On Valuation….Math is ‘Sterile’

It’s a common refrain for those in the business of selling companies; “how much is my company worth”? The best answer is, only the market knows the current value. The ‘professional’ answer is it depends upon the current and recent past profitability and the predictability of your future profits. Neither of those answers are sufficient for a business owner to decide if the time is right to sell their business. Ultimately selling is all about ‘the number’. And ‘the number’ is a complex computation of quality of your retirement years, plans for travel, relocation or career changes.

Let’s talk about ‘valuation’.

Enterprise value is the technical term investment banks use for assessing the value of a business. Technically, it defines value as any or all consideration paid by the buyer to a seller, on a debt-free and cash-free basis. The terms can get arcane and overbearing at times. As an example, it’s not unusual that an investment bank would demand a commission for an employment agreement, if they deemed it ‘above market’.

I’ve witnessed prospective buyers performing massive financial projections and analyses ultimately to justify in their minds that their offer is ‘proper’. Sellers are often asked if they have audited financials, which in most cases is unlikely for a median sized manufacturer (median size in Lighting is around $12M in revenues). Audits are costly; as are Quality of Earnings (QofE) assessments. They are also time-consuming during a stressful period of due diligence and closing. All of the above informs future sellers to take time to consider your exit and properly position your company for sale.

My viewpoint on valuation is that the true ‘value’ of a company is how it will perform under the buyer’s purview. In essence, there are significant investments of time and money to verify the current financial status of the selling company; but far less allocation of time and money spent on the quantification of integration, synergy and future growth of the combined company.

From a sterile investment perspective, no one would buy 1000 shares of a stock that they felt would remain at the same share value in the future. Acquisition requires significant devotion to improving an existing successful company; and that requires investment beyond the purchase price. In essence, there should be a Quality of Ownership assessment prior to closing on the sale. And the biggest part of a QofO should be leadership.

All transition processes encompass operational reviews, financial assessments of reducing costs, vendor reviews and product plan reviews; as well as personnel reviews. But the largest intangible value of a company is leadership. The biggest investment necessary to spur growth is to invest in leadership.

Manufacturing is the byproduct of people. Lighting is a ‘people’ business due to its ubiquity. Growing a company requires growth minded, capable people. The machinations of analytical assessments of enterprise value repeatedly overlook the primary secret to success….people.

If you’re ready to sell here are the keys:

1. Do the math. Clean up your financials.
2. Create your business forecast based on current and future growth plans.
3. Define your ‘number’; i.e. how much money do you feel you need to satisfy your future plans? That ‘number’ becomes real as you wade through the LOI stage and the reality of an actual sale of your company becomes real. Having that ‘number’ in your head before you launch and validated by your advisor is an important touchstone to keep in place during negotiations.
4. Find an advisor that actually understands your business. Despite the belief that lighting is just a manufacturing business; it’s far more complicated than that; especially to a generalist investment banker.

In sum, selling YOUR company is unique. It requires financial accuracy, but more importantly it requires mental and emotional rigor to wade through the process and arrive at your ‘number’.

Math is sterile… selling is an emotional transition of life.

I wish you and your family a happy, safe and healthy holidays. Thank you for your support throughout 40 years of ‘membership’ in the Lighting industry.