Growth is Not a Formula for Selling a Small Business

Growth is Not a Formula for Selling a Small Business

Running Harder But Staying In Place

The Podolny Group worked with a chain of restaurants that dramatically demonstrated that there is no formula for selling a small business. Our initial evaluation showed a gap between the current value of the business and the owners’ goals.  The owners suggested opening five new locations (one a year) under the classic assumption that the growth would lead to greater owner value.

New locations required a capital investment of $500,000, had a payback period of three and a half years and were to be funded by debt. The owners’ time horizon for exit was five years. When we ran a projection for this scenario, the owners were shocked to find that the net value to them was only $100,000 greater than if they opened no new locations!

Why Growth Didn’t Pay

While the owners were shocked, the reason was simple and logical. With the addition of $500,000 of debt and a three and half year payback period the company had substantial additional debt on its balance sheet at the end of five years. Although Sales and Earnings were higher leading to a higher Enterprise Value (the gross value from a business sale prior to paying off any debt), the subtraction of the increased debt brought down the net value to the owners substantially.  On the other hand, under a no growth scenario, Sales and Earnings were lower resulting in a lower Enterprise Value, but the company accumulated a significant amount of surplus cash.  Surplus cash is typically not included in a business sale and goes directly to the owners thus increasing the net value to the owners. The question had to be asked; why work harder and add the risk of more debt when the reward was essentially the same?

Conclusion – Run the Numbers

Not every situation will have this result. The key is not to make an assumption. Analyze. Crunch the numbers. Then adopt strategies and tactics that are harmonious with the realities of increasing business value and meeting the goals of the owners. That’s the true formula for selling a small business.