And, if you act within the next 30 seconds, we’ll throw in an extra set of Ginsu knives . . . you only pay shipping and handling. (If you’re under 50 years old and don’t get the joke, Google it.)
In the last few installments of this column, we’ve talked about how people like their ruts. We make New Year’s resolutions thinking that easy, one-time fixes will change everything. But, football great Vince Lombardi told us that winning is an all-the-time thing . . . and so is losing. Whatever it is that you do every day is what you are . . . what your company is. And, we identified that there are eight disciplines within most middle market companies — planning, operations, finance, HR, etc. — that buyers will look at when deciding on what to pay for a firm.
We heard ice hockey great Wayne Gretzky say that he does not skate to where the puck is right now but where the puck is going to be. Accordingly, we asked where your firm needed to be when you sell it in 3 to 5 years and suggested that you “skate” towards that. So, you start with one of the above-mentioned disciplines, get it to best practices in an all-the-time way, move on to the next discipline, and repeat.
In our last installment, we talked about two key issues that affect the sale price of your company: 1) the multiple of EBITDA and 2) EBITDA itself. How you keep your financial books will affect the multiple of EBITDA that a buyer is willing to pay. We noted that “how you keep your financial books” might mean the difference between a 4x multiple of EBITDA and a 5.5x multiple of EBITDA. That’s a swing of about 30% in value. If your firm’s value is on the very low end of the middle market, we’re talking north of the $1 million headline (the extra $500k is where the Ginsu knives come in). If your firm’s value is in the $30 million range, we’re talking $9 million. Do the math on your specific number.
The second issue related to EBITDA itself and how your accounting policies might be sucking sale price out of your firm. If you are like most owners of middle market companies, you have selected accounting policies to minimize your tax liability for a given level of cash flow. And, just maybe, you have made choices beyond accounting policies that further lower your tax liability. (Wink.) But, that lower net income translates to a lower sale price.
So, without changing anything about how you run your business but only “normalizing” your accounting policies, let’s say that you recognize $200k greater net income each year. And, let’s say that your combined federal and state marginal income tax rate is 50%. You’ll pay $100k more in taxes. (Oh my gosh! But, remember who is writing this article. The guy in the room who lives to reduce people’s tax burdens. If I’m telling you to pay the tax, it’s for a darn good reason.) Now, take that $200k of greater net income and multiply it by your 5.5x multiple. You have just added $1.1 million in firm value. For every dollar in tax that you’ve paid — in this example — you are getting 11 times that in firm value. Capisce? (For non-Italians, it is pronounced “ka-peesh”.)
You get this without changing anything about how you run your business. You get this by simply doing your accounting the right way. Combine the two effects — the multiple and the EBITDA pop — and you’re looking at a significant gain in sale price.
Now, the bad news. How did you get into this position in the first place? If you’re like most owners of lower middle market companies, you likely have the same accountant you’ve had since starting the firm — a “mom and pop” accountant. For the past 10 or 20 or 30 years, they have guiding you down this self-destructive path.
To be certain, as Michael Corleone would say, “It’s not personal . . . it’s strictly business.” Your accountant might be the nicest person in the world but their world is not an all-the-time thing regarding M&A or positioning a $30 million company for sale. In their entire career, they might be exposed to such a sale. To bring your firm’s financial to where they need to be, you’ll need someone whose all-the-time thing is prepping companies for sale. We’ve written about them before. They are easily found if you look. Now, Bo says, “Just do it.”