Think about what company size means before selling your business
Size does matter when it pertains to selling a business. Technology companies are an argument against this common phrase but all others it does apply. What few private business owners realize is that acquirers very often reward sellers for building scale, scale of revenue and profits.
Both strategic and financial acquirers (i.e.: private equity) will often reference that they like their target acquisitions to be achieving a minimum level of profitability annually. The starting point for many is a minimum of $2.5M of EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) and some even $5M or more. Below these amounts they may not your company having enough scale to invest their resources in to acquiring it. But as the EBITDA grows incrementally, acquirers will reward you for that scale so you want to think about achieving a minimum threshold before attempting to sell your business to get a premium valuation. As an example, if your EBITDA today is $1.5M, you should build a plan to get this to the first threshold of at least $2.5M. Doing so will increase the number of acquirer’s that will have interest in considering an acquisition of your business and it may get them to pay a slightly higher exit multiple than if you’re still doing $1.5M annually. And the same applies to building a plan to get your EBITDA to the annual $5M level. And if you today are doing $7M of EBITDA, build a plan that will get you to the next important threshold in the eyes of acquirer’s of $10M because this will move you in to an entirely different valuation category in their eyes.
Put on the glasses of your future acquirer when thinking about what level of scale you want to achieve with your business before attempting to sell it. Think about how they will view your business in relation to these EBITDA incremental thresholds of $2.5M, $5M, $10M then jumping to $20M. You will be rewarded by the acquirer for having greater scale and you’ll see this in the exit multiple they will be applying to the valuation of your company. As you do strategic thinking to develop your plan that will deliver a euphoric exit event one day for your business, have these important EBITDA thresholds in mind because it could be the difference between an unhappy exit outcome and a euphoric one.
