How To Avoid Disappointment When It's Time To Cash Out
How do you avoid not being
disappointed with the money you make from the sale of your company?
Perhaps you’ve heard that
companies like yours trade using an industry rule of thumb or that companies of
your size sell within a specific range, and you want to get at least what your
peers have received.
While these metrics can be
useful for tax planning or working out a messy divorce, they may not be the
best ways to value your company.
The Only Valuation
Technique That Really Matters
In reality, the only
valuation technique that will ensure you are happy with your exit is for you to
place your own value on your business. What’s it worth to you to keep it? What
is all your sweat equity worth? Only when you’re clear on that will you ensure
your satisfaction with the sale of your business.
Take Hank
Goddard as an example. He started a software
company called Mainspring Healthcare Solutions back in 2007. They provided a
way for hospitals to keep track of their equipment and evolved into a slick
application that hospital workers used to order supplies.
Goddard and his partner
started the business by asking some friends and family to invest. The business
grew, but there were challenges along the way: Goddard had to fire his entire
management team in the early days, product issues needed to be solved and
operational issues needed to be resolved.
At times, it was a grind,
so when it came time to sell in 2016, Goddard reasoned that he had invested
more than half of his career in Mainspring and he wanted to get paid for his
life’s work. He also wanted to ensure his original investors got a decent
return on their money.
He was approached by
Accruent, a company in the same industry, who made Goddard and his partners an offer
of one times revenue. Accruent had recently acquired one of Goddard’s
competitors for a similar value, so presumably thought this was a fair offer.
Goddard brushed it off as
completely unworkable. Goddard had decided he wanted five times
revenue for his business. Even for a growing software company, five times
revenue was a stretch, but Goddard stuck to his guns. That’s what it was worth
to him to sell.
A year after they first
approached Goddard, Accruent came back with an offer of two times revenue and,
again, Goddard demurred.
Mainspring had developed a
new application that was quickly gaining traction and he knew how hard it was
to sell to the hospitals he already counted as customers.
He told Accruent his number
was five times revenue in cash.
Eventually Goddard got his
number.
Being clear on what your
number is before going into a negotiation to sell your business can be helpful
when emotions start to take over. Rather than rely on industry benchmarks, the
best way to ensure you’re not disappointed with the sale of your business is to
decide up front what it’s worth to you.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
