Every business owner, it seems, has "a number"--a dollar figure at which they will have considered their entrepreneurial endeavors a success. But whenever we examine that number more closely, it quickly withers in the light of scrutiny. There are so many essential questions to ask when thinking about one's exit strategy, yet all too often, common sense is lost in the emotional swirl of "the number".
This was the topic of a recent conversation with Keith Bloomfield of The Forbes Family Trust and Paul Rich of Rothstein Kass . The title of the presentation was "The Ultimate Exit Strategy" and the setting was "GrowCo," Inc. magazine's "Grow Your Company" conference held in Orlando, FL on March 15-16.
During this hour-long conversation, these two experts discussed common paths and pitfalls to entrepreneurial wealth creation. They also laid out a template for creating a successful "liquidity event."
Keith Bloomfield is the CEO of The Forbes Family Trust. Known as the central clearinghouse for data about the wealthiest clans, Forbes magazine and The Forbes Family Trust are involved in the daily lives of some of the most successful people on the planet. Prior to joining The Trust, Bloomfield was a mergers and acquisitions specialist. Today he advises many clients on their acquisition strategies.
The opportunity to create wealth through entrepreneurialism (as opposed to passive investment in the stock market or real estate), remains the most powerful route to riches. But to achieve explosive wealth, Bloomfield says, one must think critically about their liquidity strategy. For example, Bloomfield described how most buyers manipulate inexperienced sellers so that the number they start with is rarely the number they end up with.
Paul Rich, who's created and sold his share of companies, is a partner at accounting firm Rothstein Kass and has coached many business owners to great success. He helped us bring to light all the critical factors that add to a company's value, including:
- Commonly accepted industry multiples
- Intangibles, such as company vision, company processes and the quality of management
Rich stated that, above all else, cash flow is the most crucial measurement. When one company acquires another, they are most often buying that company's cash flow. How that cash flow figures in to the acquirer's financial picture is the most important determinant of price. However, both Rich and Bloomfield agreed that running a company "cleanly" can support the price as well. Running cleanly means running a well-organized financial process (no more using the company checkbook as a personal piggy bank) with great administrative systems and a well thought out management structure and culture.
Finally, Rich and Bloomfield discussed how important it was to have a team of advisors to help you manage the sale of your company. While fees paid to advisors can reduce your "number," good advice can save you from making the wrong deal. Both advised business owners to deepen relationships with all those who would play a role in assisting in their exit, including commercial bankers, investment bankers, a well-cultivated advisory board and even competitors and strategic partners.
When one is contemplating the big exit, it's best to think 3 to 5 years in advance and move past the imaginary "number in your head," and into the real world economics of selling a business.