An investment banker explains the factors that determine the value of a business and the options facing owners contemplating a sale. Your decision will depend largely on your expectations of growth and your personal priorities.

Stuart Rose, partner, Stuart Rose, partner, Mirus Capital Advisors

Stuart Rose, partner, Mirus Capital Advisors

Life is all about timing. There are many factors to determine if it’s time to sell your company.  Some factors include your personal history, industry dynamics, and alternative investment opportunities. There are also more generic issues which determine whether you will receive a premium price for your company.  There are two timing cycles one needs to be aware of when deciding to sell a company for a premium price:

  • Where your company sits on its growth curve
  • Where the economy is in the economic cycle

Unlike trying to time the stock market, timing the sale of your company is a little easier for two reasons. First, you are in the best position to know the potential future of your company.  And, second, market multiples typically do not change rapidly.

This article will explore the first of these issues; another article will explore the second.

What’s enough for you? Remember the old adage: Pigs get slaughtered.

First, your company’s individual growth characteristics are one of the key determinants for the price you will be paid if you sell your company. Prices are typically determined by three characteristics.

  • Size
  • Growth
  • Profitability

Let’s just focus on growth; a company growing sales at double-digit pace could see a multiple expansion of 2-3 turns relative to a company growing at a single-digit rate. Companies consistently growing at 15% annually or more face the question—should I sell now at a high multiple or wait and sell a larger company in the future?

Do the math

Let’s use a hypothetical example of a company today with $3.0 million of EBITDA [earnings before interest, taxes, depreciation and amortization] growing earnings at 15% per year.  An 8 multiple would be typical in the consumer world.  This means the company would have a Total Enterprise Value (TEV) of $24 million.  If the company continues to grow at 15% per annum for three years earnings would grow to $4.6 million.  The $24 million TEV would grow to $36.8 million—nearly a $13 million gain.  Fantastic!

BUT, if earnings growth slows the multiple would shrink to 6X EBITDA.  That could lower the TEV to only $18 million—an opportunity loss of $6MM.  Look into the future, if you can grow earnings another 50% in three years, then it may be worth waiting. But remember if you experience 2-3 years of flat earnings you risk losing 30% of the value of the company.

My advice:  First, be a realist.  How likely will growth continue unabated for three years?  Second, how risk-averse are you? Stuff happens.  Will you fret about the lost $6 million for years to come?  Third, what’s enough for you?  Remember the old adage: Pigs get slaughtered.

Every situation and individual is different.  Just remember how this article started.  Life is about timing.


A future article will explore market timing.

Mirus Capital Advisors is an investment bank.