How to Sell Your Business for a Higher Multiple

Every two years we get swept up in Olympics fever at my house, and I tend to get hit the hardest. Snowboard cross, skeleton, curling — I’ll stay up to watch it all. Over the past week or so I’ve also watched several bloggers attempt to make elegant tie-ins between growing an “Olympic” caliber business and achieving “gold-medal” performance.

It got me thinking about the Russian judge. You know the one I mean. He or she will hold a competitor’s performance to the highest possible standards. He will not be swayed by sentiment, and a lifetime of hard work is summed up in his meticulously calculated score. We love to hate the Russian judge. But if you’re going to compete on the world stage, you’ll have to figure out a way to impress him.

When you sell your business, buyers will base its value on a two-part equation: a) your company’s pre-tax earnings, or simply “cash flow” times b) a multiple. The former is up to you as the business owner. Think of cash flow as your Olympic performance; it is influenced by your skill and within your control.

Now think of the multiple as the Russian judge and his scorecard. The multiple for your business should fall within an expected range given the size of your company and its industry — a for the past year showed a range of 0.8 to 5.59, with an average of 2.64 across 604 aggregate transactions. But like a judge’s score, where a multiple lands within a given range is a matter of the buyer’s opinion.

If your goal is to sell your business for the highest possible multiple, here’s how to bump up your score from the Russian judge:

Minimize Risk

If you’ve run your business for any length of time, you’ve probably gotten used to the risk associated with owning it. Potential buyers are highly sensitive to risk, and will be making their own assessment as to any apparent or potentially hidden risks that may jeopardize their investment. The antidote to risk is often diversification. Businesses that have diverse customer segments, product assortment, service offerings, suppliers and revenue streams have the ability to command a higher multiple.

Dominate a Niche in Your Industry

I recently spoke to the owner of a digital printing business. Over the past twenty years the company has developed a niche by offering round-the-clock expedited service to customers in the financial services and pharmaceutical industries. Another digital printer I know specializes in making packaging prototypes for CPG companies. Whether its construction or advertising agencies, dominating a niche in your industry goes a long way towards increasing the multiple your business can sell for.

Create Recurring Revenue

Getting new customers can be an expensive endeavor. Having to beat the bushes for new business can also add a layer of risk in the eyes of a buyer. If you’ve been drumming up new customers at your business for the past twenty years, how will the buyer do it without you? The owner of a commercial heating and air business I know has “evergreen” contracts with his customers, who are mostly retailers and hospitals. The contract continues until it is cancelled, which only one percent of his customers do every year.

Best-selling author, John Warrillow, writes extensively about recurring revenue business models and how they impact the value of your business.

Show Consistency or Improvement

No matter how much a judge may like or admire an athlete, any stumble is reflected in their overall score. If your business experiences a dip in sales or profitability, it is likely to affect your multiple. There may be a perfectly plausible reason why your numbers were down in 2012, but it’s the rare buyer who will overlook a blip in your company’s performance.

Athletes do their utmost to peak at the right moment — not too early or too late, but right when it matters most. The ideal scenario is to take a business to market when it has been showing consistent, or better yet growing numbers for the past three to five years. Unfortunately, this is precisely the point at which most owners are least likely to sell.

Outperform Industry Averages

Buyers will compare financial metrics at your company — gross margins, net margins, expenses like rent or payroll as a percentage of sales — to acceptable averages for your industry. One of the digital printing businesses I mentioned has pre-tax profit margins that are almost four times the industry average. That is eye-popping performance, and it will be reflected in the value of that business by allowing it to command a multiple at the high end of its range.

You typically get one shot at selling your business, if you’re lucky. It’s like the U.S. ice dancing pair who trained for seventeen years and had just two performances and a total of seven minutes to convince the judges that they deserved gold. It can be done! But not without impressing that darn Russian judge.