Tag Archives: Sellability Score

How To Lure A Giant Like Facebook Into Buying Your Company

Republished with permission from Built to Sell Inc.

A great business is bought, not sold, so, if you look too eager to sell your business, you’ll be negotiating on the back foot and look desperate—a recipe for a bad exit.

But, what if you really want to sell? Maybe you’ve got a new idea for a business you want to start or your health is suffering. Then what?

As with many things in life, the secret may be a simple tweak in your vocabulary. Instead of approaching an acquirer to see if they would be interested in buying your business, approach the same company with an offer to partner with them.

Entering into a partnership discussion with a would-be acquirer is a great way for them to discover your strategic assets, because most partnership discussions start with a summary of each company’s strengths and future objectives. As you reveal your aspirations to one another, a savvy buyer will often realize there is more to be gained from simply buying your business than partnering with it.

Facebook Buys Ozlo

For example, look at how Charles Jolley played the sale of Ozlo, the company he created to make a better digital assistant. The market for digital assistants is booming. Apple has Siri, Amazon has Alexa and the Google Home device now has Google Assistant built right in.

Jolley started Ozlo with the vision of building a better digital assistant. By 2016, he believed Ozlo had technology superior to that of Apple, Amazon or Google. Realizing his technology needed a big company to distribute it, he started to think about potential acquirers. He developed a long list, but instead of approaching them to buy Ozlo, he suggested they consider partnering with him to distribute Ozlo.

He met with many of the brand-name technology companies in Silicon Valley, including Facebook, which wanted a better digital assistant embedded within its messaging platform. They took a meeting with Jolley under the guise of a potential partnership, but the conversation quickly moved from “partnering with” to “acquiring” Ozlo.

Jolley then approached his other potential partners indicating his conversations with Facebook had moved in a different direction and that he would be entering acquisition talks with Facebook. Hearing Facebook wanted the technology for themselves, some of Jolley’s other potential “partners” also joined the bidding war to acquire Ozlo.

After a competitive process, Facebook offered Jolley a deal he couldn’t refuse, and they closed on a deal in July 2017. Jolley got the deal he wanted in part because he was negotiating from the position of a strong potential partner, rather than a desperate owner just looking to sell.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

How To Avoid Disappointment When It’s Time To Cash Out

Republished with permission from Built to Sell Inc.

How do you avoid not 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 rule of thumb or that companies of your size sell within a specific range, and you want to get at least what your peers have received.

While these metrics can be useful for tax planning or working out a messy divorce, they may not be the best ways to value your company.

The Only Valuation Technique That Really Matters

In reality, the only valuation technique 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 to keep it? What is all your sweat equity worth? Only when you’re clear on that will you ensure your satisfaction with the sale of your business.

Take Hank Goddard as an example. He started a software company called Mainspring Healthcare Solutions back in 2007. They provided a way for hospitals to keep track of their equipment and evolved into a slick application that hospital workers used to order supplies.

Goddard and his partner started the business by asking some friends and family to invest. The business grew, but there were challenges along the way: Goddard had to fire his entire management team in the early days, product issues needed to be solved and operational issues needed to be resolved.

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 his life’s work. He also wanted to ensure his original investors got a decent return on their money.

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 this was a fair offer.

Goddard brushed it off as completely unworkable. Goddard had decided he wanted five times revenue for his business. Even for a growing software company, five times revenue was a stretch, but Goddard stuck to his guns. That’s what it was worth to him to sell.

A year after they first approached Goddard, Accruent came back with an offer of two times revenue and, again, Goddard demurred.

Mainspring had developed a new application that was quickly gaining traction and he knew how hard it was to sell to the hospitals he already counted as customers.

He told Accruent his number was five times revenue in cash.

Eventually Goddard got his number.

Being clear on what your number is 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.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

One Tweak That Can (Instantly) Add Millions To The Value Of Your Business

Republished with permission from Built to Sell Inc.

