March 23, 2021 //
Steps to Selling your Business Part 7.
A wise colleague once told me that investors look at lines, not dots. Almost too simple as maxims go, but it has proved worthwhile. I try to keep this word picture in front of me when interacting with potential buyers.
Lines, not dots, means you show investors the trajectory of your company, a line that depicts growth potential. For example, you can show an investor a company with $25 million in revenue as a moment in time, a dot on a graph; however, investors want to see the line that shows where you are going – your growth potential.
Short of an infallible psychic prediction, the only way you can present the future to a buyer is through a clear presentation of your forecasted growth.
The predictors of your company’s future performance may include your growth strategy, projected earnings and losses, risk, and other factors that are all put through an algorithmic operation to produce the infamous Multiple.
This Multiple is what will transform your current earnings picture into your final sale valuation. It’s a simple equation with a significant impact:
What is your Multiple? A comfortable 7? A risky 3? Are you worth a 12? The Multiple is the number that every person involved in the sale will be considering and discussing. Two critical components in setting the Multiple are growth and stability. Low growth typically means a lower Multiple; high growth a higher Multiple. Stability often allows for a higher Multiple; volatility (read: risk) a lower Multiple or more contingent-based sale price.
A clear presentation of your business’s full story will go a long way since it demonstrates factors such as a robust growth strategy or mitigation against some of the risks a buyer takes on. We have to be ready for some high-stakes negotiations. Trying to move someone who already has a fixed idea of what the Multiple should be is a challenge. As such, we need to have shields up and swords drawn around it.
The Multiple and the Earnings are wrapped in your and your advisor’s credibility. If we’ve done good work drilling down into the essence of your company and presenting the earnings in a cohesive and rational way, buyers are more inclined to listen to us on the entire equation, Multiple included. When buyers start listening and can see the Multiple and Earnings number, a promising line to your valuation number is created.
Stillwater can help you uncover and identify your Earnings potential and provide a reasonable expectation of the valuation you should expect when you sell. Buyers want to see your growth potential, and Stillwater will help position your Multiple and Earnings number in discussions with prospects. Getting this right is critical to directing the final sale price of your business.
In our next installment, we will highlight three bad business habits that we have observed which Canadians are particularly in danger of developing.