If you tuned in last week, you know we’re amidst a blog series on how to know it’s the right time to sell your business. Last week, we explored how it can be hard to time an economic cycle but that assessing the relative strength of purchase multiples in your industry compared to historical averages is an objective exercise. If multiples are high, and the timing is right for you personally, it could make sense to consider an exit lest you miss the window.
This week, we’re going to touch on point #2 in the list below:
- Valuations are Historically High
- You’ve Experienced Multi-Year Growth in Revenue and Profits
- Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
- The Industry is Experiencing Tailwinds from Positive Trends
- Value Remains for the Next Buyer
- You See Your Competitors Deciding to Sell
Having been investing in private companies for nearly 20 years, this next point is a key attribute we look for when determining whether to proceed with an investment opportunity. So, without further ado:
- You’ve Experienced Multi-Year Growth in Revenue and Profits. Bruce Lee said, “Long-term consistency trumps short term intensity.” This certainly applies to how investors will assess the quality, sustainability and growth potential of your company’s cash flow. For instance, if you have a great year with outsized profitability, it can be tempting to conclude that you should exit to capitalize on a multiple being applied to your inflated earnings. However, if your pop in EBITDA seems to be attributed to one-time revenue wins or other unsustainable factors, a buyer is not likely to give you full credit for it. Further, if your financials have had significant volatility over the years such that there are a lot of ups and downs one year to the next, you’re not going to garner the same multiple as a business that elicits more confidence in future growth.
Conversely, if you have generated a steady upward trajectory in revenue and profits across multiple consecutive years, it will increase a buyer’s conviction that your historical results are replicable. Given that the economy has been relatively healthy since the recovery from the Great Recession, we like to see steady growth at the top and bottom line since 2011 or so through the present. The following exhibit will give you an idea for how an investor might value a company based on its historical performance:
Stay tuned for next week’s blog where we’re going to address point #3 above, Expected Proceeds from an Exit Exceed Your Previously Defined Goals. As always, we’re interested in your feedback. To start a conversation, please reach out to Joe Schmidt (email@example.com) or Mark Gartner (firstname.lastname@example.org).
About ClearLight Partners
ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.
Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.