If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.

A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

Obsessing Over Your Multiple

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.

Obviously, your multiple will have a profound impact on the haul you take from the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.

How Profitability Is Open To Interpretation Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.

This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in
revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.
Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, one-off lawsuits or insurance claims and one-time professional services fees.

Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Why Startups Stall

Republished with permission from Built to Sell Inc.

Have you ever wondered why startup companies stop growing? Sometimes they run out of potential customers to sell to or their product starts losing market share to a competitor, but there is often a more fundamental reason: the founder(s) lose the stomach for it.

When you start a business, the assets you have outside of your business likely exceed those you have in it, because in the early days, your business is worthless. As your company grows, it starts to have value and becomes a more significant part of your wealth—especially if you’re pouring your profits back into funding your growth.

For most business owners, their company is their largest asset.

Eventually, your business may become such a large proportion of your wealth that you realize you are taking a giant risk every day that you decide to hold on to it just a little bit longer.

95% Of His Wealth In One Business

In 2000, Etienne Borgeat and Olivier Letard co-founded PCO innovation, an IT consulting firm. The company took off and, by 2016, PCO had 600 full-time employees and offices around the world.

As the business grew, Borgeat and Letard started to become uneasy about how much of their wealth was tied up in their business. By 2015, the shares Borgeat held in PCO represented 95% of his wealth.

That’s about the point that aerospace giant Boeing came calling. Boeing wanted PCO to take on a very large project and Borgeat and Letard turned down the opportunity reasoning that the project was so large it could risk their entire company if it went wrong. In the early days, the partners would never have turned down a chance to work with Boeing, but the partners had changed.

That’s when Borgeat and Letard realized the time had come to sell. They agreed to an acquisition offer from Accenture of over one times revenue.

The success of your startup is probably driven by your willingness to put all your eggs in one basket. You’re all in. However, at some point, you may find yourself starting to play it safe, which is about the time your business may be better off in someone else’s hands.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

The Downside of Being Upfront with Employees

Republished with permission from Built to Sell Inc.

One of the core principles of creating a more valuable business is ensuring it can run without you by getting managers to think like owners.

The theory goes that empowered employees are the best positioned to solve your company’s thorniest issues, as they are the ones closest to the problems. In theory, people feel more like they are part of a bigger cause and this has the potential to contribute positively to a company’s culture.

American Data Company

Potential is used because being too open with employees can also backfire. To illustrate, let’s look at the example of American Data Company, founded by Josh Holtzman in 2003. Holtzman had built his consulting business up to more than $3 million in revenue by 2011, when he came up with the goal of building it to be a $15- million business. Holtzman knew that a $15-million business would have the scale to provide his employees with more opportunities and a better exit multiple if he ever wanted to sell.

Fifteen Cubed – The Goal of Getting to $15 Million

To galvanize his team around the idea of getting to $15 million, Holtzman came up with a catchy concept he dubbed “Fifteen Cubed”. The idea was that his team would help him build American Data to $15 million in annual revenue by the year 2015 and, if successful, he would share 15% of the proceeds of the sale with his staff as part of a phantom stock option program.

Holtzman announced the goal and bought Fifteen Cubed bracelets for each of his employees to wear as a reminder of their collective goal and how they stood to gain personally if they were able to achieve their common goal.

Initially, the program was received positively, but a year after the announcement, American Data had failed to grow. Another year went by and still American Data was stuck at $3 million to $4 million in revenue.

Suddenly, the prospect of hitting $15 million looked like a long shot. Ultimately, the only way Holtzman could hit the goal was to merge his company with a much larger one, which is what he did when he swapped his equity in American Data for a minority take in Magnet 360, a consulting company about five times bigger.

The merged companies exceeded $15 million in combined sales and Holtzman’s employees were able to participate in Magnet 360’s phantom stock option program, even though their portion of the proceeds was diluted when American Data merged with Magnet 360. It was a good outcome for all involved, but not quite the home run Holtzman had imagined when he first announced the $15 million revenue goal.

Keeping Employees in the Know

Being open with employees can be a great energy boost when things are going well. Employees see the charts and graphs all moving up and to the right and that can contribute to a positive vibe in the office. But just like using leverage when buying a house can boost results in a good market and magnify mistakes when things turn down, being open has the potential to backfire dramatically if you don’t reach your projected numbers.

As an entrepreneur, you can handle a high degree of ambiguity and you probably have an abnormally high degree of optimism. Just remember the people who work for you have chosen not to be entrepreneurs and for some of them, there may be such a  thing as too much information.

 

 

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

5 Lessons From Home Depot’s Acquisition of Blinds.com

Republished with permission from Built to Sell Inc.

Jay Steinfeld built Blinds.com into a $100 million e-tailer before selling out to Home Depot. Here are five things that made it a spectacular exit.

Win The Make vs. Buy Battle

Companies like Home Depot have a “make or buy” decision when they see a competitor winning market share. They can opt to buy the competitor or choose to simply re-create what they have built.

An acquirer will likely opt to buy your company if you are so dominant in your niche that recreating what you have built would take too long and cost more than acquiring it from you.

Blinds.com got acquired, in part, because they were a big fish in a small pond. At more than $100 million in revenue, they were the largest online retailer of blinds in America by a long shot. Even though Home Depot has close to $90 billion in sales, Blinds.com were outperforming them in their tiny niche and that made Blinds.com irresistible to Home Depot.

Run It Like It’s Public

At the time of the Home Depot acquisition, Blinds.com had 175 employees, yet Steinfeld had been running the company as if it were public for years. He had put together a top-drawer management team and taken the unusual step of assembling an outside board of directors. He had quarterly board meetings with formal presentation decks, and Steinfeld hired a Big Four firm to complete a full audit of his financials each year.

Steinfeld credits this rigorous approach to running a relatively small company as a major reason Home Depot was interested in Blinds.com and able to close on the acquisition so quickly.

Keep Most Of The Equity

Steinfeld invested $3,000 of his own money into a basic online presence for his blinds store back in 1993 and grew Blinds.com to more than $100 million in sales without diluting himself by taking three or four rounds of institutional investment, as would be typical of an internet start-up. Steinfeld took a small investment from friends and family and used bank debt to help him buy distressed companies for pennies on the dollar. It wasn’t until 2012—almost 20 years after starting the business—that he accepted his first round of “professional” money from a private
equity firm who wanted to invest more, but Steinfeld refused, only taking enough to buy out a few of his original investors and pay off some debt.

Keep Investors Aligned

One of the reasons Steinfeld accepted an investment from a private equity group was that he had become misaligned with two of his original investors. The investors saw the success of Blinds.com and wanted Steinfeld to start declaring regular dividends. Steinfeld, by contrast, was focused on building a growth company and needed the cash to fuel his 25% per year growth. After a while, his investor’s expectations got so far out of whack that Steinfeld opted to buy them out.

Share The Love

One of Steinfeld’s best memories is the day he told his employees Home Depot had acquired Blinds.com. Steinfeld had made sure every one of his 175 people had Blinds.com stock options and so stood to gain financially from the sale. Steinfeld went further and gave each employee $2,000 of his own money to start an investment account as a personal thank you for all they had done.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

5 Reasons Why Now Might Be The Right Time To Sell

Republished with permission from Built to Sell Inc.

Are you trying to time the sale of your business so that you exit when both your business and the economy are peaking?

While your objective to build your company’s value is admirable, here are five reasons why you may want to sell sooner than you might think:

1. You May Be Choking Your Business

When you start your business, you have nothing to lose, so you risk it all on your idea. But as you grow, you naturally become more conservative, because your business actually becomes worth something. For many of us, our company is our largest asset, so the idea of losing it on a new growth idea becomes less attractive. We become more conservative and hinder our company’s growth.

