There is a person I know from our town who has a nice house she needs to sell. She asked me to take a look at it and tell her, just ballpark, what she should list it for.
I walked through the house. It’s a nice place, but in a rural setting far from town. I said it would be a stretch, but that she should list it for $400,000.
“$400,000!?” she cried. “No way! That’s a special house. I have to get $650,000 for the cash I need, and that’s what I’m listing it for.”
That was three years ago, and it’s still on the market, dropping $10,000 each time she changes realtors.
In our mergers and acquisitions practice, that same dynamic occurs when a buyer calls our firm. Early on, we ask, “Have you thought about what you want for the business?” It’s not unusual to hear, “Well, I need to get $10 million.”
We ask: “How did you arrive at that figure?” And the seller says, “Well, I need to pull $100,000 a year for my retirement, pay off my bank notes, and settle up with the IRS. I figure I’m going to live another 15 to 20 years. So, I need $10 million to make the numbers work.”
Just like the overpriced house, that’s a business that may still be on the market three years from now, looking for a buyer who agrees with the $10 million value.
The homeowner and the business owner had a value in their mind before the fair market values were calculated realistically. Like it or not, a house or a business is worth what someone will pay for it, not what the owner needs for retirement.
Is your lumber and building material business special? It certainly is. You’ve invested decades building up the clientele. You’ve added buildings, trucks, maybe a truss plant. You’ve weathered (barely!) the Great Recession and survived a few other recessions before that. You’ve eaten bad debt, and you’ve skipped a vacation or two so you had enough cash to hand out Christmas bonuses. You’re right to expect a reward for your hard work. But that recognition will come through the performance of your business, the quality of your earnings, and the sustainability of the business on a go-forward basis.
What Really Motivates a Buyer?
Typically, a prospective buyer will be motivated initially by the strategic fit of your business, e.g. your product lines, customer mix, and geographical reach. If those three boxes are checked “yes,” the buyer does a financial analysis, which looks at the sales, gross profit margins, OPEX, and EBITDA margin trends over the last three years. They will also want your projections for the coming year. Additionally, the leadership team you have assembled and the culture you have established also play a positive role in boosting the quality of your earnings, and those contributions should not be minimized.
As for value, in most industries valuations are based on a multiple of adjusted EBITDA. Industry multiples go through cycles, just like the construction sector goes through cycles. Currently, valuation multiples are at their highest levels in over a decade. High-performing, well-run companies with great cultures will achieve the upper range of these valuations; lower-performing ones in the lower range.
When selling your business, we would counsel taking a good look at the financials and—given today’s multiples— determine a realistic value that fully accounts for your earnings and for the intangibles you may bring to the valuation equation. As investment bankers, it’s our job to fight fiercely to maximize that value, and we regularly discover value-enhancing features and credits to EBITDA that would have been missed by our clients. That said, we encourage expectations that are ultimately tied to your financial statements. That’s where your hard work and sacrifice are most-accurately reflected, and that’s where your hard work and sacrifice will be ultimately rewarded with the highest possible value for your company.