Do you feel a little richer this month?
You should. The value of your business just went up.
Since 2012, my team at Sellability Score has been analyzing offers entrepreneurs have received to buy their businesses. Every quarter, we look at the average multiple offered, and it is now at its highest point since we started tracking offer multiples.
For the most recent quarter, ending June 30, 2014, the average offer received was four times pretax profit (offers were much higher in some industries and among businesses with certain attributes), or about 10 percent higher than the average multiple offered lifetime of 3.66 times pretax profit.
When the value of your largest asset jumps by 10 percent, it may be tempting to hurry and get your business on the market. After all, isn't it better to buy low and sell high?
The Downside of Selling at the Peak
The thing many of us forget is that when you sell your company--possibly your largest asset and the biggest wealth-creating event of a lifetime--you have to do something with the money you make.
These days, that means you'll have to turn around and invest your windfall into an asset class that is equally bubbly. The stock market has more than doubled since 2009. The price of residential real estate has been growing at a rate of 1 percent per month in many major centers. The same trend can be seen in many markets that offer exclusive beach houses or ski chalets.
Who Is Richer: Samantha or Scott?
Indulge me in a hypothetical example. Let's look at two imaginary business owners, each running a company generating a pretax profit of $500,000. Let's imagine that Samantha sold her business back in 2009 for three times her pretax profit. She would have walked with $1.5 million pretax to invest in the stock market.
Now let's imagine business owner Scott, who decides to try and time the market. Scott waited out the recession and sold his business last month for four times pretax profit, walking away with $2 million before deal costs. At first glance, Scott looks like the winner because he sold at the peak and got four times profit instead of Samantha's three times. But when we take a closer look, Samantha would probably be better off today. Assuming she had invested her $1.5 million in the stock market back in 2009, when the Dow was trading below 7,000 points, she would now have more than $3 million, or a third more than Scott, who waited and sold at the "peak."
Timing the sale of your business on the basis of external markets is often a zero-sum game, because unless you're going to hide the proceeds of a sale under your mattress, you're probably buying into the same market conditions from which you're selling out.
Time Your Sale on Internal (Not External) Metrics
The alternative is to time the sale of your business on the basis of internal metrics, rather than external factors. Waiting until you have your business optimized according to the dimensions business buyers care about will ensure you get the highest price that businesses like yours are fetching at the time you are selling. Here is a partial list of metrics acquirers care about most:
1. Revenue Growth: The larger and faster-growing your business, the more attractive it will be to a buyer.
2. Gross Margin Growth: Maintaining and increasing your gross margin (the difference between the price of your product and the costs of acquiring the raw materials to make it) indicates to a buyer you have a differentiated value proposition that enables you to control your pricing.
3. Sales Per Employee: Illustrates how dependent you are on people to make a profit and how efficiently you translate talent into profit. This number will vary according to the industry but, like most numbers, bigger is better in the eyes of an acquirer.
4. Sale Per Square Foot: Illustrates how efficiently you use commercial space. Critical among retailers, it can also help an acquirer understand how efficiently a business in any industry uses real estate.
5. Customer Acquisition Cost: Take the total of your sales and marketing expenses in a given time period (e.g., a month) and divide it by the number of customers acquired in the same period. This helps an acquirer understand the capital required to scale your business.
Once you start optimizing your internal numbers, you can sell your business for whatever the market is paying at that time for businesses like yours. Then you can turn around and invest the proceeds into the same market conditions--whatever they may be.