Monthly Archives: October 2018
by Jeff Bruno on Oct 31, 2018 11:54 AM
I enjoy working with Trilogy clients, helping them to better understand their financials to set strategy and drive growth. But what happens when owners want to exit the business? How can they ensure that they get the highest value for the business they’ve dedicated their life to build?
As you may know, the industry standard valuation method is a multiple of a organization’s Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The objective of a company in the short-term is to maximize EBITDA any way possible, to improve its value. However, depending on your industry or business model, one may have to decide if EBITDA is the best strategy to value your business as demonstrated by these two examples:
First, let’s look at MakeStuff, LLC, a manufacturing company that has been operating for 25 years and is positioning itself for exit. With a multiplier of 5X, any addition to EBITDA has considerable impact. While there are alternate ways to add to EBITDA from cutting overhead expenses to increasing sales, MakeStuff chooses to discount products heavily to incentivize purchasing and top-line growth. The gross profit margin will decrease, a strategy that may not be sustainable in the long-run, but every extra dollar of gross profit margin would improve the EBITDA. Ultimately, if the company raises the total EBITDA from $1,000,000 to $1,200,000 for the year, with a 5X multiplier, this would yield $1,000,000 more at time of sale.
Now consider Govt Software, LLC, a software company positioning for exit in the government space. Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) are major factors for this type of entity and can be more critical than solely an EBITDA multiplier. Therefore, this company could have a completely different strategy than MakeStuff.
Govt Software’s value lies in its targeted niche, licensing specifically for government agencies and multi-year contracts. There are many larger companies that have better economies of scale with more dollars to invest in infrastructure, so Govt Software becomes very attractive as an added revenue line for a larger company.
In this instance, with the goal of exiting soon, Govt Software would be wise to reinvest all profits in sales and marketing initiatives that would help the company improve the overall MRR. With a revenue multiple of 3X, they would add $300K in company value for every $100K of annual contracts added, regardless of a positive or neutral effect to the EBITDA.
Preparing for exit is not something that should be left to chance or done without professional guidance. Each specific case needs to take into consideration the specifics of the business involved in the M&A transaction. If you’d like to have a conversation to learn more, contact Trilogy Partners at firstname.lastname@example.org or 609-688-0428.
by Blair Turner on Oct 1, 2018 12:46 PM
When working with Trilogy clients, I often tell them the story of Mitch and Jack, two high school friends with contrasting personalities. Mitch was a loner, a straight-A student who always completed the extra credit homework and was essentially the pompous, go-to answer man when the rest of us stared back at Mr. Carmen with dazed expressions.
Jack, on the other hand, was a good student who finished his homework during lunch, right before class. He often showed up a few minutes late, usually detained by friends seeking his brotherly advice. Jack was a very good listener and involved in many school and community activities.
Many years after graduation, I saw both men at a high school reunion. I found it fascinating to learn how their lives had evolved. Mitch graduated at the top of his class from an Ivy League school with a law degree. He had moved around and through various prestigious law firms as well as three wives. His continual complaining and negativity turned off our classmates and sadly, they drifted away from his table.
Conversely, Jack earned his Associates degree and started working at IBM where he was able to complete his Bachelors. Through the years, he moved with the company and had been promoted many times. He now led a huge regional sales team, was married with two children, had settled into a new home and was thankful he could become more involved in the community. The same classmates who sought his brotherly advice decades earlier were still his friends.
Like many, I grew up believing that success in school equaled success in life and in the workplace. Intellectual Quotient (IQ testing) dominated society’s view of human potential for a hundred years. People with school smarts or high IQs, were analytical, logical, rational and could retain and recall information at high levels. At the time of my reunion, I was reading about street smarts or people with high Emotional Intelligence (EI) who can recognize, understand and manage their own emotions and recognize, understand and influence the emotions of others.
This new concept of emotional intelligence was clarified when I reflected on how Mitch and Jack’s lives transformed into such dissimilar directions.
So why is EI important for business owners and their employees? Scientific data shows a correlation between emotional intelligence and proven success in our personal and working lives. Daniel Goleman, who first published Emotional Intelligence in 1995, shares that Johnson and Johnson found that in divisions around the world, those identified at mid-career as having high leadership potential were far stronger in EI competencies than were their less-promising peers. This is further supported by Travis Bradberry, author of Emotional Intelligence 2.0, who wrote, “Ninety percent of top performers are also high in emotional intelligence.” and states that there is a direct link between EI success and earnings.
Is there someone like Mitch in your organization? Self-perception, Self-expression, Interpersonal skills, Decision making, Stress management and Happiness can all be assessed in an emotional intelligence test and these skills can be improved no matter our age. At Trilogy Partners, we identify barriers and help develop emotional brilliance. To learn more, call us at 609-688-0428 or email email@example.com.