ESOP Authority Resource, Exits, Uncategorized, Valuation
Business valuations are calculated a number of ways, as outlined in our business valuation blog post here. What’s important to note, though, is that typically an owner who is selling his or her business will want to maximize value.  Our goal with this post is to break down the factors that make the largest impact to company valuation.

Recurring revenue / subscription revenue.  Recurring revenue gives confidence to the longevity of the business.   If there is any way to have recurring / subscription oriented revenue, this will command a higher valuation multiple, which will then result in a higher overall valuation.

Profitability.  I have to kind of laugh as I write this, given all the publicity that silicon valley gets.  Most people have read about the unicorn tech startups that sold for double- or triple-digit millions pre-revenue, or while running at a loss.  Sadly for the remaining 99.5% of business that want to be acquired, running a profit is pretty important. A great way to kind of see this in action is to actually watch the TV show “Shark Tank”.  Shark Tank is portrayed as a group of loud investors yelling at businesses that are often very odd and obscure, however, if you watch a few episodes of it, a theme emerges very quickly. The “sharks” are typically financial investors — they are buying or investing in a company to see a return, and ideally sooner than later.   It is our experience that most acquirers are doing the same. If you still aren’t sold on this concept, then consider it this way. If company A and company B sell the same thing and have the exact same business, are the same size, and truly all factors are the same, except company A generates a 30% profit margin where company B generates 6%, company A will certainly be valued quite higher.

Growth.  Growing companies are healthy and have a bright future, particularly if profitable while growing AND if the company is both aware of and in control of what is driving growth.  If you can show your company is growing and explain what specifically you are doing to drive that growth, your company will receive a stronger valuation. The converse is true for flat / stalled growth, as well as companies that are shrinking.

Scalability.  An acquirer is purchasing your company to receive a return on his / her investment, and a way to expedite this return is to grow the company faster.  If your company has a specific plan, management team, culture, and processes in place to scale the company, then your company will be valued higher. If you do not have these, the acquirer will know that he/she will have to create these, and thus that will incur a discount on your valuation.   Factors to really develop for scalability are hiring processes, repeatable workflow a company value chain that is documented, repeatable sales processes for new revenue generation, established culture that sustains with the company’s growth and protects the integrity of the company’s current success, as well as other factors (links to future blog posts).   Scaling Up by Verne Harnish outlines several of the predictable revenue milestones of $1m, $2M, $10M, $50M, and $100M+, and the differences in how companies must transform and be prepared to operate differently to grow to these levels, abandoning some of the things that “worked” or were “OK” at smaller company revenues.

Culture.  As mentioned above, your company should have a unique identity and position within the marketplace that justifies your existence.  Ideally, you have a defined set of core values that you are using to unite your company around a mission statement, which explains why you exist and what your company is about.   Hiring, talent management and retention, internal work and efforts, and everything else that the company does should align with these values in a quest to further the mission of the company.  Creating these is not an overnight matter, and so if your company doesn’t have these, or you have a set of values that don’t function in the manner described above, we would encourage you to take the time to do this.   This post explains the value of why this is so important for scaling the business and thus breaking through growth plateaus.  (note: We don’t believe in doing this just to do it, or for the sake of “Kum ba yah”. We believe and have experienced that this is crucial to have in place for effective and frictionless growth.

Unique IP.  This can be truly unique technology, a unique solution, a product or process that is patented, or just an approach that is core to your company that both produces a better result when your company is engaged and is absent from competitors.

Brand.  Brand strength, particularly for larger companies, commands higher valuation.  A strong brand has loyal customers and is not easily disruptive, which has the same value principle as recurring revenue: stability.
Other valuation factors are considered, and in most circumstances, there are factors that are both unique and specific to certain industry segments.   

The goal of a company owner, whether there is a plan to sell the company now, later, or not at all, should be to maximize the above.  The irony is that the best kind of company to own is one that does the above, and in the event you are approached for a potential sale of your company, if the above are in optimal shape, you can expect top dollar for your company (and really, you shouldn’t accept any less).

If you’re interested in learning about how to calculate your business’s value, we’ve prepared How to Calculate ESOP Valuation.  

