I put that question to the head of mid-market M&A for a Toronto-based investment bank specializing in selling companies worth between $10-million and $100-million.
“Typically, a client calls us because they have been approached out of the blue by a buyer,” said my banker friend, who requested anonymity.
He explained that an unsolicited advance causes a business owner to start thinking about what the business might be worth.
And the second most common trigger? “It’s typically a health scare,” he said. “The owner, a close friend or spouse has a health issue, which causes them to reflect on how short life really is.”
What I found interesting was that in both cases (health scare or unsolicited offer), the trigger was externallygenerated instead of a business owner taking a proactive approach to exit planning. I wrote about the consequences in my Globe & Mail column this week.
Book launch party invitation…
Books for Business in Toronto is hosting a book launch party for Built To Sell: Turn Your Business Into One You Can Sell coming up on Wednesday February 24, 5pm-7pm. Please email Rachel@BuiltToSell.com for the details and to RSVP. Hope you can be there.
A business owner I know recently told me that, instead of giving his money to his kids when he dies, he plans to give it all to charity.
Another entrepreneur I know of (let’s call him a friend of a friend) has hundreds of millions in the bank. He spends it on yachts, cars and minor league sports franchises. He has more money than most of us would ever want or need, yet he is miserable.
I think we’d all agree that having enough money to do the things we want to do is important, but is there a point where too much money is a bad thing? Is it possible the marginal value of money is actually negative?If the answer is yes, what implications does this have for how big you want your company to get or how long you’re willing to run it before you look for an exit?
Let’s test this idea.
Imagine you and your family have just arrived in a new country with not much more than the clothes on your backs, and some kind soul hands you a check for $100,000 and tells you it is yours, no questions asked. One hundred thousand dollars would be enough to buy winter clothes for your kids, get food on the shelves, and buy you a computer and suit so you can find a job. You could get a place to live and fund the necessities of life while you get established into a job or your business gets off the ground. How life-altering would that $100,000 be? On a scale of 1 to 100, I’d imagine it would be close to 100.
$500,000 – $1,000,000
Now let’s say you have worked hard and built up a nest egg of $500,000, and someone hands you a check for $500,000. Wow, half a million dollars. Most people would blow a bit and use the rest to pay down their mortgage. Five hundred thousand dollars is a great windfall but not necessarily as life-altering for you as the $100,000 would be for the newcomer, even though the check is five times bigger.
$5,000,000 — $6,000,000
Now let’s say you’ve been wildly successful and have made it into the top 1 per cent wealthiest people in the country. Your net worth is $5-million; your house is paid for; the kids are through college. And someone hands you a check for $1-million. A great gift to be sure, but would it change much? Maybe it would give you an extra bit of safety, an opportunity to travel a bit more or buy another property, but I’d imagine the $1-million check would not make much of a difference to your overall life experience, even though it is ten times the size of the check the newcomer got.
$20,000,000 – $120,000,000
Finally, let’s say you have $20-million. With $20-million, you have enough money to fund the whim or fantasy of any normally adjusted person. What if someone gives you a check for $100-million? Now what? Would the extra $100-million be worth the hassle? What if you followed the stereotypical pattern of most people who quickly accumulate that kind of money: buy a yacht or a second (or third) home so you can “escape” your 20,000-foot primary residence; throw lavish parties and invite important people. Would people start noticing all of that money and figure you’ve got a lot to throw around? Would someone steal the Ferrari out of your driveway? Would you start to worry more about security? Would your kids become spoiled brats? Would you strive for bigger and bigger purchases looking for that high you first achieved when you were starting out? Would you get overwhelmed with the added complexity of maintenance contracts, more staff, more lawyers and managers and paperwork?
Would life be better with $20-million instead of $120-million? How about $5-million instead of $20-million? What about $1-million instead of five? How big do you want your company to get before you sell it?
What is the number at which you optimize the benefits of wealth without all of the nasty side effects? How much would someone have to offer you for your business in order for you to walk away? Or do you love your business so much you’d be willing to run it—like Vikram Pandit of Citigroup did in 2009—for $1 a year?
What’s your best before date?
Here’s a video describing the trigger that caused me to want to sell my latest business:
Built To Sell starts shipping this Monday. Pre-order your own copy from Amazon.
Would you buy a business named after its founder if he or she was leaving? Does using your family name in your company name limit your exit options?
I’d like to make the case that you can indeed build a sellable business even if you have your family name on the door.
Enzo Ferrari built a nice little car company.
William Harley and Arthur Davidson created a lasting motorcycle brand.
You have Torakusu Yamaha to thank if you like playing a Yamaha guitar or riding a Yamaha snowmobile.
Jack Warner started Warner Bros. of Harry Potter fame.
