Selling your business - part 1.
I thought I'd try an SEO friendly blog title for once, after I had an alert to tell me my best ranking blog so far on Google was ranking 20th for the phrase "my darkest moment" (read the infamous blog here).
So, hopefully you've found this blog from the 1st search position on Google because you want to learn about selling your business.
My goal with this blog mini-series it to be relevant to you, whatever stage of the journey you're at. From aspiring founders that haven't yet made the leap, to tired founders that are in the midst of due diligence.
I only have one experience of the process (you could call it a 100% success record... details here), so please take any advice with a pinch of salt. I'm sure all processes are different.
Now I'm very aware that not everyone wants to sell their business. But, if that's the case then a blog titled 'selling your business' might not be the one for you. So any advice below is on the assumption that you do want to sell your business one day...
Me and Steph, approximately 15 seconds after signing the paper work to sell Molzi.
In part 1 of this blog series I'm going to focus on one of the things that can really drive wealth for you as a business owner.
At the earliest possible opportunity I would suggest you have a think about who might buy your company one day. And I mean really think about it. Not just, 'a bigger company will buy us'.
In general, companies are valued on a multiple of EBITDA (profit basically). So if you build your business to generate £1m profit per year, and your company is valued at a 5x multiple, your business will be worth £5m.
So the goal to generating maximum wealth from the sale of your business is making it as profitable as possible, and getting as high a multiple as possible.
Getting the higher multiple is the cheat code here.
If you can get a multiple of 8x rather than 5x, then you only need to build your business to generate £625k profit per year to get the same value as a £1m profit business getting a 5x multiple.
Very broadly speaking, most growing, profitable service businesses sell for between 4-6x multiples. If the business is small, or not growing then potentially the multiples could be even lower.
In order to get a real life changing payout with a 5x multiple, you really need to build your business to at least £500k annual profit. That would likely give you around £2m after taxes and transaction fees, assuming you're the sole shareholder.
But if we can find a way for a buyer to give a 10x multiple on the same business, you'd be walking away with around £3m in your pocket. So it's worth giving it some thought!
So how might we command a higher multiple?
In the above example, it's literally the £1m question.
To find the best multiples, you need to think about the benefit that your business would bring to a buyer.
Do you open up a new geographical market for an existing company?
By buying your business, they could quickly increase the contracts for their existing clients into your region. In that example, the value of your business becomes the value of the expansion opportunity for the buyer, rather than specifically the financial metrics of your business.
Do you offer a new service offering for an existing business?
As above, but instead of your business allowing the buyer to expand into new regions, you allow them to easily upsell your service or product to their existing revenue base.
Do you make them sexy?
Big, established businesses, that tend to be the ones performing regular M&A activity, are not quick to react to market trends. But they really don't want their existing clients searching for new agencies to service new platforms. So they buy companies in order to add new capabilities to their offering.
In this case, your value is really being compared to how expensive it would be for them to develop the capability themselves, and how much business they would lose whilst building it.
Do you increase their own multiple?
Over the last few years, many fast-growing independent businesses have taken on private equity investment in order to acquire other businesses and accelerate their own growth rate.
The goal of the private equity investor is to support the business to grow significantly over a 3 or 4 year time period and then sell to the next investor for a high return. This means that the buyer is also looking for ways to increase their own multiple as well as their financial metrics.
So if your business will help the private equity company achieve a higher multiple on the overall group when they come to sell, then you will bring huge value, likely far greater than any multiple of your own profit.
The above are just a handful of examples, but really the point I'm making is that you don't just need to wait until someone offers to buy your business one day. You can design your business to appeal to the types of buyers that will pay you the most money.
In part 2, I'll cover some ideas that will get you noticed by those buyers that are going to pay you millions!