The reported $12.5 billion valuation attached to the Los Angeles Lakers may seem worlds away from the realities of a small or midsize business (SMBs), but Josh Taves, Managing Director of Mergers & Acquisitions at The Post Oak Group, says the same fundamental question applies to companies of every size: What makes a business valuable to a buyer?
Taves has more than 26 years of experience as an entrepreneur, operator and buyer of businesses. He has acquired five businesses, successfully exited six and helped deploy more than $100 million in capital. During the latest Business Trends Today episode, he explains why business owners should think beyond revenue and profitability when preparing for a potential sale.
Management matters to buyersÂ
For SMBs, one of the biggest valuation issues can be the owner themselves. Taves said buyers want to know whether the company can continue operating successfully without its founder at the center of every decision. According to Taves, SMBs must have a management system and management team in place before handing the business off to someone else.
That becomes especially important when a founder serves as the company’s primary operator, decision-maker and relationship holder. If no one is positioned to take over those responsibilities, a buyer may need to account for the cost of bringing in new leadership, potentially reducing the transaction value. Taves said owners should also pay attention to adjusted EBITDA and understand how lifestyle-related expenses affect the financial picture presented to buyers.
Taves also emphasized that selling a business requires owners to recognize what they are actually giving up. Founders often view their companies as extensions of themselves, but an acquisition transfers control to the buyer.Â
Deal structure can vary considerably, from cash at closing to earn-outs, escrow arrangements and rollover equity. Taves said cash upfront is the most premium structure when available, but rollover stock can keep former owners financially engaged in the company’s future.
Looking beyond the numbersÂ
Despite economic and geopolitical uncertainty, Taves said the current environment can still present opportunities for owners with healthy, founder-driven businesses, strong revenue and EBITDA and room for future growth.Â
The larger lesson is that owners should not wait until retirement is imminent to think about an exit. Building a management team, maintaining credible financials and creating a business that can thrive without its founder can strengthen both the company’s operations and its eventual valuation.
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