When’s the best time to think about selling your company? Right now, even if you have no current plans to sell. I’m a firm believer that you should build your company from the beginning to sell for maximum dollar. In my experience most entrepreneurs don’t give a lot of thought to this idea until they’re thinking about moving on. But if you identify and adopt best practices – practices that add value to your company – as you build your company, it will look more attractive both to potential investors now, and buyers tomorrow. How do you build as if you’re selling your company?
“From the start, you should know what practices will get you top dollar. By adopting them, you’ll wind up with a better company.”
In a vintage Inc. magazine post, I tell the story of Natalie – founder of a $5 million recruiting agency. Natalie was ready to sell, and came to me for my opinion on her exit plan. I gave Natalie a couple of tips to improve her plan that every entrepreneur should incorporate into your thinking years before actually selling your company.
“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.”
For her industry Natalie thought the standard multiple was three to five. Her original plan was to grow sales from $5M to $10M within 5 years, and then sell. My question to her was how to get her company’s EBITDA multiple to five – a metric potential buyers will certainly look at. We also discussed her company’s potential vulnerabilities and how to eliminate them. Top on this list for any company are your customers – how many, relationship strength and length of time, and revenue spread. Also important is how vital YOU, the owner, is to those customer relationships.
“The relationships can’t be solely dependent on you, and the company shouldn’t be too dependent on a few customers.”
In order to get the highest valuation – whether you’re selling your company today, in ten years, or never – is to create long term contracts with a wide customer body that can be transferred to a new owner without customers jumping ship because the founder is gone. Here at Birthing of Giants we say entrepreneurs should be working ON their business, not IN their business.
Read Norm Brodsky’s article in its original form at Inc. Magazine’s website.