Welcome to the Scale With Speed Podcast. This is Judge Graham and I’m with my business partner,
Matt Manero. So we’re talking about enterprise value.
What does enterprise value mean?
Enterprise value is for everybody listening that owns your company, what’s it worth? Right? What’s its value? Why are you doing this?
I have a chance to sell this thing. Wait for, there could be a pot of gold at the end.
Yeah. So we’re going to go over, um, really mixed metrics on like business valuation. And then how do you build enterprise value? We’re going to give a couple of steps on some of the things you should be doing in prep, whether you want to sell your company or not. If the opportunity presents itself, you’re in the best position to sell it. Or if you’re tracking towards I’m building it to sell, you should be doing a lot of these things.
You should be building your business to be sold at any time, whether you want to sell it.
We’re not, that’s our belief. Totally. You know, so,
And we always use the, uh, example of, uh, alumni from the burn, the ships who came in. He had no interest in selling his business. They didn’t think about it. Six months later, he sells it for millions of dollars, right? Every business should be built to be sold, whether you want it or not. Now, how do you know what your business is worth? Because unfortunately, uh, I’m not exactly sure where we get this stat for burn the ships judge, but something like 92% of businesses that are listed to be sold, never sell. They never find a buyer.
Yeah. And that’s because they weren’t prepared properly. They don’t have a lot of the steps we’re going to talk about. They weren’t big enough. They didn’t have enough stickiness. They didn’t have recurring revenue and on and on and on.
We teach this topic of enterprise value to burn the ships. And we’re going to give you some of that content right now. There are three ways that your company is going to be a baseline value. The first is a multiple, a multiple is a dollar amount paid by a buyer to you as the seller. And the multiples are going to be based on three things, revenue, net income, or EBITDA earnings before interest taxes, depreciation, and amortization. EBITDA is not that important. If you’re in a service-based business, you don’t have a lot of debt. Uh, but it does. If you’re in a capital intensive business or, um, you know, you’re, you’re a machine shop, you’re a trucking company, something in which your company has had to incur lots of debt to produce the product or services you end up selling. So those three things are key metrics that you better be spending some freaking time on. Dude, you bet, you always see it on shark tank, right. Where that entrepreneur comes up and they get
Grilled for not knowing their numbers. Right?
How much business have you done? And I love this one. Well, we’ve done, um, you know, $1.2 million, um, over what period will that since inception. Yep.
Give me a business for five years.
And then what’s the followup. They always, the sharks ask what have you done in the last six months? Yeah.
Right? What’s the margin? What’s your marketer? Yeah. So three
Key metrics that you have to completely understand to understand the revenue. You have to understand the net income and you have to understand that EBITDA. And we’re now going to go in and give you some examples that we have seen the judge has experienced in what the multiple of those three key metrics could be. And so when it comes to revenue, these are rules of thumb gang. This is directional, directional good one X revenue is a reasonable rule of thumb. If you have a $5 million business, there is an argument that your business could sell at one X of $5 million. Now, when we talk about this and burn the ships, w you know, you, you begin to see people like that. You can just see it in their eyes like, Oh,
Yes, I can sell it there, hold on. Cowboy. We got to go a little bit further on that. More deals are not done that way, right? I mean, software companies, maybe most companies aren’t getting one X or the rest,
Because here’s how it plays out now. But you have to understand enterprise value, the purpose of today’s podcast, which is now if you have rev, the next question, your buyer’s going to ask us, how much do you make on that rev? So let’s just say that your company on $5 million, um, operates at a 10% margin. Well, you have a $500,000 net income on $5 million worth of revenue. And on net income, you might, depending on time circumstances, uniqueness, tech, culture, uh, you know, is it a strategic buyer? Is it a nonstrategic buyer? Who wants you? Why do they want you all to your client base, all that sort of stuff, your recurring revenue base, your trustworthy cash flow? You might see a five, six, seven multiple to your net income. Okay. So let’s say you had a five X multiple on your five mils, a 500,000. You’re now 2.5 million in enterprise value. It’s a big difference. It’s a 50% haircut off of the 5 million in revenue that you got so
Excited about it. Right? Totally.
