“What does my growth plan have to do with it, Jim? I’m making a million bucks a year, who wouldn’t want to buy my company?” Nathan (not his real name) was rather annoyed at me. He had called me about selling his company. We discussed valuation, potential buyers, how the process would work, and what he might do to enhance the value of his company. It was the last part that he didn’t like.

A friend had told Nathan his business could sell for seven times EBITDA. Once he heard that, he couldn’t get $7 million out of his head. He even had his wealth advisor already looking at an investment plan with that number in mind. At the age of 58, Nathan was planning for a very comfortable retirement after having run the manufacturing business his father started in 1983.

Minor problem, his business is only worth $4 million, maybe $4.5 million if we get lucky. The business has a stable record of success, which is impressive given various ups and downs in the economy over the past two decades. Even the pandemic did not materially affect his revenue or profitability. But there are three issues that will likely prevent us from getting a premium multiple (meaning, a premium as high as 7X). First, he doesn’t have a strong management team, much of the company’s success revolves around him. Second, while the company is stable, it isn’t all that profitable. His EBITDA margin consistently hovers around 10%. But the third problem is Nathan cannot articulate a growth plan for the company. You see, buyers will pay a premium for a business when they see a compelling and logical plan for growth. But I can’t get Nathan to wrap his brain around how to articulate a growth strategy. He is stuck in the moment, doing what the company has always done to profit about $1 million per year.  In other words, he is settled.

Now, when you’re 58 years old and can sell your business for $4 or $5 million, most people would consider that a big win. But once Nathan had his mind settled on $7 million, only getting $4 or 5 million makes him think he is an underachiever.

But I didn’t leave him hanging. I said, “Nathan, we might be able to move the valuation if we can deliver a specific and actionable plan for growth.” I went on to explain that would need to include a clear articulation of his target customer, how to find the new customer, how much it costs to connect with that customer, and how much that customer will spend once he makes the connection. I pointed out that once we had that data, we could build a financial model that forecasts the cost and financial return to grow the company. I call it “owning your future.” Here’s why: when a business owner knows what investment he must make to drive growth and how that investment will pay off in revenue and profit growth, then he/she not only owns their company but also owns their future.

Not to be too hard on Nathan, I have this same conversation with all my clients, and only a handful have ever thought about a return-on-investment growth plan, and even fewer do it. But those that do get the premium multiple.

 

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."