September 15, 2015
By David Walsh
If you are a business owner contemplating a recapitalization or sale of your company, there is just a whole lot to think about. The first thing on every Entrepreneur's mind is “How much is my company worth?” Value is a strange thing because really, like beauty, value is in the eye of the beholder. Different buyers find value in different aspects of a business. That's why in order to unlock maximum value and create competition amongst buyers, you need to market broadly and gets lots of ‘beholders’.
To get ‘beholders,’ in the first place, you start with the marketing. A typical marketing plan to sell a business includes a document that is called a ‘book’ or ‘confidential information memo’ that describes the state of the owner's business in great detail. It often includes narrative, financials, pictures, and charts. There are all sorts of methods, styles, and content that different firms use to produce these books.
The one thing that a great number of these descriptive offering memorandums all have in common is a phrase that goes something along the lines of this:
“Owner has not used professional, dedicated sales and marketing resources.”
The paragraph where this statement shows up will then go on in greater detail to essentially implicate, and I loosely paraphrase here:
“Can you imagine how much revenue growth you could get if you, the buyer, just went out and hired a couple of sales folks?!”
Savvy buyers, though, aren't having any of this without some investigation. Their thinking is simple. Fundamentally, it is this: if it was so easy, why wouldn't the owner have already done it? After all, the entrepreneur who built the company certainly knows the most about the operation and its potential? So why hasn’t the owner already put their cash flow to work to get more cash flow?
It's a good question.
If you're an owner thinking about selling your business, you need to review how you acquire and keep customers. If there are improvements you could make, I strongly suggest you consider making them now, well in advance of hardcore sale preparation.
Start by asking yourself a few basic questions like:
By getting a deep understanding of these points and who in your organization is doing the work to acquire and retain customers, you can get a sense of the expense required to really dedicate resources towards customer acquisition, retention, revenue growth, and, most importantly, if the potential numbers will reflect favorably in enterprise value.
When you have the basic framework of how things work today, you can create a simple model to understand what the economic value will be, how to set compensation goals, and how to measure their effectiveness. The enterprise value of one sales person at $40,000 total target compensation annually can be figured like this:
(Base Salary + Commission + Overhead) * EBITDA multiple
Where EBITDA multiple is the expected value multiple of the company.
For this example, if an owner hired a sales person who earned $20,000 base and $20,000 in commission with a 15% overhead, at a total cost of $46,000, and the EBITDA multiple of the company is an estimated 4 times or 4X, the overall enterprise value or cost of hiring a sales person is $184,000. In order for this to be a good investment, the owner needs to model current and projected revenue, gross margin, operating expenses, and EBITDA and have a return greater than this level.
For this example, to keep things simple, let's assume that every dollar this owner's new sales person generates in revenue translates to 15% of EBITDA.
For a business owner to break even on their investment, their new sales person must generate at least $306,667 in topline revenue, at equivalent gross margins to the average of the business.
There are many other things to consider, including ramp up time, training, management, systems, compensation plans, etc. But growth in revenue and earnings drives not only interest in an owner's business but overall value. The more an owner can demonstrate how it's working rather than how it MIGHT work, and the stronger the EBITDA, the higher the EBITDA multiple will climb.
To give you a sense of the difference a carefully planned sales strategy could make in to your exit, consider if an owner discovered, in the example we're working with, that they could impact EBITDA positively by a net $50K on an annual basis by hiring a sales person. That resulting difference in value with $3M of EBITDA at a multiple of 4X might move that company to a $3.05M EBITDA at a multiple of 4.1X or a difference of $488K.
That's a lot of lettuce.
Now of course, it's more complicated than just that. But the point is to explore your options and invest wisely to demonstrate that the scalability and return is there. What I see time and time again is that small- to mid-size companies often ignore this until it's too late. Hiring professional sales & marketing people can help an owner to:
There is no doubt that understanding the numbers takes work. Reach out to your accountant, exit planner or advisor for help if you need it. And on the sales/selling side, it is work to understand, hire, train, and manage the resources. On the flip side, there is greater access than ever to outsourced services that can help a business owner develop a sales team and the necessary review points and resulting cadence requirements to get the right outcomes.
Why am I asking you to focus here? Because you've spent years building this business and you deserve the highest value when you sell. Building a competent sales resource or team will likely bring tremendous returns in terms of buyer interest. Think more ‘beholders’ which creates that price competition to drive value.
Then your advisor can put this statement in your confidential information memo:
“Owner HAS professional, dedicated sales and marketing resources that drive year over year revenue and profitability growth”