Why Are You Focused on Your EBITDA Multiple?

Here is one truism I can hang my hat on–every business owner thinks their business is worth far more than it really is. But God forbid they think a business they are buying is worth what the owner believes he/she values it to be. For whatever reason, they choose not to use the same logic in valuing their business that they did for someone else’s. I wonder why.

When I’m engaged in these types of discussions, ultimately I’m asked what multiple (of EBITDA) they could obtain from a buyer. Like my answer is going to be some financial rite of passage if I say 5x, 6x, or 7x.

But I never answer this question. It’s not even the right one to ask. The right question is far better. Is my business sellable? That’s the right question.

If the answer is, “Yes,” we have a second question. How do we make the business even more sellable or more attractive to a buyer?

Business owners control whether their businesses are sellable or not. Making the business more attractive improves the odds of sellability, and that is controllable too.

Attributes Tilting the Odds Toward Sellability

There are multiple factors that increase the chances of not only selling your business, but obtaining a higher purchase price if you work on just three primary initiatives. Even if you are not looking to sell soon, here are three strategies that will increase your cash now and later.

The business is not fully dependent on the owner. This is a killer for most small businesses with sales especially under $3 million. Many of these smaller businesses are heavily dependent on the owner. Success or failure depends on the actions of the owner. And that’s because the owner has not built a team around himself that can run or manage the business.

My favorite litmus test for this attribute is pretty simple. I ask the business owner what would happen if he/she walked away from the business for three months. What happens to the business? Most answers are the same–the business would begin to crumble.

Building a solid business model that’s repeatable and not fully dependent on the owner will be far more sellable than one that is not. In this scenario, the owner should be building, strengthening, or expanding the brand. His team should be the ones executing the ideas of the owner. That’s sellable.

The business is not dependent on just one big customer or a small handful. Again, another killer if the business has a high concentration risk of just a few customers. But we need to throw in customer segments too. If a business is highly dependent on one customer segment of a large market base, this also hurts sellability.

I have found one workaround to the one-big-customer problem. Get a contract. A long one. Assuming the customer has a strong balance sheet, this can help offset the high concentration of the one or few big customers.

The business has a crappy P&L and Balance Sheet. The balance sheet isn’t necessarily the biggest issue. Although, you will encounter skeptical buyers if you have some serious problems with your receivables and inventory.

The bigger issue is declining sales, declining gross margins, and eroding net margins. If this is happening, your exit is probably an orderly shutdown. You might get lucky and find a buyer, but good luck on this one. If the goal is truly a high probability of selling to a third party, get help in turning sales around. Get help in fixing your margins.