Your Business is an Investment. It’s Time to Start Thinking of it That Way.
April 6, 2022
By Leon LaBrecque, originally featured in our FOCUS magazine
Mike is an entrepreneur. He built a successful small manufacturing company, worked long hours, pulled in his family, borrowed money, made it through hard times and good times and sold the business three years ago to a private equity shop for $5 million.
That private equity shop just flipped it for $10 million.
Mike was miffed and asked me how they got twice as much for it as he did. I gave him what I thought was the right response: “To you, the business was your baby. To them, it was a business. You would have gotten more if you had thought about it that way.” Mike asked, “How can I do that?”
Here’s my recommendation—to get the most out of your business, start thinking of it as an investment. I’ve put together some suggestions and questions to help you start seeing your business for what it is—the process of investing money for profit.
What’s Your Purpose? Firstly, it’s important to understand the purpose behind starting your business. Ask yourself these questions:
Am I building a lifestyle business? A family legacy? Am I building my business just to sell it later? Why am I in this business versus something else? What’s my end game?
Remember: whatever you are doing, there’s a reason why you are not doing something else.
Enterprise Value. Every business has enterprise value (EV). EV is thought of as the theoretical takeover cost because it’s considering all the factors involved in buying a company. In the stock market, EV is used as an alternative to market capitalization, because it includes debt and cash, as well as market capitalization. So it looks at debt, plus a company’s current holdings and future earnings. This is the same with your business: what is it worth to a buyer? How much debt do you have? Cash?
Six Important Letters: EBITDA. Entrepreneurs tend to focus on “bottom line” or net profit. A much stronger measurement and key metric frequently used to determine the value of a business is earnings before interest, taxes, depreciation and amortization, or EBITDA.
Many business purchases are based on EBITDA times a multiplier, which varies by the type and size of the business. For example, say the multiplier for a business is six times the EBITDA. If the EBITDA is $500K, then the business is worth $3M. Note that the buyer will adjust the EBITDA to replace an owner’s salary, or expense related to the owner, like dues or marketing expenses. Think about a family member on the payroll that is “overpaid” by $100K. That adds up to $600K in the valuation.
The key: every dollar of the EBITDA translates into value. That’s whether you are selling, growing or keeping the business. As you make decisions on expenses/investments, ask yourself whether the dollars spent are maximizing enterprise value. Does it make sense to hire friends and family? Are those luxury spends good investments? Find the multiplier for your business and remember that one dollar might equal six, or 10 or more.
W.I.N.—What’s Important Now? Notre Dame Coach Lou Holtz created the famous acronym W.I.N—What’s Important Now? He used it to get his players to focus on the task at hand. When they were on the line of scrimmage, he wanted them thinking only about the next 15 seconds, not the afterparty, their exams tomorrow or the weekend ski trip. He also suggested his players apply it to all parts of their lives—in the classroom, in the weight room, and yes, even while having fun.
Entrepreneurs can get wound up in putting out fires, or dawdling with menial tasks or trying to multi-task. Applying the W.I.N. theory as a business mindfulness exercise will be helpful. Grab a notecard every morning (or evening) and ask yourself, “What’s Important Now?” Write it down and get to work.
Focusing on the here and now can help you gain a new perspective on what your business needs to make it a long-term success. Take a few minutes to consider all these questions and suggestions. Although it’s challenging to not think of your business as your baby, you will get the most dollars out of it by thinking of it as an investment.
Leon LaBrecque, JD, CPA, CFP®, CFA, has been an advisor and run businesses for over 43 years. Leon is a regular contributor to Forbes.com, appears on national and local media, and serves on multiple boards. Leon can be contacted at email@example.com.