Most companies sell at subpar or par value, meaning that their ultimate price tag is somewhere between three to five times EBITDA (earnings before interest, taxes, depreciation, and amortization). Poorly run companies sell for a smaller multiple, while companies that are run about as well as their average competitors might go for four or five times their net earnings. But just as superpremium ice creamscommand a higher price in the marketplace, some companies sell for a superpremium of nine to ten times EBITDA. It’s like the difference between generic ice cream and Häagen-Dazs.
So the questions are these:
Why do some companies command that super premium price while others don’t? And if you are a C-level executive of a $10 million to $100 million enterprise, what do you need to be doing right now to prepare your business for an exit at a super premiumprice?
And just as important, what do you need to stop doing?
Here are five mistakes businesses make that practically ensure sub-par valuations when the founders or the C-level executives are ready to exit. Keep in mind, building business value should be top-of-mind for every leadership team and is not just associated with an exit strategy. So, since building value is your number one priority, how many of these issues apply to your business?
1. Your strategy is a secret.
You’ve got a new mission and direction as a result of your most recent offsite meeting. Great! But how are yougoing to get the word out to your one hundred and twenty employees? Are you getting posters designed to illustrate your new mission, vision or purpose? Are you stuffing paycheck envelopes with a document thatlists the five new goals of the organization? Most mid-market companies don’t communicate these ideas verywell. If a vision exists, the CEO fails to share it with others. Or if she does try to get the word out, she does so using what the Reverend Bill Hybels of Willow Creek Community Churchof Chicago calls the “Mt. Sinai approach.” Moses came down from Mt. Sinai with the two tablets denoting the Ten Commandments and while that top-down approach might have worked for Moses, it doesn’t work in today’s business climate. Keeping the strategy a secret is a recipe for trouble.
2. Your business plans are ego driven.
Normally, a leader’s greatest attribute is unbridled optimism. As retired General Colin Powell says, “Perpetual optimism is a force multiplier.” You would rather have Colin Powell lead you into battle than Eeyore, but you also need to deal in reality. The unbridled optimism that turned a business dreamer into a business leader has a downside. It can keep executives from confronting the hard facts about their organizations. Sometimes leaders sweep so much bad news under the rug that they can hardly see their own desks. Optimism is terrific, as long as it is tempered by an ability to deal in reality – a trait not all leaders have.
3. You’ve got the “I’d like to thank the Academy”syndrome.
It’s great when companies get awards – everybody feels good. The problem is that the red carpet high can become an addiction for a CEO. When business leaders get awards like “Entrepreneur of the Year” or “Top 40 Executives Under 40” or an invitation to the Young Presidents Organization or similar groups, they have an unfortunate tendency to believe that they single-handedly accomplished all of their company’ssuccess. This is a sure way to alienate the team. One suffocating ego is all it takes to destroy an otherwise successful business.
4. You’ve fallen into the success trap.
In business today, conditions change so rapidly that what worked yesterday won’t necessarily work today. But tell that to an executive who is so enamored of his own past performance that he can’t see how the world has changed. For example, fifteen years ago, technical service companies could make handsome earnings by augmenting staffs and building custom business applications for clients. Today, however, those firms make a third of what they once did on the same deals with business going to places like RentACoder. Serving your customers and staff, however, never goes out ofstyle.
5. You’ve got the “Fat and happy” syndrome.
A CEO who develops a reputation as a turnaround specialist is likely to be wooed by other struggling companies to accomplish the same magic for them. This often leadsto the CEO “putting the band back together” – going out and rehiring the team that made the first turnaround so successful. The problem is that a lot of those executives may well be fat and happy by now – they made their money on the first deal and no longer have the fire, the energy, or the desire to work those sixty-hour weeks all over again. Putting the band back together might work for the Eagles. But in the business world, people often end up singing an unhappy tune.