Lead Like You’re Up for Sale
Want to know the right time to
be thinking about selling your
business? How about now?
Norm Brodsky is a veteran
entrepreneur. His co-author is
editor-at-large Bo Burlingham.
They are also co-authors of Street
Smarts: An All-Purpose Tool Kit
for Entrepreneurs. Follow them
on Twitter: @normbrodsky and
“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 rela-
tionships 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.
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.
SCAN THIS PAGE TO SEE NORM ANS WER QUES TIONS FROM EN TREPRENEURS. (See page 8 for details.)
Do you have a question for Norm? Write to him at email@example.com.
66 - INC. - MAY 2015