Many owner-managers are shocked at both the difficulties in finding a buyer for their business and the low prices an owner-managed business often commands.
A recent Intelligent Work article (How Does 10x-ing Value Work in an Owner-Managed Business?, John Mill) discussed guidance provided to Harvard MBA students regarding investing in owner-managed businesses. That guidance included the reality that these businesses with earnings between $750,000 and $2 million tend to be priced at 3x to 5x earnings before interest, taxes, depreciation and amortization (EBITDA), as compared to 6x to 12x earnings for larger companies with EBITDA of more than $5 million. In addition, most owner-managers are forced to sell due to age or health issues and such distress sales generally result in lower multiples.
Often, investors do not want to be owner-managers, and as such, will employ another individual to run the business. This further reduces the value of owner-dependent businesses.
Some strategies to grow the value by focusing on the qualities that command higher multiples include the following:
- Competent management that is not owner-dependent;
- Lean systems;
- Engaged employees; and
- A solid track record of EBITDA growth
The article suggested a 10-year track record of 18% EBITDA growth (an average for the successful expanding of small businesses) as an appropriate target.
ACTION ITEM: Starting the discussion on how to maintain and enhance the value of an owner-managed business should be commenced many years before the anticipated sale or transition.