2. Money Is Cheap

We’re coming out of a period of ultra-low interest rates. Financial buyers will likely borrow money to buy your business so—at the risk of over simplifying a lot of MBA math—the less it costs them to borrow, the more they will spend to buy your business.

3. Timing Your Sale Is A Fool’s Errand

The costs of most financial assets are correlated, which is to say that the value of your private business, real estate and a Fortune 500 company’s stock all move in roughly the same direction. They all laid an egg in 2009 and now they are all booming. The problem is, you’ll have to do something with the money you make from the sale of your company, which means you will likely buy into a new asset class at the same frothy valuation as you are exiting at.

4. Cybercrime

If you have moved your customer data into the cloud, it is only a matter of time before you become the target of cybercrime. Randy Ambrosie, the former CEO of 3Macs, a Montreal-based investment company that manages $6 billion for wealthy Canadian families decided to sell in part because he feared a cyber attack. Ambrosie and his partners realized they had been under-investing in technology for years, at a time when cybercrime was becoming more prevalent in the financial services space. Ambrosie decided to sell his firm to Raymond James because he realized the cost for staying
ahead of hackers was becoming too much to bear.

5. There Is No Corporate Ladder

In most occupations, the ambitious must climb the ladder. Aspiring CEOs must methodically move up, stacking one job on the next until they are ready for the top post. They have to put in the time, play the right politics and succeed at each new assignment to be considered for the next rung.

By choosing a career as an entrepreneur, you get to skip the ladder entirely. You can start a business, sell it, take a sabbatical and start another business and nobody will miss you on the ladder. Your second (or third) business is likely to be more successful than your first, so the sooner you sell your existing business, the sooner you get to take a break and then start working on your next.

It can be tempting to want to time the sale of your business so that the economy and your company are peeking, but in reality, it may be better to sell sooner rather than later.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Why Now Is The Riskiest Time To Own Your Business

Republished with permission from Built to Sell Inc.

Most people think of starting a business as risky, but unless you invest a significant amount of start-up cash in your venture, you’re not really risking much other than your time.

That changes if you’re lucky enough to get your business off the ground. As your company grows, you start to risk more and more of your wealth because the business you’ve built is actually worth something. The longer you hang on to it, the more you have to lose.

This phenomenon makes owners become more risk averse as their business grows, potentially squeezing off growth to avoid risking what they’ve created. This can mean the owner goes from a company’s great asset to its biggest liability.

Cigar City Brewing

For an example of how growth can impact an owner’s appetite for risk, let’s look at the case of Joey Redner, the founder of Florida-based Cigar City Brewing. Redner’s craft beer operation started off in 2009 with the relatively modest goal of selling 5,000 barrels of beer per year.

Cigar City proved popular with the locals and Redner was able to sell 1,000 barrels of beer in his first year of business.

Cigar City Brewing continued to grow but was thirsty for cash, eventually forcing Redner to take on an SBA loan. Redner quickly surpassed his 5,000-barrel goal, and by 2015, had scaled all the way up to 55,000 barrels per year, at which point he ran out of capacity in his brewing facility.

To get to the next level, Redner would have had to find another $20 million for a major expansion, but he was tired of the feeling of being “all in” at the poker table. He had built something successful and wanted to enjoy financial security rather than having to roll his winnings into even more debt that he would have to personally guarantee with the bank.

Redner decided to sell even though his business was still growing and he had built a brand Floridians loved. And therein lies one of the hidden reasons owners decide to sell. They are tired of shouldering all of the risk. Most of us have a limited appetite for risk, and as the Bob Dylan song goes, “When you ain’t got nothing, you got nothing to lose.”

Start-ups aren’t risking much, but when you build something successful, every day that you decide to keep it is another day you have all (or most) of your chips on the table, and no matter how strong your hand, eventually we all decide to cash in.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.