If you are a business owner, at some point in your life you will probably want to start thinking about this acronym – T.E.E.M.M. (pronounced “team”). Why? Because at some point you may want (or need) to exit your business…either through a sale, the formation of an ESOP, passing it to your descendants, or by other means.
There are several key concepts to think about years before you consider a sale or other exit from your business:
T – Timing
In the book “The Exit Strategy Handbook” by Jerry Mills, there is a discussion of the millions of business owners who will be looking for a way out over the next few years as we head for what Jerry calls ‘the Baby Boomer Tsunami™.’ As more and more baby boomers who own private businesses head for retirement and get ready to exit their businesses, how will your company stand out among the competition? Timing is critical. If you sell too early, before your company is at its full potential, this may lead to a lower price than what you might achieve otherwise. If you wait and sell when the tsunami hits, will you be able to find enough willing buyers to get the price that you think your company is worth? If you plan to sell sometime in the distance future, what happens if something unexpected happens (e.g. death in the family, disability, etc.)? Will you have your plan ready?
E – Emotions
In selling your business, you will need to be prepared emotionally to exit your business. Why? Because for many business owners, selling their business is like selling their children (depending on whether or not you have children…and how much you like your children…this illustration may or may not be helpful to you).
In all seriousness, for most business owners…selling their business is a difficult emotional experience. Sometimes these emotions can cloud good judgment and destroy the sales transaction. The best way to deal with these inevitable emotional decisions is to be prepared in advance and have a well-thought-out and documented exit plan… and some good advisors to keep the plan on track.
E – EBITDA
So what in the world is EBITDA? “EBITDA” and the next key concept the “Multiple” are two parts to a simple math equation that will be used to value your business. In short, EBITDA is an acronym that stands for Earnings Before Interest Taxes Depreciation and Amortization. This is a simplified way of getting earnings from a vast array of businesses to be relatively comparable. For example some businesses pass on their tax liability to partners or S-Corp shareholders so they don’t usually have an income tax expense deducted from pretax earnings. On the other hand, other businesses that pay taxes at the corporate level will usually have an income tax expense. Looking at earnings before things like taxes, interest, etc. tends to level the playing field when it comes to comparing one company to another (obviously other more complicated factors will apply as well, including the concept of “adjusted EBITDA”). One main focus of you, and your financial and operational teams is to increase EBITDA to an optimal and sustainable level prior to the sale.
So let’s say your business has $3 million in net income and $2 million in interest, taxes, depreciation and amortization. Then your EBITDA would be $5 million. So what? Let’s go on to our next key concept: the Multiple.
M – Multiple
The Multiple is the second factor in this two-part math equation. In simple terms, if your business has EBITDA of $5 million and a buyer is willing to pay you a multiple of four (4), then your business would sell for $20 million ($5 million multiplied by 4). There are many factors that affect the multiple. Some you can’t change (e.g. overall market conditions), but there are a number of things that you can do with the help of a skilled team to increase the multiple. The list of items is way too long to list in this overview, but most have to do with nailing down critical aspects of your business (e.g. reduction of risk, making sure you have properly secured intellectual property (IP) rights, and assembling and documenting key contracts, processes, employment agreements, etc.)
Let’s say by some hard work and planning, you are able to increase the multiple from 4 (used in the example above) to a 6, then $5 million of EBITDA multiplied by 6 would give you a business value of $30 million (a $10 million improvement). Proper planning and preparation for a successful exit is essential for ensuring that your earnings and your multiple are at their peak levels.
M – Management
The last critical factor in the acronym T.E.E.M.M. is the Management of the exit process. Unfortunately many business owners try to manage this exit process themselves. Although they may manage the process effectively, usually this distracts the business owner from what should be their key focus and that is keeping their business running at peak performance. The reason that business owners don’t personally get involved with running payroll, or cutting accounts payable checks is that they can hire competent teams of people to do this so that the business owner can focus on running the business, improving productivity, leading the troops and increasing revenues. It is the same with the development of an exit strategy plan, the formulation of an exit strategy team, and the successful implementation of this plan. In short…at the appropriate time, assemble a team that is experienced at the process and someone that has experience leading similar teams to their successful conclusion.
For more information about the exit planning process, visit our B2B Exit™ website.