Recently we met with a potential client who, after telling us his company has earnings of $1.5 million, said “I don’t know what (expletive deleted) I’m doing.” It was said to get a laugh and it did. What he really meant as the conversation went on was, I am making a lot of money but I don’t really have a plan for building value. Part of the reason we were referred to him by his corporate attorney was to help him better understand what buyers value in a company. His current dilemma was whether to stay in his current location, which was at 80% production capacity, or move to a larger space where he would have room to grow by 70%…hopefully. The rent increase would eat into earnings by $1 million but the upside was huge over the next 4-5 years when he felt earnings could grow to $5-6 million. What would buyers prefer, earnings today or potential growth tomorrow?The somewhat frustrating answer is buyers want both earnings and potential growth. But they will only pay cash for what they are confident the company will earn. The upside potential of the new facility also has the downside risk of failure. Some buyers will walk away while others will discount the deal or structure payment to decrease their exposure to the downside.We asked a question he hadn’t considered, what is your timeframe for a sale of the business? For clarification, there is no family succession option so divestiture of some or all of the ownership interest is the ultimate answer. But, when? The answer to the dilemma differs depending on when he no longer finds owning the business as thrilling as he does today. A shorter timeframe to sale suggests maximizing earnings and avoiding the risk of too much excess capacity. A longer timeframe allows time to grow into the new space and the higher earnings positively impact value. The client is now thinking more about his time horizon to sale as part of his expansion process. We will continue to work together as the business evolves.Business owners face these types of decisions constantly in the life of their business. If we can help you or one of your clients answer questions about how a strategic business decision might affect the sale value of the firm over various time horizons, please let us know. Click Here to Email Jeff @ Beacon
