So Your Business Is a Cash Cow...Who Cares?

Recently I had a conversation with a business owner who had a built a company doing over $500M in annual revenue. Net profit was in the 10% range. The business was doing well. He was doing well and beginning to think about how he could cash out of his cash cow. Just one problem - nobody would touch it. And those that would were offering a valuation much much lower than he expected and with more strings attached a textile factory.

How can this be? $50M in net profit annually and no one wanted to buy his business? Ya, that’s right. Unfortunately for our friend, Joe Business Owner, his industry is highly regulated and associated with the Healthcare space. Additionally, most of his revenue came via three important broker relationships. Despite a very profitable and large business, potential acquirers were petrified of what could happen in the coming election cycle or if a key relationship was damaged. With the stroke of a pen, our friend could go from hero to zero.

You see, cash and profit are not everything when an acquirer is looking at your business or when it comes time to exit. While it is certainly important, things like industry, regulation, market position, etc play critically important factors…in this case even more than the financials. There simply was to much risk to future cashflow for an acquirer to take on an acquisition at the desired valuation.

Fortunately, for our seller, he found this out early in the diligence cycle, not after months of hard work and negotiating. The sad reality is that usually by that point, sellers are so worn out from deal fatigue they agree to almost anything and that is not how to exit your business. So what’s next?

In this case, our seller has two options. Option one is to take a smaller valuation with all the strings attached. Option two is go back to the drawing board to diversify his broker relationships, sure up his market position and potentially look at additional revenue streams that will reduce the overall acquisition risk. Ultimately, executing on these things will drive up the valuation of the business and help produce a cleaner, happier and more profitable exit. But, it will take multiple years to pull off.

This scenario happens to most business owners no matter the size of the company they run. It’s why we exist at SGS. Take the time to get out in front of these conversations before going to the market to exit. This scenario, in some form, will happen to you. The investment of time and resources will be well worth it as you move faster through the exit process, make more money and close with less strings attached.