The third piece is EBITDA. And a lot of the private equity guys, more sophisticated buyers will care about EBITDA because they understand that perhaps let’s just say, you’re in a capital intensive business. And EBITDA is at 5 million. Let’s say that your Reba does, uh, let’s say you Rebidose 1.5 million on say, 5 million in sales. They understand that they have levers to pull that you may not. One of the primary levers they may have is buying power. Maybe they can buy the capital-intensive equipment less than you can, and therefore they can increase the EBITDA. You didn’t have that buying power. Maybe they can, the debt is cheaper than you can borrow the debt. So the interest expense and greater. So EBITDA matters to those guys because they may have some scale that you don’t have, and they can pull an immediate IBA doc and increase it for them. Totally. Okay. So again, if you have that says it’s 1.5 million, and you’ve got five X on your EBITDA of 1.5 million. Now you’re in the seven, seven and a half million dollar range. It is possible that if you get bought or valued off EBITDA, it could be worth more than if you’re being valued off of net income. Okay.
Yeah. And, and for, for people that understand this as a symbol concept, if this is the first time you’ve heard this, that, you know, when you just do more research, you probably should come to burn the ships. But the idea is this is the three ways people usually get sold. And we should caveat too. Like if you’re not at least a million in EBITDA or net income, it’s going to be tough to even sell your company, right. It really, you need to be in that five, six, 7 million EBITDA, not revenue range to get attention and get a sizable exit.
Let me, let me just double click on that just for a sec. The point is you’re listening to a podcast called scale speed. It does not scale slow. It’s not like limp in, it’s getting freaking big, fast because of the numbers that the judge’s throwing out there, let’s say that you did have a $5 million EBITDA. You’re going to be much more attractive to a lot more people than if you have a $500,000 EBITDA. You’re just not even going to get in the front door. But if you have a five X or a $5 million EBITDA, and you were to pull a five X you’re now looking at a $25 million exit, your freaking life changed because you committed to scaling a business with speed, getting it to a $5 million EBITDA on a twenty-five million dollar freaking exit. Guess what? You just got fucking rich. That’s the game that you’re listening to this podcast for? How do you get scale at profit?
Fast? Amen. If you want to make it even more exciting to get to 10 million and Yvonne. So for 10 accents, a hundred million numbers, I get excited about. All right. So let’s talk about some of the fundamental things you have to do to even be in a position to sell. Right? So Matt just went through the mechanics and kind of the logistics of here are scenarios of, of, of things that you could look at to, to exit and how the exit works, but you got to even get to the dance to do it right. And so some of those things are two to three years of audited financials, right? So, um, listen, if you’re only doing, you know, 50,000 a net income, you know, don’t worry about artist financials. I mean, once you’re hovering, and again, this is directional, these are all Matt and I’s opinions, right? You’re about it. A million in EBITDA, 700,000 in EBITDA, you should start exploring audited financials.
I couldn’t agree more with that. And I also think that the double click on that is the easier you make your financial statements, be trustworthy to the buyer, the less they’re going to scrutinize it, the less they’re going to scrutinize it. And the more trust they have in you as an owner. Totally. And so, you know, when you’re spending five grand a year from, you know, Baba’s tax return service, and now you’re spending $50,000 a year on your audited, there is a very good chance that you will earn that money back in total on the exit.
Yeah, yeah. A hundred percent. The other piece is not easily duplicated. Right. So if you’re in a business that can be stood up fast, it’s easy to duplicate. Um, you have nothing special. You’re just going to be valued as much. That’s just how that plays out. Um, buffet calls it a moat. Yeah. That’s a great, great example, right? I mean, you, you’re the business that you have to be in has to have some secret sauce. Yeah. Right. You know, that, that only increases the value if it’s a commodity and there, you know, there’s just not going to be a lot of value. I mean, it goes back to the niche. Yeah. Niche will get you rich, experts get paid, and amateurs get crushed, right. Three to four months of cash, save, listen. People were about to buy your business. They don’t want it to be empty.
They want to know, and you work all this out. It’s called working capital. But, they want to know you have a reserve. If the next COVID hits and they buy you that business can operate fine during that three to four-month COVID repair coverage period. Right? So at some point, you need to start putting some money in the kitty and just keep it in there. Right? I mean, it’s just, just good business practice, right. If you’re going month to month and you’re stretching that cash, that’s a problem. And again, now this is when you’re starting to make money. We understand, the startup phase, but you’re starting to make some money. You need to keep some out,
Even. So you, I mean, even whether you’re freaking just getting going, do you need to keep something? You need to keep some money. Now, this goes back to the next point. You’re about to talk.
