Is your EBITDA too high?

Occasionally I run into owners of privately held companies that boast of very high EBITDA’s. “Look at my company, twelve percent EBITDA for three years straight”. I recently ran into such an owner who – it turned out was well into retirement age, by more than fifteen years I might add, and he proudly recounted the history of this fine company that he had started back in the 1960’s. All’s well I am sure. What he wanted to know from me of course was what I thought the business could be sold for. “An EBITDA multiple of TEN or even higher?” he suggested, tongue in cheek.
For openers I pointed him in the direction of several sources of information about this subject, most notably the AMAA, Pitchbook and GF Data, sources that routinely provide an objective reality check on expectations of that kind. But then I began to take a closer look at the company as he allowed me to ask more questions during a follow-up session.
First off, I noted that the top line of the company was not growing very well. Actually for the last seven years it had oscillated around the $10million mark but the long term trajectory was pointing downward. I also could not help but notice that the owner had paid very little – if any – attention to the Digital Age and technologies that are available to rejuvenate business models.
Then it became obvious that he wasn’t making much effort toward customer acquisition either. The old cadre of supporters he had built fifteen years ago was still there but nothing beyond that. He ran a very lean team with his two daughters in charge of admin and finance respectively. Sales productivity was sky high, no question about that. But there wasn’t a trace of investment in business process software, or training beyond the most rudimentary use of xls Spreadsheets or anything like that.
And what about new product introductions? Or even the slightest experimentation with presenting new ideas to his customer base? No, none of it. Not a trace! But what really worried me once I became more fully aware of the situation was that the owner did not even have a succession plan. At minimum, he could have taken a first step by transferring ownership of the company to his daughters, but even a small step like that had been lost in the maelstrom of procrastination.
I came to a simple conclusion – once again – and that is that as a business owner you cannot eat your cake and have it too. If you go for EBITDA but starve the company of the oxygen it needs to survive and rejuvenate itself, the organization suffers. A buyer will see through this in less time than you can blink an eye, unless perhaps they’re from outer space.
Buyers look at the management team, the top line, the bottom line and the business model. If all four are thumbs up, they are encouraged to take a next step. If on two or more counts it is thumbs down, it often becomes just another case of an owner ‘Over-expecting’ in the face of ‘Underperforming’. But there is a broader lesson in this story of the elderly gentleman-owner and that is that:

“Exit Planning Delayed is Shareholder Value Impaired”.

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