In case you didn’t know it, I’m going to share a secret: I once dreamt of going to Harvard. This was a long time ago, and in a different college admissions era, but I thought that I was pretty hot stuff in high school as a class officer, newspaper editor, high scorer in the “morning activities” (grades and SAT scores) if not in the “afternoon events” (varsity letterman, but far from a star). Like several thousand other aspirants, I filled out my application, sent it in, and held my breath â€” which wasn’t easy to do from December until April.
I thought of this a couple of weeks ago as grandson Noah, a talented high school junior, spent a night with me while embarking on his first college tour during his winter break. Unlike his grandfather decades ago, but like most of his 2012 peers, Noah knows something about the admissions game. Where I applied to just two colleges (an early admission to Bowdoin relieved the pressure), Noah is developing his hierarchy of possibilities, hedging his bets, trying to appear committed in his conversations with admissions officers and college soccer coaches while remaining non-committal in his head.
His dream is to go to a college at which he can be both an athlete and a scholar, without being typecast as either one. In coming months, he’ll expand his list as well as his criteria while no doubt increasing his focus on the few schools that he considers to be the best match for his interests. And then he’ll start to dream, especially after his applications go in the mail: “Here I am at Princeton [or Middlebury, or Tufts, to mention a few early contenders]. The world is my oyster. How can I maximize the return on my four-year investment here?”
Coincidentally, I’ve heard the same question from three of my small business owner clients in recent months, each of them in various stages of trying to actualize their returns on many more than four years of investment. Each in their businesses has created an asset of value, but they’re approaching the far end of the timeline of personal return that starts in college or earlier. They have revenues, they have profits, and they have strong competitive positions in their respective markets.
As well, they’ve heard of various rules of thumb in determining value, from basic net worth to multiples of revenue to multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to rumors of the price commanded by other companies in the industry. In most cases, even a casual conversation on this topic has been enough to wake them up to pay attention.
But what they have found in seeking admission to the merger and acquisition market place is that there are some additional considerations in the process of value maximization for successful small businesses. Among them are the following:
- A continuing revenue stream: Major valuation benefits accrue to the firms that have a high persistency of customers/clients vs. those that start from zero each year.
- You can’t escape history: What you’ve done in the past few years is the best predictor of what you’re going to do in the future. Absent unique factors, your 5-10% historical growth rate isn’t going to morph into 15-20% overnight.
- You make it happen â€” and then you’ll get paid out. If a significant part of your company’s value is future-based, your post-sale proceeds similarly will be future-based.
- The financial acquirer may pay a multiple of your current profit or EBITDA, balanced against his/her risk. The less certain your future earnings, viewed in the context of your historical results, the lower the multiple.
- On the other hand, the strategic buyer may be willing to overlook your spotty financial history if parts of your business can add value to his/her current operations. But the other parts, including you and your senior staff, may not survive the deal.
- If your “special sauce” â€” the ingredient that makes your company stand out in the marketplace â€” isn’t bottled and sealed with non-compete agreements and/or intellectual property rights, you may have nothing to sell.
- Your buyer may dream of adding significantly to the company’s profitability by changing its culture: A new emphasis on productivity could be a nightmare for your loyal staff, on which your long-term payout depends.
In pursuing his or her dreams of a brilliant exit, the entrepreneur needs an occasional stock-taking to make sure that the package that he or she is creating fits not only with the general conditions described above, but also with the peculiarities of the industry. Better to spend a little time along the way with an investment banker (i.e., dream analyst) for a reality check than to be awakened (rudely) by offers well below your expectations.
So what happened to my dreams about Harvard, you ask? Well, even if you don’t ask, just let me tell you that when I received the fat envelope from Cambridge on that happy April morning sometime in the last century, the subsequent rude awakening was all Bowdoin’s.