Do your investment decisions today bridge to your company worth
A good sixth sense to develop is knowing when an investment decision you’re facing is one that could impact the future sale of your company and which ones won’t.
In making an investment decision in new hires, systems, equipment or capacity, there are multiple lenses that you will want to look through in evaluating the investment. One such lens is asking yourself, how might this investment impact my company worth?
The math to do this is simple. Let’s say you are thinking about hiring a new Marketing Director and the all in cost could be $225,000 per year. So if you’re EBITDA is running annually at the rate of $5,000,000, then when you hire this person that EBITDA drops to 5,000,000 - $250,000 or $4,750,000.
Now ask yourself, what do I estimate the exit multiple might be that an acquirer could apply to my business if I were selling it today. Let’s say that number is a 7x exit multiple. The investment decision I’m considering isn’t going to cost my business $250,000, it’s going to cost me $250,000 x 7 or $1,750,000 of company woth.
Looking through this lens, you next ask yourself – will this Marketing Director create new company worth (i.e.: by directly or indirectly accelerating our sales or margin growth) equal to or greater than $1,750,000? If the answer is a resounding yes, then just applying this investment decision lens would support the decision. If the answer is no or my confidence isn’t high, then this lens should give you pause.
You can apply this thinking to any investment, not just people. Some investments are minor in magnitude and don’t need this lens applied. But you want a sixth sense for which investments you should be applying this lens.
Investing in your business can be a great way to build your company worth. Start thinking about the investments in this way. Yes, there are multiple lenses to look through when making an investment decision. But this lens is an important one to add to your decision mix.
