is also the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a company dedicated to helping business owners improve the value of their company.