During the 2-3 year period we actively pursued selling our digital agency business (Lifeblue), we had offers with valuations as low as $4M to as high as $15M and everything in between. I used a number of accounting professionals and valuation tools to try to figure out a good benchmark to determine if we were getting a good deal or getting stiffed. The answers were just as varied as the offers we were receiving. Not much help. We eventually sold a majority share in the company for one of the highest offers we received. Could we have found a better offer? Possibly, but I’ll never know. In my 15 years experience, as an agency owner, working as a business coach, and having gone through a full business cycle, this is the reality of valuations and selling your business.
What is my agency worth? A common question amongst creative and marketing services business owners. A quick Google search will give a fair number of perspectives from an accounting point of view. 5 times my historical EBITDA. 3 times future earnings. 4 times revenue. 7 times my projected annual recurring revenue. Depending on the past, present, and future of your business, each of these calculations could give you a wildly different number. And like any market scenario, you should want the highest price as the seller while the buyer would prefer the lowest price.
However, if you want to maximize the value you gain from the sale of your business, you simply are worth what you’re worth based upon the goals, resources, and strategies of the acquiring business. Well that’s nothing profound you might be saying to yourself. True. So how do I make my business the most valuable across the board?
The real question to ask:
What does the business look like that you would want to own and never sell?
The answer is the same business that would be most attractive and valuable to the largest pool of buyers. Anything less, but still with a high valuation, is merely just luck or manipulation of a particular buyer or market situation. This is a comforting way to look at how you’ll invest your resources because you don’t have to choose separate paths to get to the same result. The eventual decision to sell doesn’t come from a point of desperation or fatigue. Rather, it’s just the next best decision in your own personal journey and/or makes the most sense for the future success of the business. Sure, if and when you might decide to sell, you’ll tidy up some loose ends by cutting unnecessary expenses and locking in some good contracts. It’s the same way you’d spruce up the landscaping and painting if you were going to sell your house. Whether it’s your business or your house, it’s merely squeezing just another percent or two to maximize the same valuation.
So what are the most important elements to ensure you get the most out of your hard work and effort?
The Three Critical Components of a High Value Business
Riches in Niches
The phrase is popular but what does it really mean? It means you have a very specific solution for a very specific customer. And by the way, the riches part doesn’t happen if you’re not delivering really good value to those customers. What makes this valuable to a potential buyer? It allows the them to understand exactly why your business will be valuable as an investment. Your specific offering might complement their own customer base. They might want your niche customer market for their own suite of products. It also gives a better perspective on the likelihood of your business’s ability to continue to generate the riches part. The most objective reason is that, if you’ve solved this component, there is a high likelihood your business generates a large amount of cash. How much cash your business produces is the unavoidable measuring stick that will be a significant factor to valuate your business.
Many agencies are merely the creative outlet of the agency owner or principals. The second those principals are removed from the business, there isn’t much left of the business. Having an agency that has built processes, methodologies, and otherwise successful infrastructure, means you have a real business. Not just a figurehead with helpers. Put another way, have you set up the core areas of the business (Leadership, Sales, Operations, Finance, and Team) to live independently of any single person? Scalable infrastructure makes everyone’s job easier.
So, why does this matter to a potential buyer? First, any savvy buyer will recognize the existence, or lack thereof, of scalable infrastructure. Only rarely is there value in buying an individual. Investors want to buy a business. Having scalable infrastructure also provides more clarity to evaluate the overall integrity of the business. Few buyers are interested in buying something risky. Clarity diminishes risk.
A Great Team
A great team is both the chicken and the egg of the aforementioned components. You can’t deliver really great value to a specific customer while setting up a scalable infrastructure without a great team. Conversely, you can’t have a good team if they don’t understand who the customer is and how best to serve them while providing a proper environment to train and perform their roles in a fulfilling manner. If you’ve been in the business any time at all, you understand the value of a good team. If you think you have a good team, the question is whether you got lucky? Or worse, think you have a good team and don’t. Did you in fact create the environment to allow a good team to exist in the first place? The results necessary to get a high valuation will speak for themselves as you can’t have a good track record with a bad team environment.
The Bonus Component
The reality does exist that you could have crushed all three of these components and still might not get the highest possible valuation for your business. The bonus component is you have to go find the ideal buyer that is going to pay the most for your business AND educate them on why you’re worth what you think you’re worth. Just like you would if you were going after your next big client. For larger agencies, there are companies out there that can help in this process for a hefty fee. However, for most agencies, you’re going to have to do this work yourself. Your every day business broker or capital specialist will NEVER get you a max valuation and you will still pay a hefty fee. You’re also the best person to determine whether the prospective buyer is who you’d want to sell to in the first place. At the end of the day, you just can’t leave this in anyone else’s hands. This is potentially your last, most important job.
The value of your business is what you want it to be. The rest is the sum of the work it will take to get that value. The beauty of being the owner is that you get to keep the value you create, and share accordingly, until you decide otherwise. Often, many people will tell you you’re crazy and try to diminish the value. Rather than believe the diminishers, you just have more work to do in the critical components to prove yourself right. Good luck!