Want to know the right time to be thinking about selling your business? How about now?
I have long believed that you should build a company to sell it for as much money as possible, even if you don't plan to sell it anytime soon. From the start, you should know what practices will get you top dollar. By adopting them, you'll wind up with a better company.
Of course, most entrepreneurs give little, if any, thought to selling their businesses until they begin feeling that they want to move on. Recently, for example, I had a visit from a young woman who has built a successful executive recruitment firm that does about $5 million a year in sales. I'll call her Natalie. She was getting tired of it and wanted to do something more creative. She figured she'd increase her sales to $10 million in three to five years and then sell. "Well, you're starting late, but not too late," I said. She could begin by figuring out how to maximize the multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) that her company could command. "Do you know what's typical in your industry?"
She said she thought the range was three to five times EBITDA. "OK," I said. "So the question is, how do you get from three to five?"
"Build a better business," she said.
"Yes, but what does that mean?" I said. "What are your company's potential vulnerabilities? You should eliminate them." We talked first about customers--her contracts with them, her relationships with them, how long she has had them, and how her revenue is spread among them. "If you want the highest multiple, you need long-term contracts that you can transfer to a new owner without losing customers. The relationships can't be solely dependent on you, and the company shouldn't be too dependent on a few customers. The smaller the percentage of revenue that your largest customers account for, the more valuable your company will be."
Even more important, I said, was her staff's ability to run the business on their own. If Natalie is essential to the operation, she's much less likely to get a high multiple from a buyer. Why would someone pay a lot for a company that could go downhill when the founder leaves?
Right about then, Natalie mentioned that an opportunity to sell had come up, but she didn't think she was ready. A firm that recruited midlevel personnel wanted to expand into executive recruitment. The best strategy, it figured, was to buy an existing executive recruitment firm.
"I'd look into that right away," I said. "It's a great possibility."
She was surprised. "Why?" she asked.
"It's the multiple," I said. "They have a need now, and you can fill it. They might give you a high multiple even if you haven't eliminated your vulnerabilities. You'll probably have to stay on for a couple of years. But if you could get almost as much money now as in five years and work half as long, wouldn't you take it--particularly after you factor in all the risks?"
"What risks?" she asked.
"Well, first, there's an interest-rate risk," I said. "When interest rates go up, multiples go down, because buyers are paying more for money. You're also taking a risk that you'll be able to get sales to $10 million and that you'll have the same percentage of EBITDA then as now."
Natalie agreed that she should at least find out what the potential buyer was willing to pay. I asked her to keep me posted, and I'll keep you posted.