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3X Thinking

“I’m a bit slow, but now I finally get what you’ve been telling me.” Kevin (not his real name) is ready to sell his HR services company.  We have identified 15 potential private equity buyers and a handful of potential strategic buyers.

The marketing message to these two types of buyers must be different, assuming you want to break through the clutter. If your investment banker or intermediary tries to tell you the message to both sets of buyers is the same, they are inexperienced or lazy, or both.

Kevin is leaning toward selling to private equity because he’d like to take some chips off the table now and continue to run the company for four to five years and participate in the second exit when the private equity buyer monetizes their investment. As we discussed the marketing message to this category of buyer, I told Kevin it it simple. The private equity model comes down to this: they must see a 3X to 4X return on their equity investment in five to six years. Therefore, everything about our marketing package, and I mean everything, must focus on that singular objective.

Over many years of advising business owners about exit strategies, I’ve seen several common characteristics, one of which is they find it hard to talk about growth strategies. When asked “How can you 3X the size of your company in five years?” I usually get blank stares.  That’s why I like to sit down with the business owner and patiently consider the rational ideas that could get us there, such as acquisitions, new products, new markets, new or better staff, etc.

When we first started to hone in on our 3X growth strategy, Kevin told me he wasn’t comfortable with that line of thinking because it seemed frivolous. “I’m so focused on the day-to-day,” he told me, “I don’t like thinking about ideas I’m likely never going to pursue. I like thinking a year at a time, certainly not four or five years out.”

“That’s one reason you have a successful business,” I replied. “The private equity buyer wants a solid business like yours, but they only want it within the context of a reasonable and believable 3X growth plan.”

Kevin is now fully engaged in the 3X line of thinking. Since he wants to stay on after the sale and work alongside the private equity owner, he knows whatever plans he proposes he’ll be in part responsible for executing. While I finish work on the package we’ll be presenting in Q1 to potential buyers, Kevin is at his lake house working on the growth plan that we’ll include in that package. I can’t wait to see what he comes up with!

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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