I’m a big believer in building a company today as if you were going to sell it for maximum dollars tomorrow. The fact that you might not actually be selling your business doesn’t matter.
“In other words, no shortcuts. Do what’s best for the business long term. And two, build the business so that it can be sold for as much money as possible–even if selling is not part of the plan.”
Sadly, a lot of entrepreneurs don’t think this way, and don’t even consider their company’s value until they’re ready to sell. I’ve dusted off an older Inc. magazine post from my column to tell you the story of Hannah and Ted, a married couple who came to me for advice on selling their 30 year old company – only to discover that they hadn’t considered the company’s true value, or the impact selling their business would have on their lives.
“Businesses are valued on the basis of a multiple of earnings before interest, taxes, depreciation, and amortization, or EBITDA. With a little research, [Hannah and Ted] could find out the current multiple for a company like theirs.”
I thought that they might get around $4 million for their company, which at the time pulled about that much in revenue each year. They were delighted, but I warned them not to count their chickens yet. They also had to factor in things like debt, selling costs, and not least, how selling their business would impact their quality of life. I asked them to calculate not just the salaries they took (about $200,000 each), but also medical insurance, company cars – anything that their business was currently supporting.
“Hannah and Ted did the exercise–and found that the company was actually paying them almost double their salaries.”
That didn’t seem like a big deal to them until I broke down how much they were likely to get from the sale, and reminded them that they had to hold that amount sacred. It amounted to their nest egg – all they’d have now that their business was sold. Assuming they invested that money in something safe, the most return they’d get is around $100,000 per year – a far cry from the $400,000 they were currently earning.
Hannah and Ted hadn’t considered how big a drop in earnings they’d be dealing with. There was also the emotional impact. While both had already extricated themselves from the day-to-day operations, and in fact only worked three days a week, they enjoyed interacting with their customers, something that they’d probably miss. I told Hannah and Ted to remember that they had a choice. They didn’t have to sell. They could hold onto the business and make a few changes that would allow them to do more of what they like.
Ultimately Hannah and Ted chose not to sell at that time, opting instead to enjoy what they love about their business.
“But if they’d built to sell from the start, and implemented best practices, they’d have more options now.”
Read Norm Brodsky’s article in its original form at Inc. Magazine’s website.