How do you avoid being disappointed with the money you make from the sale of your company?
Perhaps you’ve heard that companies like yours trade using an industry standard, like 1.5 times turnover. Or that companies of your scale sell within a certain range, and you want to get something similar at least.
While these rules of thumb can be useful for tax planning or a divorce settlement, they may not be the best ways to value your company.
The Only Valuation That Really Matters
In reality, the only valuation that will ensure you are happy with your exit is for you to place your own value on your business. What’s it worth to you? What is all your “sweat equity” worth? Only when you’re clear on that will you ensure you are satisfied when you come to sell your business.
Take Mainspring Healthcare as an example. Hank Goddard started Mainspring back in 1993. They develop an application for hospitals to keep track of their equipment which evolved into a slick programme used by hospital workers to order supplies.
Goddard and his partner started the business by asking some friends and family to invest. The business grew with the inevitable challenges along the way. Goddard had to fire his entire management team in the early days, product issues needed to be solved and operations needed to be better coordinated.
At times, it was a grind, so when it came time to sell in 2016, Goddard reasoned that he had invested more than half of his career in Mainspring and he wanted to get paid for that. He also wanted to ensure his original investors got a decent return on the risk they had taken to help him start the business.
He was approached by Accruent, a company in the same industry, who made Goddard and his partners an offer of one times revenue. Accruent had recently acquired one of Goddard’s competitors for a similar value, so presumably thought Goddard would see this as a reasonable offer.
Goddard dismissed it as completely unacceptable. He had decided he wanted five times revenue for his business. Even though the company was growing strongly and in an attractive industry, five times revenue was optimistic, but Goddard stood firm. Five times revenue is what it was worth to him.
A year later, Accruent came back with an offer of two times revenue and, again, Goddard turned it down.
Mainspring had developed a new application that was quickly gaining traction and he knew how hard it was to get into the hospitals he already counted as customers.
He reiterated that his number was five times revenue… in cash.
Eventually Goddard got his number.
Being clear on your number, before going into a negotiation to sell your business, can be helpful when emotions start to take over. Rather than rely on industry benchmarks, the best way to ensure you’re not disappointed with the sale of your business is to decide up front what it’s worth to you.
And then, like Hank, you can work towards making it worth that much. A few simple tweaks could double, triple or quadruple the value of your business to the right buyer. All it takes is knowing the right levers.
To identify which levers will make the biggest difference to the value of your business click the button below to obtain your personalised value-builder report.