“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 Nashville 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.
It seems somebody Nathan knew had told him 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 $5 million, maybe $5.5 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 slowdown this year has not materially affected 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 7). 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 break through to an eight-figure revenue company. 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 $5 million, most people would consider that a big win. But once Nathan had his mind settled on $7 million, only getting to $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 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. Once you have that data, you can build a financial model that forecasts the cost and financial return to grow the company. I call it “owning your future.” When a business owner knows what investment he has to 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 actually do it. But those that do get the premium multiple.
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. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . 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 story, names and fact patterns are changed to preserve the parties’ identities.
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