Key hiring decisions can directly impact your company valuation
During a recent conversation with a company owner, he expressed that he was looking for a Vice President of Business Development. He said he felt the position was needed because his company revenue was of concern in recent years and he felt he needed a new direction. He asked if I thought making such an investment could make sense based on my experience.
I asked how much the investment in this position would be and the answer was approximately $175K annually, including benefits. I then asked if he felt this position investment would deliver a return of at least $1,400,000 in company value in the next 2 or 3 years, which is the time frame he’s hoping to sell his business. The answer was, I’m not sure and haven’t thought about it in that regard.
I explained the reason behind my question. His current company valuation was approximately 8x his trailing 12 months EBITDA. And this investment of $175K compensation would reduce his EBITDA by this amount annually. And if he were selling today, this $175K x 8 would equal the $1,400,000 of reduced payout he might receive from the acquirer.
Now if the individual filling this position could join his team and generate business development opportunities that the company could start benefiting from in its revenues and build greater than this $1,400,000 in company value, then of course it’s a great position to invest in.
The outcome of our discussion is the owner is now rethinking how this investment bridges to his exit plans. So, when thinking about investing in key management positions, give thought to how it bridges to your exit plans and not just what it means for you in the short term. Giving consideration as to how the new hire will impact your exit valuation in the eyes of your future acquirer could be a key factor in how happy you are with the outcome.
