Pavlo reflects on a business owner who had worked with Aurik and recently sold his company for 120 million. When Pavlo mentioned this purchase to another business owner, the response was: “He must be really lucky to land such a deal.”
Luck does count – where you are located matters, timing can matter but largely, it has very little to do with luck. For a business to have a high valuation in the sale, the business needs to be built backwards, starting with the end in mind and designing it towards the end goal.
This business was built eight years ago with the intention to sell it in the long run. When asked how much he would sell the business for, the owner said 100 million, and he was adamant on that number. To reward his years of investment, risk, and sacrifice, this was set as the target.
The plan to act for tomorrow had to work backwards from that future date. He and Pavlo ran a few numbers. What they calculated is that five years forward he would need to have a revenue of 85 million, profitability running at least 15% to be able to argue and justify a multiple of around eight. If you take the initial 85 million, multiply it by 15%, and multiply it by eight, you’ll get something like the 100 million target.
On average, most businesses are lucky to earn three or four multiples. But the reason for that is that when most people sell their businesses, they arrive at that point at the 11th hour after 10, 20 or even 30 years of successfully generating income. They learn that what they have built is a business that’s good at generating income but not a business that is transferable as an asset to the future buyer or acquirer. As a result, they are heavily penalised for the multiple.
The multiple is an indicator that effectively answers five questions.
In this podcast of The Money Show, Pavlo Phitidis breaks down the process of building a business backwards, and asks the 5 key questions:
To illustrate the point, let’s use an example of a furniture business:
If you address each of those five levers, you’re taking a three multiple to an eight multiple. You’re adding an additional point in each instance.
And that’s what we mean by an engineered approach, which requires you to start with the endgame, saying, “I want 100 million for my business.” and then design the business to deliver that eight multiple.
Why acquisitions fail to yield value:
A Harvard study from 2016 estimated that 82% of acquisitions made, failed to yield value for the buyer. Very often, these acquisitions are made by listed companies, where there’s quite a bit of pressure to demonstrate how your investments are yielding shareholder value. They identified all of the major reasons why these acquisitions fail.
Understand that when you are ready to leave a business, you need to serve and understand the needs of a new customer: The Buyer.
The problem is that most of us arrive at this point with three, four, five, or six months left because we want to get out at that point. We make the decision to get out, and yet we have never built the business in such a fashion that it fits neatly with what the buyer wants.
Start with the end in mind and build it backwards.