With thousands of valuations having been run by bizval, trends are emerging that offer useful insights to buyers and sellers of businesses. One such trend is owner independence, with an outcome that may surprise (and inspire) you.
In business as in music, timing is everything. It’s absolutely true that if you can get the timing just right in the interest rate cycle, figuring out when it’s a buyer’s market vs. a seller’s market, then you can get a better outcome.
Of course, this is very difficult to achieve. There are numerous investment professionals who get this wrong on a regular basis despite living and breathing this world, so it’s even trickier for founders who are heads-down in their businesses out of necessity.
Thankfully, it’s also true that time in the saddle is a huge factor in value creation. Not only does this help a potential buyer understand more about how the business behaves over the years and in different economic cycles, but it tends to lead to a business that is more independent from the founder.
The numbers never lie
With substantial valuation data at our disposal and literally thousands of examples of real-world businesses, it’s no surprise that we are seeing interesting trends emerge in private company valuations.
In conducting our valuations, we look at the age of the business based on four buckets. These range from “less than three years” to “more than ten years” – in other words, from startups and recently formed entities through to established businesses.
In any valuation, the track record is important. Buyers will always feel more confident in paying a higher multiple where there is evidence of how the business performed over multiple years and in different economic conditions. This is one of the reasons why so-called blue-chip companies on public markets tend to trade at higher valuation multiples than smaller counterparts. So, it’s natural to put a higher valuation multiple on companies that have been around for a long time. If our only insight here was that more established companies carry a higher multiple, then all we’ve done is waste your time with an article about how our model does what we told it to do in the first place. Luckily, that’s not all folks. Keep reading.
Age is only one variable
A major driver of value is the level of independence from the owner. This is where things gets interesting.
Among businesses that are more than ten years old, only 3% of founders are in a position where they cannot take a holiday because they are involved in the business 24/7. By that stage in the business lifecycle, that’s a disaster that needs to be addressed urgently to have any hope of a successful exit. Or, for that matter, a successful life. A further 4% of founders can barely manage a three-day holiday, which is equally problematic by that stage.
65% of founders are able to go away for three weeks, provided they are available to their teams. The rest (28%) are able to go away for three weeks without internet access. There are no prizes for figuring out that these businesses tend to attract the highest multiples within that bucket. Although we don’t ask the question explicitly to founders using our platform, we would also be willing to guess who the happiest founders are.
This chart shows the full story, with founders in the “less than three years” bucket in desperate need of a night out and a care basket of chocolate:
The trend is clear: as businesses get older and become more established, founders are able to step away more often. Not only is this a necessity to avoid burning out, but it also creates more valuable businesses.
In businesses that are more than ten years old and with founders who cannot take a holiday at all, the average valuation multiple comes out below 3x earnings. In businesses of that age that allow the founder to switch off completely, the average multiple increases to around 6.3x earnings.
You can do many things to increase the value of your business, but few steps are more effective than putting in place a succession plan and building the business in such a way that you can actually take that dream holiday.
As the numbers show, that holiday might just pay for itself many times over.