With more than 25 years of experience advising businesses, Leroy Davis knows the sweet spot for selling a company. While many entrepreneurs have heard of the $20 million valuation rule, he shares there’s much more to it than numbers and forecasting.
“We don’t put a hard line on 20 [million of revenue], we try to dig on some of these more intangible factors,” Leroy says. “And we get surprised regularly with some of the revenue multiples that we see, particularly in today’s market.”
According to Leroy, entrepreneurs, particularly those in tech, must consider many financial factors when determining when to sell — and having a team of experts by their side can provide a complete picture of their options. This team is also invaluable to forecasting, one of the most important areas that potential buyers look for. Not hitting numbers is the number one reason why deals go sour, Leroy says. He also talks about how to set yourself up to attract the right buyer at the right time.
On this episode of Deal Talk with 7MA, Leroy provides invaluable insights for entrepreneurs who want to sell, particularly when intellectual property assets are part of the deal. He also shares about how to prepare yourself mentally to pass the torch on to someone else.
“As an owner, are you ready to hand the keys to somebody else and give up control? That’s a big deal.”
Name: Leroy Davis
What he does: With more than 25 years of investment banking experience, Leroy has manages transactions in the technology, consumer, insurance, healthcare, and infrastructure sectors as a Partner at 7 Mile Advisors. He began his career with Coopers & Lybrand and is a member of the AICPA.
Organization: 7 Mile Advisors
Words of wisdom: “The minute you enter an M&A process, it’s tantamount to being like a public company.”
Top takeaways from this episode
★ Know your options for selling. You could sell to a strategic buyer who’s already in your space or to a private equity group that can expedite and execute a growth plan.
★ Work with a team for a full financial picture. Metrics can be overwhelming — but working with an advisor can help you see where your company will land when it comes to pricing multiples. Additionally, it helps to have a deal attorney who specializes in M&A, an accounting firm to organize your finances, an asset management or wealth management group, and an investment banker.
★ Many deals go south because of companies not hitting their numbers. High-growth rate businesses should expect to maintain those growth rates to attract buyers, but there are always some factors you can’t control. After all, businesses are subject to volatility. Taking as many variables off the table as possible can help companies hit their numbers.
★ Revenue style is a consideration, but it isn’t everything. Revenue style is indicative of scale, and there is some truth to the $20 million valuation standard. However, some subjective factors come into play beyond the P&L, especially for technology companies.
★ Take advantage of momentum and timing. The moment your business is doing well could be the right time to sell. Know that deals can take about six to eight months to close, and that if you’re highly involved in your business, you may want to stay present for about three years after you sell.
[02:21] Weigh internal considerations: Before you sell, you need to assess a few internal factors, such as: Is your business ready to transfer to someone else? Do you have a growth plan in place? And are you mentally prepared to give someone else control of a project that you’ve put your heart and soul into?
[03:45] Know your external considerations: The market also plays a major role in whether it’s the right time to sell. You need to weigh if the market will line up with your financial expectations.
[07:47] Research your stats: Know your company stats. For example: Revenue growth rates and gross profit are among the most important on the P&L statement to show where your company will land on pricing multiples.
[08:37] Put rigor around forecasting: According to Leroy, entrepreneurs should be aware that starting the M&A process is similar to sharing stats as a public company. Potential buyers will pay close attention to make sure you are hitting your numbers.
[11:00] $20 million is the magic number: Across the board, $20 million seems to be the magic valuation number to sell. Leroy shares some reasons why that number generally holds true but adds that there are exceptions, especially in the tech sector.
[21:38] Build a team you trust: There are many professionals you’ll need on your team for a successful M&A. What’s important is hiring trustworthy people who are familiar with your particular industry and who will go to bat for you in negotiations.
☑️ Let us know what topics you would like to hear about on Deal Talk with 7MA by emailing us at firstname.lastname@example.org.
Deal Talk with 7MA, a bi-weekly podcast by 7 Mile Advisors that aims to give listeners a look behind the curtain of the middle-market Mergers & Acquisitions world. 7 Mile Advisors is a middle-market M&A firm based out of Charlotte, NC, that provides investment banking services and advice on mergers, acquisitions, and private capital transactions around the globe.