For Founders Feeling Below Average

This post is for the founders who want to exit in the next three years but suspect they will get below average multiples.

I want to shake you a little and make you think about what you are doing and why so you either re-engage with renewed purpose or stop wasting precious time and jump to your next opportunity. My intent is to help you personally succeed.

Imagine a data set of companies that can receive an offer. If we first eliminate companies on the verge of failing from our study and then plot the remaining companies by achievable multiple, we would expect a normal distribution. Some companies on the far left would be in the ‘close to the verge of failing’ with much lower multiples and some companies on the far right would be in excellent shape who will have lots of buyer interests and superior multiples. But most companies would congregate around the middle of the distribution, meaning average multiples.

This post is for founders of the companies on the leftward downslope of the curve as represented by the red oval on the image above. These companies have below average multiples and for the sake of argument, let’s say they congregate around the 25th percentile. And let’s also eliminate the founders from this group who are doing their life’s work and don’t plan to exit for another 20 years, if ever.

How do I know my market multiple? Multiples in the market aren’t great. See this post for a starting point.

How do I know my percentile? If you know some bankers or PE folks, or can get intros to some, you could ask. But you don’t need definitive answers to run through this decision tree. Try looking at your company from an outsiders’ perspective and ask these questions:

• Am I in a segment that is out of favor with public market investors and VC’s and PE?
• Has my growth been high over the past couple years or has it plateaued or even declined?
• Am I profitable?
• Have I been profitable for the past several quarters or is it just recently?
• Have I been consistently profitable or am I profitable and unprofitable by the month or quarter?
• Are my margins consistent or fluctuating?
• How well can I forecast cash? Can we set projections and hit them or are we often surprised and scrambling?
• How competitive is my space? Can I raise prices or does it take a prayer session?
• How capital efficient am I? Do I have long Cash Conversion Cycles and what does my Inventory Turnover look like?

You get the idea. If your story is full of nuance, explanations, unforeseen events, unexpected downturns etc you are showing signs of average multiples at best. It’s nothing to be ashamed of. You just need to be realistic about how you are likely to be perceived by the market. You are fighting against the Dunning-Kruger effect which in this case is not low ability as an operator but rather low ability to set your multiple relative to the people who do it for a living.

So, now we have a decent guess as to the average multiple for our type of company and where we likely fall in the distribution. If you don’t like what the market is saying about your valuation, what should you do?

Here’s what you don’t do: the same shit you have been doing for the past 10 years.

I suggest going through the following decision tree:

1/ Do you have the capital, time and most importantly, the will to make real changes to your business and keep going for another few years?

2/ If the answer is no, ignore the sunk costs, set aside your ego and get working now on your exit.

3/ If the answer is yes, take a hard-nosed, objective look at your company to determine if you can move to the right half of the curve and achieve a superior valuation.

a/ In time, can you improve your answers to the questions above?

b/ Can you get to best in class margins?

c/ Can you generate strong cash flow and be capital efficient?

d/ Are you building a true asset in your customer base or are you really just an ad arbitrage play always buying sales through ad spend?

e/ Can you develop unique advantages in distribution, business model, costs, customer segments or something else that not only brings more interested acquirers but forces them to give you superior multiples?

4/ If the answer is yes, then set a deadline for achieving those things. These are your new goals.

5/ If the answer is no, then what valuation would be satisfactory to you?

a/ In the next 3 years, what needs to happen for the market to improve to where your satisfactory multiple is at the 25th percentile?

b/ What would need to happen for you to go from the 25th percentile to the 50th percentile?

c/ What are the likelihoods of (i) you making those improvements and (ii) the market moving in your direction enough in the next 3 years?

7/ What is your personal opportunity cost of not moving on now?

a/ Your personal opportunity cost is what you could do if you weren’t running your brand. Maybe it’s a job, maybe it’s starting something else that you think could be more successful.

b/ You are trying to compare two paths. One path is selling now and doing your new thing, whatever that might be. The second path is the difference between what your valuation might be in the future and what it is today. It’s important you subtract those things.

8/ If the answer is keep going, you now know the EBITDA and multiple you need as well as the timing. If you have assumed you can make some improvement in your percentile, then you also have to set those milestones.

a/ Remember, the easy answer here is to keep going. I know because I have been in your situation, twice. I spent years chasing outcomes that always felt so close. ‘Next year will be our big year!’ I was a master of staying in the game. It’s easy to find encouragement to keep going. And it’s easier for friends and colleagues to tell you to keep going than to tell you what I just did.

b/ The harder answer is to ignore the sunk costs and dreams of what could be and do a cold comparison of your opportunity cost versus the difference of what might be in 3 years versus what you can get today.

I hope this helps and I want you to be successful. If I can help, even just as a sounding board, feel free to DM or reach out.