A Single Perspective on Multiples

2015, 12 Nov | In Uncategorized

“How much is my company worth”? That’s the million dollar question, or more appropriately the somewhere between several hundred thousand dollars and many, many millions of dollars question. I can’t tell you how many times I’ve been asked this question. Here’s the simple truth, MULTIPLE = RISK. This is also the point of the title of this commentary, that there is one factor that dictates the market value of any given entity…and that is risk. All of the other elements involved effect the risk profile for better or worse. A strong IP portfolio and exclusive licenses mitigate risk as a barrier to competition. Contracts in hand mitigate risk of your client walking away tomorrow. The list goes on and on…

Our industry is ripe with overused clichés and “past client experiences”, my favorite of which is the, “I was playing golf with a friend the other day and he told me he just sold his Company for “X” multiple… don’t take anything less than “Y” for your business” and then he continues to provide guidance on the M&A world. Truth be told, this story is often real, but only comes out in the most advantageous of times. Nobody brags when they shoot 115 (yeah that’s me), or brags about a mediocre sale price, or even more likely, brags about not being able to sell the company at all. My intent is to shed some light on why this is the case.

Business valuation is more of an art than a science, which is a phrase used when the “science” is too complex to explain in more than a few talking points. Business valuation is extraordinarily complex and encompasses many variables, which becomes the “art” involved in painting the whole picture, but those variables all share one common trait… they effect the risk of the business or more importantly the likelihood of the expected return. I will save the specific risk factors for a later discussion, but if you get one takeaway from this note, it is to look at your business from the perspective of me, an outsider…a potential buyer, viewing your business and imagining every little thing that can go wrong. As you dissect your company, industry, and business model, look at it from the lens of the worst case scenarios and mitigate those scenarios. When I am selling a company, this becomes one of the most critical roles I serve, mitigating the risk prospective from an outsider.  The opportunities for growth are typically obvious and the financial results should speak for themselves, but that is table stakes as to why someone is interested in buying the company in the first place.

Private equity firms typically have a very standard list of questions regarding customer concentrations, contractual recurring revenue, etc… The thing to remember is that, as an owner who has built a business from nothing to a significant force in the market place, you have a different view on the industry. You know your customers, you have built relationships and trust throughout the verticals in which you operate. The confidence in that goodwill goes out the window on day one for a new buyer. It doesn’t mean that it actually disappears and more often than not it should continue on to a large extent, but it is not without risk.

Additionally, the leveraged position of your company today vs. the same company tomorrow after a buyer steps in will, be dramatically different. A buyer is paying for the future earnings potential and ideally paying a premium for it. The result is that the new owner needs to service its debt or hit the return expectations on equity. This puts added stress on performance, as it could potentially impact the going concern of the business, not just the size of the bonus pool at the end of the year. Again, the intent is to illustrate the other side of the transaction and view the buyer risk, because ultimately this will influence “what your company is worth”.

So, what’s the point? Most lower-middle market companies, despite their individual historic successes are not market ready or at least are not ready to optimize their market value in a transaction. To best position your business to maximize the results of a sale, a significant amount of time needs to be focused on understanding how the process is best optimized. Talk to the experts, the folks that know what variables a buyer will hone in on. You do not need to spend tens of thousands of dollars to have a business appraisal performed, but you can have a marketability assessment done to help identify problem areas. Not all elements will be curable within your timeframe, but many are. Since this often takes time, starting two years before you look to sell your business versus 2 months, could result in millions of dollars either in your pocket, or being left on the table. A little bit of planning will go a long way in minimizing the most critical risk elements of your business and better your chances of maximizing the value of your company.

Jake Matthaei


Merit Harbor Group