Finally, a very good reason to consider selling to an ESOP is that the valuation you can command for your firm is often more fair and frankly higher than you would receive via a third party exit.  If an acquirer were to approach you and ask to purchase your company, ideally you would already know what it would sell for if sold to employees (including proper and documented justification), and would then use that as a starting point for negotiation.  

ESOP Authority Resource, Uncategorized
Simply stated, an ESOP, or employee stock ownership plan, is a qualified defined-contribution benefit plan comprised of company stock, held by shareholders at a company (which is usually all vested employees).  For the purposes of this website, however, an ESOP is a way to sell your company to your employees, enabling all employees to become shareholders in the company, and selling shareholders to obtain liquidity.

ESOPs are a great way to align the financial incentives and rewards of employees with those of ownership, as all employees will hold shares in the company.  

Technically, ESOPs are a standalone entity (a trust), and the ESOP buys some or all of your company, and then issues shares to employees.   

ESOPs work like this:


1. A company decides to sell some or all of its stock to an ESOP.  


2. A valuation and formal sale process are undergone, where the business is valued, and a negotiation is held between the selling shareholders and the employees.  Employees are represented by a trustee (a lawyer), who advocates on behalf of the employees for the purposes of the transaction, valuation, deal terms, etc. 

3. Once terms are agreed to between selling shareholders and the third party trustee, a transaction is completed. 

4. Sell shareholders receive liquidity for their shares, and employees become shareholders.

5. The business moves forward in this new operating state, with employees now having equity / stock in the company, and ownership having obtained liquidity (and in some cases, exited all together).

There are many nuances to an ESOP.  For example, a company may choose to sell some or all of its stock to an ESOP.   Some owners may choose to exit, where others may choose to stay on.


The point of this is that ESOPs are a highly customizable solution, and through exploration, an ESOP can be designed to meet any number of circumstances.


Criteria for an ESOP to work well:


1. Ownership is seeking liquidity.


2. Company has a well established culture, with employees that “buy in” to the company mission and core values.


3. Established management team that plays an active role in running the business (this doesn’t have to be formally established, or it could be partly established, however, the people who would comprise this management team need to be currently a part of the team)


4. Company is profitable


Situations when an ESOP doesn’t work well:


1. Company culture is not defined 


2. Core values are “stock” and not modeled nor stitched into the fabric of the business


3. There is no management team — the company revolves around one owner

Read a bit more via our library of ESOP topics, as there is quite a bit more to explore, such as:


How to Calculate ESOP Valuation?


Factors that Affect ESOP Valuation?


See Videos on the Experience of an ESOP Exit


Exits, Uncategorized, Valuation

A private equity exit is the sale of your company (or a company) to a private equity (PE) firm.  PE firms are usually partnerships that are comprised of many shareholders that have pooled investment dollars, invested them into the acquisition and growth of privately held companies, and have a very specific goal of beating the average annual returns of the stock market index, which are typically in the 7-8% per year range.

PE firms consolidate around industry verticals and use a variety of strategies to produce returns on investors dollars.  The point here is that these firms are often potential acquirers for privately held companies, and so looking at this as a potential exit is often worth considering.

A private equity firm will have a goal of making a return on its cost of acquisition and as such, in valuing your business, will look closely at cash flows, overall profitability, and growth potential.


Cash flows — Simply stated, this is the business’s ability to generate accessible cash in the form of profit on a monthly and annual basis.  Free cash flow is what is used to pay back an investor, and maximizing this has the potential to increase company valuation.


Profitability — This is similar to cash flow but is the overall profitability of the business, including taxes and any owner discretionary perks or other overhead items that are expected to be removed after an acquisition.  Be sure to itemize these and claim them as an add back to overall valuation, as this will help improve acquisition price.


Growth potential — This is crucial, as a PE acquirer will want to accelerate the rate of return on invested capital as quickly as possible.  Seeing how your company can grow and that you have very specific growth plans will generate acquisition interest, as well as increase overall valuation of your company.   Additionally, expect to stay on for at least two years to ensure these growth goals are hit, and expect your valuation and buyout payments to be tied to these goals.

