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How Growth Plan (not growth) Affects Valuation

“We are poised for significant growth. We have identified a competitor we’d like to acquire, they are about a third of our size, so it wouldn’t be a big stretch. I’d also like to hire at least one more senior-level sales person. We know we can close about 60% of our presentations and that will more than pay for the new hire and give us a nice margin.”

Donna (not her real name) was obviously excited about the opportunities ahead.  Problem is, her business partner Shelby (not her real name) was decidedly not so inclined. As soon as Donna finished her comment, Shelby jumped in, “That may be true, but we’d have to invest more than I feel we should.” Then she looked directly at me and said, “That’s why we need you to advise on what we should do.

Donna and Shelby have owned the business for about 15 years. One other relevant detail about them, they are sisters. They took over the business when their father stepped away from day-to-day management. He is still active in the business, but from all I can tell, key decisions are left to Donna and Shelby.

They have reached a point that seems to occur with most business partners, they’ve reached a point when one partner wants to go in one direction and the other doesn’t. Of course, the obvious answer to this dilemma is that the partner who wants to invest in growth (in this case Donna) buys out the partner that doesn’t (in this case Shelby). But Donna was ahead of me even putting that idea on the table, “Though we disagree about the future of the business, neither of us wants to separate. We’ve been successful working together for so long, I can’t see us doing it solo. Buying out Shelby’s interest isn’t even on the table as far as I’m concerned.”

I was impressed with the functional stability of their dialogue. I have been in many meetings with business partners discussing strategy. There’s usually a weird sense of contention in the atmosphere when discussing divergent views of the future. You can just feel it. But with Donna and Shelby, I didn’t get any of that. Their rapport was solid; I could tell they enjoyed working with, and being with each other.

Since the usual, simple answer (one partner buys out the other) won’t work in this case, I went in a different direction. “You have a couple of choices,” I said, “You can do nothing and keep the business doing what it’s doing. While you might miss out on some growth opportunities, you’ll likely be fine. Or you can find a compromise growth strategy, though sometimes being half invested in a strategy is the worst decision you can make.”

“But maybe this is when it’s time to consider selling, which is why we called you,” Donna said. I don’t think she appreciated the power of her suggestion. One of the most attractive features you can bring to the table when selling a business is a compelling growth strategy, which adds 75 to 100 basis points to a transaction multiple. For example, let’s say a business with good margins, a solid organization, and no dangerous warts would sell for a multiple of five. With a compelling growth plan, I would be comfortable taking the business to market for a multiple of six.

To be clear, the growth plan needs to be tangible, not just something generic like “add more salespeople.” To move the needle in valuation, the growth plan needs to articulate “when we do this, then that will happen.” In other words, the growth plan that moves the valuation metric needs to demonstrate a return on investment.

Donna and Shelby are in a good place. They don’t have to sell, but if they decide that’s what they want to do, their tangible growth plan will drive a strong valuation.

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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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