Millions of British University students would be stuck in their dorm rooms over Easter had it not been for Tony Ryan starting Ryanair.
All of these entrepreneurs found a way to separate themselves personally from their businesses and build independent, enduring companies that could be sold or otherwise live on without them at the helm.
In my case, I sold Warrillow & Co. to the Corporate Executive Board in 2008. From the start, I knew having my surname in my company name could be a problem when it came time to sell, so I went out of my way to distinguish myself from my company. For example, when we published a piece of research, we would merchandise the researcher as the author. Each of our managers was asked to speak at conferences and workshops. My role at the Warrillow Summit started to decrease as other senior leaders took on bigger and bigger roles. I went from doing four keynote presentations at the 2003 Warrillow Summit to simply thanking people for coming at the 2008 Warrillow Summit.
I wrote about how to create a sellable business even if your name is on the door in an article for Canada’s national newspaper, The Globe and Mail, this week.
Is your family name in your company name? If so, how have you separated your business from you personally?
Should you share equity with key employees? Few questions have produced such polarized responses. I’ve personally debated this subject with a number of entrepreneurs and advisers I trust and respect, and I’ve found that equally smart people have opposite views. I have rarely come across such a divisive issue with two such seemingly opposite philosophies. There seem to be two camps and no definitive “right” answer. Let’s explore the basic arguments of both.
The “share equity” camp
Some entrepreneurs are quick to share equity with their key employees. They argue that nothing better motivates employees and aligns them with the long-term value of the business. The “share equity” camp says that you can pay employees below market rates if you’re willing to share equity, which preserves your cash. They argue that employees will be more loyal if they have a piece of the action. Finally, employees with equity enjoy the favorable tax treatment of a capital gain when you sell instead of the higher tax treatment of bonus income.
The “do not share equity” camp
There is another school of thought that sharing equity with key employees is a mistake. These entrepreneurs argue that, beyond the obvious dilution of your stake, sharing equity is risky because employees are not sophisticated enough to understand equity. They contend, too, that being a minority shareholder in a privately held company is next to worthless given that the majority shareholder may never choose to sell and can manipulate the numbers in order to avoid paying dividends to minority shareholders while paying themselves handsomely. The “do not share equity” camp asserts that the small potential bump in employee loyalty and alignment is far overshadowed by the complexity of creating and managing a set of minority shareholders.
In the four companies I’ve owned, I’ve tried both, and I admit I’m in the “do not share equity” camp. I’ve found that people who are given equity have no appreciation for the cost of creating that value. If people buy equity, that’s different, but in my experience, people who are given equity change their day-to-day behavior little or not at all, yet the resulting complexity and dilution can be daunting.
I prefer retaining 100% of the equity and using a Long-Term Incentive Plan (LTIP) for motivating and driving employee loyalty. In an LTIP, a portion of the employee’s bonus is set aside in a pool they can withdraw from over time. There’s a sample plan you can use as a template here.
What camp are you in? Do you share equity with your employees? If so, what has your experience been?
I just wrote a controversial article for The Globe & Mail suggesting business owners consider following Michael Dell’s footsteps by charging the customer before providing the product/service. Based on the tenor of the reader comments, my article seems to have touched a raw nerve with their readers. You can read the comments here but suffice it to say, most were appalled by the idea of charging up front. The piece was the second most emailed article on the newspaper’s site yesterday.
I’m surprised at the controversy because charging up front was never much of a problem for any of the companies I’ve owned. In my last business, we charged up front for a yearlong subscription. That way, I could use our customer’s money to finance our growth and didn’t need to go to outside investors for money or to banks for a loan.
Below you’ll find a video blurb explaining my philosophy on creating a positive cash flow cycle and how to get paid like Dell.
My first column for The Globe & Mail came out today and it talks about the kind of multiple business owners are getting for their company.
The general consensus I’m hearing from deal makers is that multiples are down at least one (if not two) turns to something around four times pre tax profit. What’s worse, a lot of business owners are being forced to finance some of the sale themselves.
The problem is that, since the financial crisis of 2008, buyers can’t get bank debt so they need to put more of their own cash into a deal. The more cash they put up, the lower their potential return on equity and hence the lower the multiple they’re willing to pay.
In the article, I quote an interview I did with private equity deal maker George Rossolatos. His advice for increasing your multiple is to simply increase the size of your EBITDA. Rossolatos argues that buyers are willing to pay a higher multiple for a big company’s EBITDA because the deal costs are spread over a larger deal and the chances that the business is super-dependent on the owner are lower.
Here’s a two minute video of me being interviewed about how to increase your multiple:
Would you sell for four times if someone offered it to you tomorrow?
If not, what are you doing to increase your multiple?
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