Most business owners would not sell their business for less than a 2x EBITDA multiple because they could just continue to own and run the business for 2 more years and make the same amount of money. The question is how do you prepare your company to have that 5x or higher valuation? See below the reasons we have found past clients did NOT receive the desired valuation they were looking to obtain.
· Too Small – We have found that if you are under $500k adjusted EBITDA (email us and we can discuss what adjusted means) the valuation will most likely be under 5x.
· Weak Management Team – This does not mean you need a large management team, but it
does mean you have delegated most business functions so your focus is only on “directing
the ship”. It’s risky for a buyer if “you” are the business.
· Commoditized Product / Service – If the pricing of your product or service is only based on
market supply and demand despite the input costs and, therefore, you cannot have
consistent margins, your valuation will suffer.
· Lack of Profitability Tracking – If you are unable to track revenue by client, costs to acquire
clients, costs to retain clients, profitability by product or service line, it is not a dealbreaker;
but acquirers will view your business as a riskier investment given the lack of insight.
· High Customer Concentration – If ~40% or more of your revenues come from one or a
couple clients, this will most likely hurt your valuation.
· Inconsistent Revenue/Profitability – most buyers used debt to buy a business so if they
deem your revenue unsustainable, and therefore unable to cover debt payments, they will
lower their valuation.
· Remote Location – This is not as important as the others because you should not change
the location of business to attract an investor. But, if you can run remotely, this can help
increase the valuation due to the lower cost of operations.
· Messy Capitalization Table – With the caveat that there are investors/acquirers that buy
companies for the purpose of cleaning up the cap table, if you have more than 10
shareholders, buyers have to take the risk that one or a few don’t agree to the terms and
hold up the sale after hundreds of thousand of dollars have been spend on diligence.
If you have a particular thought in mind that we can help with, please feel free to contact us for a Confidential & Complimentary discussion.