Yeah. So owners need to be taking a market rate salary. So we’re going to get a little technical here, right? If you own the company, you can take the biggest distribution as you want. No problem. But if you’re trying to kind of avoid taxes and you’re taking a very small salary, so let me give you an example. You run a company that, to replace your position as CEO, the salary is 350,000, but because you would rather make more money in distribution and have to pay fewer taxes, being taxed at ordinary income, you decided to take a hundred thousand dollars salary. So it’s the difference of 250,000 Matt. You’re a math guy here. You can help me. You come in and the buyer is about to buy you. All right? And they’re going to buy you for a 10 X when you make the math easy for you, man. Cool. They’re going to buy you for 10 X. Okay. And they look at it and they say, well, you’re taking a hundred thousand right now. If you were to get hit by a truck tomorrow, we were going to fire you. We’re going to have to hire a CEO for 350,000. Therefore that 250,000, you’re going to be taxed by the buyer on times 10, what is 250,000
Times, $10.5 million. So you just
Left 2.5 million on the table because of how you were playing that out,
Which is you were playing it to avoid
Right. To save 15,000. He lost two 45, right. Or 20 or whatever it is now. Now, this is something, you know, when you’re getting in that cell mode start taking that, that salary six months prior, right? Um, dude, nobody is buying the company. If it’s you, your name’s on the door. And you make all the decisions and you work with the customers and you sell the customers. And if the company can’t survive without you, you’re not getting bought. You need an executive management team. You need to be seen as a leader. And if you were to get replaced or hit by a truck, the next day, you have a team that can handle everything.
You have to have those figureheads. And those figureheads will be analyzed extensively by the buyer. They are not buying a phony executive management immuno. I talk about this Nicola deal for those of you. Right. And I, you know, look, I, I’m not a big stock guy. Only buy a couple of stocks, but when this Nicola company, they were to be the, um, next Tesla, the next Tesla, they
Copied the name. Right. Right. So let’s just
Go ahead and take the guy’s first name, last name taken. Right? Um, but, it turned out that, um, there were a few players on the executive management team. One of the guys was the vice-chairman of general motors, which by the way, why do you think general motors took an 11% stake in Nicola to do this Badger deal, which is their electric truck. The guy put that deal together. But another person, the director of hydrogen technology for Nicola was the founder. Trevor Milton’s brother. This guy doesn’t know shit from Shinola about hydrogen technology. When you look at his LinkedIn profile and all this was a bit on CNBC, I mean, I’m not, I’m not like, you know, uh, disclosing, well, I’m not doing journalism. I’m not doing that. I’m just watching CNBC in their hair and telling me this there’s some bitch. His last job on LinkedIn before he got this job at Nicola was he was a concrete driveway guy.
He boards driveways for concrete.
So, so now what happens, it all blows up Nicolas going in the toilet, the founder has resigned. And since he resigned just last week, there were two sexual lawsuits against him. Mean this guy’s career ruined. Don’t feel too sorry for him. Because his exit package was $3.1 billion. But the executive management team in a real buyer’s world freaking matters. Are these people, what have they done? How long have they been there? What are their credentials? Can we trust that they can continue the organization at the same rate?
Super important. The other thing is, is margin optimization, right? I mean, if you are running a multi-multi multimillion-dollar company, but you’re making a 2% margin, good luck. Doesn’t matter how big your revenue is. Nobody wants to buy that unless maybe again, it’s some software company and it’s a strategic buyer dude making money matters. Right? And it’s not revenue that Matt did. Do you need to be making money? Well, it also matters. Margin is more important than revenue.
It also matters to judge the liquidity of the exit. Right?
Totally. The value goes up. If you have a high, if you have a 10% margin versus a 30% margin, that’s could be the difference between a five X and a nine X
Will also be the difference between you getting a check and being able to leave the organization or you getting a little bit and rolling the dice on a massive future payout when they’re like, yeah, we pay you when we get the company when we pull the Lars and get the margin. Yep.
All right. Um, succession planning, we kind of talked about that. I mean, that’s part of the executive management team, right? I mean, if you’re not in a position now where you have leadership, you need to, if you’re getting closer to this idea of an exit, you need to build that succession planning to make that buyer feel good. Like, Hey, listen, my COO easily could be promoted to my position. Right. And here’s the succession plan of how that looks. It’s already in our employment agreement. We’ve been working on it. She’s going to be ready at any time. Um, and here, when you give you a quick four tidbits on how do you constantly build enterprise value, right? Recurring revenue, um, we’ve viewed either have done a podcast on it. I think we just didn’t want to, right? Do people want to buy predictability? You have to have recurring revenue. If you don’t know what that is, go back and listen to the podcast on recurring revenue. It’s called recurring
Revenue saves your ass.
