Exit Multiples Examples With and Without Preparation

You’ve spent most of your life building a business that you are proud of. It’s a business that’s your identity, it’s a business that put your kids through college and a business that has provided a good life for your family. It’s a business that has provided tremendous value for your clients as well. You have made it. Now you want to retire to spend more time on you. You want to cash in on the amazing business you’ve built. You deserve it.

The challenge: Is your business ready to be sold and have you maximized your business’ enterprise value and exit multiples? You’ve had conversations with business brokers and there is likely a gap between what you and the broker think your business is worth. Or, you’ve gone to market and you haven’t been presented with the offers you thought you’d receive. The gap can be meaningful, often many millions of dollars, and it makes you re-think if you want to sell. Is your dream of cashing in on the business you’ve built a distant dream now? Will all the hard work you’ve put into your business not pay off in the end? There is a gap.

Why is there a gap? There are three main reasons for the valuation gap. Profit, risks with your business, and your business processes. Saying it another way, does your business make enough money, is your business safe to buy, and does a buyer feel conformable with the business’ processes. Buyers are willing to pay a premium for businesses that are scalable driving up multiples. Buyers want a scalable & safe bet because they are putting up their own money and, likely, a personal guarantee on a loan to buy your business. Buyers don’t want to lose. In many cases, a win for a buyer is not having to deal with surprises post sale.

Let’s look at enterprise value and multiple differences between risky businesses and growth oriented businesses.

How You View Your Business

Your business generates $1.5M profit on $15M revenue each of the past three years. You are running the business, your client list remains relatively unchanged, and you are the primary contact with your clients. You’ve made some changes to your business, but it’s been operating the same way for many years. Your employees have been with you for many years and you trust them like family.

What you see is a wonderful business that many buyers would love to purchase. Consistent profits, stable, good clients, a dedicated team. A business any buyer would want to purchase.

How a Potential Buyer Views Your Business.

• Profit margins are low and there has been no business growth.

• There is a major risk that if the current owner leaves, clients are also going to leave because they only trust the current owner, not the potential new owner.

• The workforce is aging, they lack modern skills, and when the owner leaves, there is a strong chance the employees will leave too.

This means potential buyers are going to have to re-build a lot of the business and put their hard-earned money at risk. Although some buyers want to purchase a turnaround, most buyers want growth opportunity and to limit risk. They want to dream about growing the business and investment after they purchase it rather than investing in re-building, then growing. Therefore, they are going to lower the valuation.

This is the type of risk a Searcher see. Thinking of selling to Private Equity where valuations are higher? Their expectations are even more demanding. Private Equity wants a thoroughly professionalized business free of legacy encumbrances. They want a safe business that can grow. Private Equity has enough cash and deal flow to be patient and picky.

In the example of the $1.5M profit business above, the valuation is likely to be at a 4x multiple or a $6.0M enterprise value. The buyer must discount the business because of all the work they have to put into it. Additionally, the business is not likely to generate Private Equity views and your buyer base will be more limited. Closing will be more difficult because the Buyer will need an SBA loan, which is more scrutinized. They are also going to have to find $600k-$1.2M as a downpayment. Not the kind of money everyone has laying around. The buyer will also need Seller financing, which means increased risk for you.

What Your Business Could Potentially Be Worth

Now, imagine three years after the buyer purchased the business, they’ve increase profit to $3.0M on $20M revenue, built sound business practices, hired productive talent, and they are poised for a market expansion. It wasn’t easy, their first year and a half were spent learning the business and making changes, but now they are in the driver seat looking to grow. Your, ahhem, their business is now valued at a 6x multiple or $18M. In three years, that’s a $12M gap between what you sold the business for and what it is worth now.

Why?

They increased not only profit, but also profit margin growth

They de-risked the business by adding new clients and adding in key management

They added standardized business processes to ensure that both sales and operations can scale.

While $6.0M when you exited is a lot a money, it’s not $18M. No, it’s $12M more than you sold your business for. And the reality is that with some fundamental changes to your business you could have captured the $12M valuation difference.

That’s where Fenwick Partners is here to help. Our goal is enable you to sell your business for $18M -> 3x what you would have sold it for.

How does Fenwick Partners do it and what makes us different?

Most firms or Business Brokers that you speak with are advisors only. Advisors give advice and expect you to run with it and make the changes. Advisors don’t get into the weeds to make actual changes, they expect you to do that. Advisors work with templates, never learn your business, and have other priorities. With Advisors, real changes never materializes because implementing and operating is way more difficult. Your mother-in-law is an advisor too. Has that worked to your benefit?

Fenwick Partners is different. We not only advise, but more importantly, we work with you to implement, teach, and grow your businesses. We invest the time with you to trial processes and projects to best understand what works for your business. We strategize with you, build the processes with you, re-engineer your financials, train the team, and tailor solutions to your business. This type of work is hard work, not just advice. It’s hard work for you and for us. The hard work is how we maximize your enterprise value. Would you rather work hard to maximize enterprise value or leave money on the table for others to capture?

Fenwick’s approach to maximize enterprise value has three key priories:

• Grow your EBITDA

• De-risk your business

• Add fundamental processes to your business that allow it to scale

By focusing on these key priorities, at the end of our journey, we enable you to have an increased number of options for the exit of your business. Following our engagement, Buyers will have a sense of confidence that your business is safer, generates more cash flow, has processes enabled for growth, and the business can be transitioned more easily from your to them. Your business will be more attractive to not only private buyers, but also to Strategic and Private Equity buyers. And, you want to know they best part? They will be more than happy to pay a premium for your premium business.