This edition is about the important role of the CEO for any company.
And one of those critical functions is about growing the business
The specific topic that we will address deals with the role of strategic planning and strategies for the growth of the business.
There are three different ways that a company can grow.
And these include
- organic, which means grow from internal possibilities and ideas
- create joint ventures or affiliations with other companies or partners to expand
- merger and acquisition activity, which means to acquire another business, or maybe sell the entity
So how do you go about doing this? Plus who can help you in this type of activity or what advisors could be available to you?
There are three types of advisors that could be considered.
- a CEO coach,
- a consultant that specializes in mergers and acquisition of firms
- a special type of consultant, which is called an investment banker.
An Investment Banker is a business broker, who on your behalf will help identify potential companies that could be purchased or even buy your firm.
An important element to consider on all of the above factors is the valuation of your business or the valuation of another company that might interest you.
How does someone go about identifying what these valuations might be?
Several approaches to that include
- Industry activity that would be available to you via articles or trade journals in your industry.
- Historical data that can be found in the specific category where you operate documenting prior purchases or sales
There are ratios or formulas that are often used to establish the valuations of similar firms.
Ratios could include
- a multiple of revenue.
This is very common in the software business or other type of high tech entity
2. a multiple of earnings, which would be calculated as EBITDA (earnings before interest, taxes, depreciation, amortization)
This is the most popular yet vague or general multiple. The value can be viewed as:
Low if less than 4 X EBITDA
Normal if 5 – 6 X EBITDA
High if greater than 7 X EBITDA
The importance of your advisor can make a significant difference in the above negotiations.
Their experience, their insight, plus their approach can be worth millions to you.
Several years ago I was President of a bottled water firm in Texas. We were approached by a competitor interested in a possible acquisition. This is a strategic buyer (in the same industry.)
While we were not very profitable, we did have 30,000 customers in 5 markets.
The norm in the industry, at that time was $400 per account. Do the math & you will see that we actually sold the firm for $12 M. This was a defensive acquisition…..they really wanted our customers to add to their base.
A lot of due diligence, sampling of data, verification of the accuracy of the financial records, etc had to be performed. Several months of effort to implement this transaction. But it was a SUCCESS!!
If you want to understand more about this process, reach out to me, we can talk.