Blog

January 20, 2014

3.6 or 6.1 times earnings — which offer would you prefer?

We’ve just done some analysis with the data from the users of The Sellability Score since we launched back in 2012, and we’ve discovered companies that are “Built to Sell” get offers that are 71% higher than average:

Background On The Survey

After writing the book Built to Sell, I hired a team of researchers and we developed a scoring system that allows readers to understand the “sellability” of their business. You can complete a forty-question survey and you’ll see how you performed on the eight key drivers of sellability.

We license this and other tools to Sellability Score Advisors (people like accountants and M&A professionals) who invite their contacts to complete the survey and get their score. During the survey, we ask respondents if they have received an offer to buy their business, and if so, the multiple of their pre-tax profits the offer represents.

The Sellability Premium

We recently stuffed 6955 of our completed questionnaires over the last year or so into a mathematical model and churned out some interesting statistics, the most thought provoking of which is this:

Those businesses with a Sellability Score of at least 80 out of a possible 100 get offers that are 71% richer than the average business.

We call this 71% delta between the average business and a Built to Sell business “The Sellability Premium”. Take, for example, two companies each creating a million dollars in pre-tax profit. Business A has a Sellability Score of 65 and Business B has a Sellability Score of 82.

When we did the survey, the average multiple offered all businesses was 3.55 times pre-tax profit. Therefore, business A, according to our data, is likely to attract an offer of $3.55 million dollars ($1,000,000 x 3.55).

Business B is also generating a million dollars of pre-tax profit but they’ve been doing the hard – often unsexy – work of building to sell. With a Sellability Score of 82, Business B is predicted to get a 71% premium over the average business, thereby fetching something closer to $6.1 million ($1,000,000 x 6.1).

Yes, building to sell does make your business safer and more enjoyable to run, but it also makes it a whole lot more valuable when it is time to sell.

One final thought: if you’re planning to attend the Built to Sell workshop in Las Vegas from Feb 28 to March 2, we’ll invite you to get your score from one of our advisors prior to attending the event. That way, you can bring your report to the event and we can discuss your score together during our one-on-one. There are still a few spots available for the workshop and you can lock in your early bird discount of $600 by registering before January 31st.

  • James Price says:

    John

    Thank you for the Sellability research. Just to compare with other measures in the market it would be useful if you could provide more detail on the definition of ‘pre tax profit’ (does it include or exclude working owners wages, interest, depreciation etc..)?

    Also your multiple range is quite large. What does industry and size of business have to do with this range? More detail and clarification would be useful to assist users in calibrating their expectations of potential market value.

    Regards

    James Price
    Managing Director
    JPAbusiness Pty Ltd

    • johnwarrillow says:

      James:

      The pre tax profit number is from business owners. We ask them to tell us what their pre tax profit was over the last three years. We realize this number does not include Depreciation or Amortization but we’ve found asking for EBITDA can confuse some business owners. We also ask the owner to take into consideration a market rate salary for them so as to “normalize” for an artificially low or high salary for the owner before estimating their profits.

      There are a number of other data points in The Sellability Tracker research published today for Sellability Score Advisors. As a Business-level advisor with us, you have access to the entire package. Simply login to there advisor portal and download the research under “Sellability Tracker”.

      Enjoy!

Add Comment

Follow John Warrillow

RSS Facebook Twitter
Pre-Order Built to Sell

Get your free chapter of Built to Sell: Creating a Business That Can Thrive Without You by signing up below: