If you’ve ever thought about selling the business, you probably have a number in your head for how much your company is worth. Unfortunately, this number is often disconnected from reality and will leave you disappointed once you meet with buyers.
“Everyone hears about the headline multiple, like SavATree trading at 18 times earnings, and applies it to their own business,” says Kory Mitchell, CEO and founder of Iconic Founders Group. “But that multiple was earned with recurring revenue, plant health care contracts, and a real management team. Buyers pay those numbers for those businesses, not for every business.”
Mitchell notes that owners can be wrong in the estimated value of their company in both directions.
“I pulled a founder out of an ESOP that was going to pay him $15 million, and I sold his company for $42 million,” he says. “I’ve also seen owners convinced they’re worth 10x because a buddy at a trade show told them about his deal. Most owners anchor to a rumor, not to what live buyers are paying today.”
Mitchell will go beyond basic valuation math and explain why strong operators receive discounted valuations during his session, “What Your Business Needs to Be Worth & What You Think It’s Worth” on Wednesday, Nov. 11 at 8 a.m. at ELEVATE.
“I’m not a banker who just walked off the golf course in Connecticut,” Mitchell says. “I grew up in my dad’s contracting business in Iowa, started at 14, bought it with my brother, grew it from $8 million to $200 million, and sold it. My warehouse looked just like yours. I learned this the hard way, through pain, from the inside. If you own a landscaping or tree care business, this is the conversation I wish someone had had with me before my first exit.”
What Buyers Evaluate in Companies
It’s easy to assume that if you run a profitable business, you will be desirable to buyers, but Mitchell says what matters most is recurring revenue, high gross margins, smaller average project size, and a management team that runs the business without you.
He adds that some of the things buyers hate include capital expenditures, customer concentration, and lumpy project revenue.
“The green industry has a structural advantage here because maintenance contracts and plant health care are exactly the recurring revenue buyers chase,” Mitchell says.
One overlooked aspect of the business that can impact the overall value of your business is your financial data.
“It’s data visibility, clean job costing, knowing your numbers cold,” Mitchell says. “Every serious buyer runs a quality of earnings report, which is like an ultra-deep audit, and if your books can’t survive it, your price won’t either. The whole key is being able to tell the story of what the next two years look like, with data behind it.”
If the company is dependent on you as a founder, this can also suppress the enterprise value of your company.
“If every big customer relationship, every bid, and every problem runs through you, a buyer isn’t buying a business; they’re buying a job with key-man risk,” Mitchell says. “Weak management bench and customer concentration are the two discounts I see over and over, even in phenomenal companies.”
Practices to Command Premium Pricing
Mitchell recommends hiring and developing a general manager to make the business less dependent on you.
“It’s the single biggest driver of value I’ve seen across 100+ deals,” he says. “Get your data on dashboards so decisions don’t live in your head. Then test it: take two weeks off, fully off. Whatever breaks is your to-do list.”
You should also create a scorecard on what drives value and get a grade to update your value range every year.
“Even if you never plan to sell, run the business so you could sell it, because life makes that decision for people all the time,” Mitchell says. “And make sure it’s a market-based valuation from someone seeing live deals, not an old-fashioned appraisal. Those folks charge thousands, and they don’t know the industry. I’ve seen outside appraisals come in millions of dollars over or under what a deal is actually worth.”
Mitchell also advises sitting down with a financial advisor to determine what number you need to retire comfortably. This includes your life costs, what you have outside the business and taxes. Then you can back into what the business needs to net you.
“For some owners that’s $3 million, for others $30 million won’t do it,” Mitchell says. “The owners who get hurt are the ones who never did that math until an LOI was on the table.”
If you do receive a less-than-ideal valuation, you need to decide if the business is still serving you and if you have the energy to fix the aspects driving down your value.
“Fixing data, concentration, and management depth can move your multiple meaningfully, and building to sell can cut two years off the timeline versus just building,” Mitchell says. “But if the business is no longer serving you, sell it. There’s a scarcity of good businesses and an unfathomable wall of capital looking for them.”
Want to learn the five things to start doing Monday morning so the option to sell is always yours? Register for ELEVATE, and we’ll see you in Tampa, Florida!
