CEO Advisor Newsletter January 2016
Critical Reasons Why Now is the Time to Sell Your Company
Historical ValuationsThe prospects of these historically high valuations continuing are not likely for several reasons, which we will further discuss in this article. Traditionally, depending on your industry, type of business, business model, growth rate, gross profit margins, earnings growth, management, etc., there have been 4X - 6X EBITDA multiples for many decades. Meaning, if your EBITDA is $1 million, as a simple example, and you were able to justify a 6X EBITDA multiple based on the factors above and others, your company was typically valued at $6 million.
Valuations in the Last DecadeIn 2005, an average of EBITDA multiples on privately-held companies increased to approximately 8.5X across all industries; dipped briefly to an average of 7.8X in 2009; and have increased since then. In 2014, EBITDA multiples grew to an average of 11.8X. EBITDA multiples in the past decade have been in the 7X - 12X range.
In 2015, EBITDA multiples have stagnated to some degree and in some cases dropped depending on the company and deal structure. If you are able to fetch a valuation of 12X today for a recurring revenue software company with $1 million in EBITDA, for example, but valuations suddenly turn down to 6X as in previous years, you will have lost $6 million or half of your valuation in a very short period of time.
Lost ValueIf I had a hundred dollar bill for every CEO that told me that they could have sold their company in early 2000 and made tens of millions of dollars, I could have paid for both of my sons' college educations to top private universities. The fact is, economic downturns, like in 1920, 1929, 1941, 1954, 1970, 1981, 1987, 2000 and 2009 hit very abruptly. In mid-December, 2015, Junk Bonds started to take dramatic hits, which have been the start of prior abrupt economic downturns. This does not allow for the 6 to 9 months or more of time for a privately-held company to prepare for, be put on the market for sale, and close a deal before the serious damage is done.
Strategic BuyersStrategic buyers, especially publicly-held companies, are pressed to use their cash to grow at an aggressive pace. And while valuations are very high currently, you need to seriously consider 2016 as a great time to sell your company before the market changes direction.
Private Equity BuyersDue to the low interest rate environment over the last seven years, there are few options where money can be parked or invested, thus selling a part or all of your company can be a very prudent decision as private equity financial investors/buyers are proactive in putting money to work.
Interest RatesInterest rates are a key factor in mergers and acquisitions activity and valuations. Interest rates in the late 1700s were about 8%; in 1860 were about 7%, in 1920 about 6%, in 1980 about 20% and have trended down over the last 35 years. The Fed has finally started to raise interest rates in 2016 and several things will be triggered by these interest rate hikes. A) Private equity investors will have to pay more to borrow money and this will negatively affect valuations, and B) The stock market will be under selling pressure, thus reducing both public and privately-held company valuations, plus other factors that will not be in your favor regarding valuations or your ability to find a buyer for your business.
Geo-Political RiskThere is no secret that the geo-political environment is very volatile on a global basis. The U.S. presidential election may also tee off the financial markets and the jury is out on the outcome and effect on the stock market and valuations.
Economic CyclesAs discussed earlier, the loss of value from economic cycles comes fast and furious. Our current economic cycle is approximately eight to nine years old and will most likely come to an end in the next year or two. The key to focus on are the years that you want to be clear and out of your business. Keep in mind that preparing to sell and selling your company takes at least 6 to 9 months. You will need to commit to stay with the buyer for 2 - 3 years to achieve full value and to get a sale done today. If you add to that a down turn in the economy where you miss your window to sell, you could be nearly a decade away from officially retiring or going onto the next big thing in your life.
Sell On the Way Up!As you can see, it is critical to sell when valuations are rising and the business climate is healthy and stable. When the climate changes or has peaked, and especially if an abrupt downturn occurs, you will have missed the selling opportunity and this may cost you millions of dollars.
Contact Mark Hartsell, MBA, CEO of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
CEO Skills Result in Greater Sales, Profits and Value
- The Wharton Business School newsletter, published by The Wharton School, University of Pennsylvania did a recent poll of executives and business owners. The results below show the four most important skills that would strengthen a CEO's performance. There are other factors that result in a CEO being more successful, and we will discuss them in future newsletters.
- Strengthening what skill would most improve your performance?
- * Leadership - 33%Time
- * Management - 28%
- * Negotiating - 22%
- * Understanding Your Financials - 17%
- 1. Leadership
- Leadership is a primary factor in your success and achieving your goals. Leadership requires proactive planning, organization, a crystal clear understanding of your business both financially (quantitatively) and operationally (qualitatively), and creating a culture of accountability to grow your business to the next level. Leadership by example can inspire your employees to help you in reaching your company's goals.
- 2. Time Management
- Time management is the Achilles heel of most CEOs and small to mid-size business owners. Time management involves more than managing time on a calendar and working 60 hours a week to keep up. It involves real strategy and planning to focus, prioritize and structure your time to impact your business in a disciplined manner. Another critical factor is planning so as to not waste valuable time and money. CEO Advisor, Inc. works with its CEOs of small and mid-size businesses to set goals and priorities, and truly excel in both leadership and time management.
- 3. Negotiating to Success
- Negotiating is a skill that needs to be learned, practiced and perfected - with customers, prospects, vendors, employees, etc. CEO Advisor, Inc. focuses deeply on negotiations using some of the top techniques
- used by military leaders and business people, alike. Your sales team can benefit tremendously from sales training and negotiating skills training from securing the initial meeting to negotiating price effectively to closing large deals. Strengthening your negotiating skills can yield a 100X return on your investment from hiring, purchasing, selling and persuading. If you are not a master negotiator and salesperson, invest in your negotiating skills and prosper in 2016 and beyond.
- 4. Understanding Your Financials
- If there is one New Year's resolution that every CEO and small to mid-size business owner should commit to is gaining a thorough understanding of the financials of your business. If you don't, you are flying blind! This includes your Profit & Loss Statement (Accrual and Cash basis), Balance Sheet, Financial Ratios, creating a 2016 Financial Forecast, and learning to analyze and understand how to positively impact your Gross Margins and Net Profit, as well as, pinpointing early signs of problems.
- CEO Advisor, Inc. spends the time to ensure every client not only understands but uses their company's financials in growing their business to the next level. This will ultimately result in increasing your profits and company's value leading up to the sale of your company.
- Contact Mark Hartsell, MBA, CEO of CEO Advisor, Inc. today at (949) 629-2520 for a no cost initial consultation, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.