Bea Wolper was the person who introduced me to the term monthly nut.
“What’s your monthly nut?” was the first question she asks any entrepreneur who approached her expressing a desire to sell their company.
‘Monthly nut’ is the effective income that you need to bring home each month to maintain your present (and perceived future) lifestyle.
‘Most people don’t know what their monthly nut is,’ Bea says. ‘You’d be surprised how many of them, successful businessmen who’ve been at it for decades, don’t have a ready answer.’ So if you plan to sell your business and intend to be happy you should start with trying to achieve clarity on two financial facts
Do you have a realistic sense of what your business is worth?
How much money do you need and want to address your post-sale life?
This is one of the questions that I addressed in my Q&A session with Dr. Annurag Batra of BusinessWorld. The full interview is available here.
Yesterday after I spoke to a group of Rotarians in Bangalore, the first question that was posed to me, was “How does an entrepreneur get the valuation they seek?” A few weeks ago, an entrepreneur who was still part way through my book posed the same question to me as in “How do I get the valuation I want?” The short answer is you build it. But how does one do that? Through careful planning, execution and a spot of luck!
In both these cases the entrepreneurs had been running their businesses for a considerable length of time. It was when they began considering exiting or selling their businesses that they found there might be a gap between their expectations and the valuations potential buyers might offer them. So how does one bridge this?
There are three steps to getting the valuation you seek. Understanding valuations, preparation and running a good process.
Understand how valuations work in your industry. Typically for a business in a mature industry, this works as a multiple of earnings (EBIDTA) or even revenue. A simple place to start is to look at others in your industry or sector who have been recently, say within the last 6-24 months, been acquired. Informal conversations with investment bankers can also help get a sense for this. Now do a reality check of this number against how your company would measure and what you seek. If you are lucky you are already there. Of course in fast growth or emerging industries, often technology-based, these numbers may not matter. For instance, my first company Impulsesoft had barely broken even and had revenues in the single-digit millions yet was able to attract both a top-tier investment banker and global buyers based on the industry (wireless technology) and technological innovation. So get a sense of what valuations are likely and where your own business falls.
Plan and work on bridging the gap between typical valuations and the one you seek – this requires you to first understand what you seek not just the valuation or $$ but also your own role, if any, post acquisition. Tim McCarthy founder of Workplace Impact hired a consulting firm and tasked them with the job of finding what sort of buyer he should look for, and what within his company would cause such a buyer to pay less than they deserve. They came back with a set of five specific things, not all of them financial that Tim’s company would have to address—things such as customer concentration, client size and EBIDTA. Over the next five years Tim and his team set about fixing these and sold his business for $45M in cash!
Run a good process One of my mentors Chandrasekaran was fond of saying “It’s a matter of their need and your greed, or vice-versa.” So understanding the potential buyers’ motivations and hence value perception is critical. Assuming you’ve clarity on the outcome you seek and done your prep, one of best ways to maximize value is to have more than one buyer, ideally several, at the table prepared to bid against one another.
Luck of course plays a bigger role than any of us is prepared to admit. However the more you plan, prepare and persevere the luckier you are likely to get.
In a hat tip to Om Malik who writes a periodic column called “What I’m reading“, I decided to write a weekly note on what I’ve been reading. Today it was Flowers for Algernon by Daniel Keyes. I was rooting around the basement library of some friends that I was crashing with for the week, hoping to find a mindless Ludlumesque or Lee Child adventure, when I came across the book. My friend’s copy was in mint condition lulling me into believing it was a recent book despite its blurb “The classical novel that inspired the Academy Award-winning movie Charly” which of course I’d never heard of.
I picked up the book with little idea of what it was about or even when it was written. I certainly did not think of it as science fiction, which is what Wikipedia speaks of it as. I read the book in a single sitting, as it held me enthralled. The start of the book, as in letter form or more accurately, journal entries took a moment to get used to and for the first page or two, the misspellings and poor grammar seems a little contrived. However, Charlie Gordon’s voice and narration drew me in and I had a hard time attending to real life needs be it breakfast or lunch as I plunged my way through the book on a work day! The book worked at so many levels, from how mentally retarded folks are treated, to the insular world of academicians and scientists to growing self-awareness and insight of an evolving Charlie Gordon and how childhood experiences and memories continue to shape us. The redemption of Charlie’s sister Norma, his encounter with his father, his evolving relationship with Alice – the book is filled with tales of redemption and self-knowledge – even if every one of these characters are not threshed out fully. I’ve rated the book with 5 Stars for both the subject and how it’s been covered and the way it held me truly enthralled.
Over the last several years, I have written about startups, entrepreneurship and business in general in the Hindu BizLine and Wall St. Journal. I have compiled these for easy access in the column below.
by Marshall Goldsmith with Mark Reiter
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