Uh, recurring revenue saves your ASCA. Listen to that low customer concentration. This killed me on one of my deals. And I came back and fixed it. Who, if you have an amazing company that has an amazing margin, you’re a hundred million in revenue and you’re 50% margin. Right? That sounds awesome. Okay, come up. But you have one customer that takes up 40% of your revenue, big, big, big problem. That customer leaves, dude, you’ve lost 40% of your company. So it doesn’t matter how revenue, how much margin do you w do we have one? We’re going to do a podcast on just customer concentration, how to avoid it, how to offset it. But you need to be looking right now with your customer concentration, right? If you have anybody, in my opinion, that’s over 30%, maybe even 25 of your total revenue, you’re at risk. Whether you’re trying to sell or not. What happens when 25% of the revenue walks out the door?
Hey, it is. I mean, it’s, it’s massive. I don’t, I don’t know how we understood that very early on here, but I like to hit singles and doubles. I don’t like to make revenue from home runs. And what I mean by that is home runs as you land that monster account. And now guess what? You’re freaking beholden to that
You’d be holding it. You got to go, go win another one. That’s I mean, yeah, it’s a whole,
So look real, real quick story. Cause I hope you’re listening to this podcast because you get real freaking life stories from us. Uh, we just redid our health insurance here. And you know, for those company owners who, who does health insurance at their companies, you realize it never goes down year over year. It always goes up. I mean, it’s just, it’s just an automatic in business. Health insurance renewals are always going to be more expensive than the previous year, except this year for us, the first time in the history of the company. Why? Because the company that lost out to us last year, Uber sharpened their pencil to get their business, our business this year. That’s what happens with customer concentration. When you have that one big account that you check that you just stole, guess what? Those guys don’t just sort of, you know, pack it up and fold it up and go away. Do they sharpen their freaking pencil to win that business back? Yeah.
Yeah. That’s, that’s a whole separate podcast on being opportunistic. Right. Um, and optimizing your revenue right. By hitting up those vendors. Uh, the other one is building intellectual property. Listen to me again, that the name of the game when you’re sending your company is how do you increase that multiple? The difference of getting a five X versus a 10 X is, is chiefly meaningful, right? How you
Do that is, is, is through a multitude of things,
But one of them is intellectual property. Right? And what do I mean by that is, do you have a unique process or piece of technology that makes things faster and better for the customer? And if you do, and it’s unique, there’s value in that, the last one is the ability to scale. No one is going to buy your company if you’ve tapped out the market. Yeah. Okay. If they’re buying you for a hundred million, they need to see that the opportunity is a billion with their resources, their scale, their cross-pollination of customers, and everything they’re doing. So make sure you’re in a market that you can dominate, but the ceiling is high because if you’ve already into that, it’s not that, you know, it’s still a good business, but buyers that spend real money, they’re buying the scale, right? If they’re writing a hundred million dollar check, they want to make it into a billion.
So, um, I’ve listened to, I don’t know how many auto programs judge. I know this might sound crazy, but I would, I wouldn’t be surprised if it was a thousand tapes, CDs, shit like that.
That’s dating you bud say, say, uh, iTunes. Well,
But actually, I don’t listen to him at the same velocity. I listened to shit. That’s of interest to me, not, not this foundational shit. And I don’t know how many books, hundreds of books, never in any of them, did they ever teach me enterprise value? And what the process to exit the business must be the audited financial statements or customer concentration. The metrics that we might be valued off of the key piece of technology, the recurring revenue.
And this is just a tiny bit
Of what you get. If you come to the freaking burn, the Bootcamp shifts. So I cannot stress enough on behalf of the judge and me, if you like what you’re hearing in this podcast, this is episode 11, by the way. Awesome. If it’s benefiting, you go to the next level and click burn the ships.com Bootcamp and buy your ticket and come, it’s a hundred percent money-back guarantee. If for any reason you didn’t feel like you got your value out of the registration, we will payback.
And if you’re not ready or you’re not a fit, but you liked the content, leave us a review, share it, right. I mean, it’s awesome. We’re seeing those ratings go up, but you know, Matt and I take a lot of time to do this. It’d be awesome. If you’re listening to you, enjoy it. Please share it. Lose a great review.
All right. So that’s it for today’s episode on enterprise value, man, if you do nothing from it, start to look at your business. Under the pretense of my business can be sold at any time to the highest buyer
Make it happen.