The type of negotiation in a sale to a private equity buyer is usually on the side of the PE firm, favoring their ability to generate options (where you only have one company to sell).  It’s important to not be married to this form of exit, and if the deal terms aren’t just right, be sure you’re OK to walk away.

Realize too that in the sale to a third party, and particularly a private equity firm that plans to grow your company and maximize its return, you will no longer have control of the business, operations, etc.   Generally, a PE firm doesn’t want to run your business, but expect tight scrutiny on quarterly performance. If things are off, expect the PE firm to impose budget cuts and even insist on management changes, inserting personnel they trust.  

This type of exit is not for the faint of heart, and you will certainly earn your acquisition price.  However, selling one’s company is a triumph of its own, and so if you do find yourself in a circumstance where you get a great offer and see that it can be successful, definitely consider it and be sure to congratulate yourself.

If you are wondering what alternative exit strategies exist consider the following:



Sell to a strategic buyer


Sell to a financial buyer




You sold your company — congratulations!  What now? Surely something fun and celebratory, as you certainly deserve it.

At some point during the dust settling process, you’re likely to be hit by the gratitude bug.  Generally, people fall into one of three categories:


Planned givers — these folks will give off the top and usually have faith / religious reasons for doing so.  They’ll be planning to give away a portion of their proceeds, usually a percentage.


Non-givers — these folks won’t give.  They earned their money and no one gave it to them (this is the thought process…), and they don’t owe anyone else anything.  While we don’t begrudge these people, we think this is a little obtuse…

Spontaneous givers — If inspired and the circumstances create the opportunity to give, people in this group will make a one time gift.

I am just going to come out and say it:  If you aren’t in the #1 or #3 bucket above, particularly if you made 7-figures (or more) from the sale of your company, you should consider it!  Not because I am on a high horse and am shouting down to you to do so, but because of what it will do for YOU.

I am going to explain this thought process by the below example scenarios.

Scenario 1:


You sold your company and your proceeds were $5M.


You pay taxes, and generate about $3.55M (yikes!  Paying $1.5M of taxes is expensive…)

You invest that $3.55M in the stock market index, and ride off into the sunset generating $383,400 per year (average 8% return) of income, never touching the principal.

This is wonderful, but it only benefits you.   Let’s contrast to another example, using a very low giving percentage of 3%.

Scenario 2:


You sold your company and your proceeds were $5M

You gave away 3%, which is $150,000, to a charity of your choice

You pay taxes on $4.85M, and generate about $3.45M (note — giving away $150k only cost you $100k, how cool is that?)

You invest the $3.45M in the stock market index, and instead ride off into the sunset with $371,900 per year of income while still not touching principal.

The difference above is less than $12k/yr, on a scale of making $383k vs $372k of income.  Those who have made that level of income, and if you have sold your company for this much, you are probably familiar with this income territory, will likely agree that the difference isn’t really felt.

What is felt is the benefit of the $150k that you gave away.  There are organizations that provide very simple needs, such as providing take home food for school children who otherwise will likely not eat dinner, at an average cost of $5 per meal.  With this $150k donated, you will have provided 30,000 meals. That is dinner for over 650 kids for a year. If you have children, this may resonate (the impact of doing this).

There are other organizations that combat mounting issues such as childhood and adolescent suicide for kids coming from domestic violence situations.   Non-profits exist that provide at-cost counseling services for kids that have these needs, and a gift of $150k would provide over 2,300 hours of counseling.  This would give an hour a week of counseling to 59 kids for an entire year. Consider how many suicides this would prevent.

The beauty of this, though, is that there are organizations that support all kinds of needs.  And because you, the giver, are such a strong business person, you possess the capability to properly discern which organizations would be the best stewards of this money.  I think of this as analytical giving, which is using one’s analytical strength to ensure donated funds are used for maximal benefit, a skillset you uniquely possess.  

Further, the feeling you will receive from this as you see the impact that this gift makes may rival the sense of accomplishment of having generated ~$3.5M of free cash for your own family.   

This may stir a desire in you to give a bit more, and may even flip values a bit in terms of seeing needs in the world and your ability to help meet them.

Note please, no one should feel obligated to do this.  The above is certainly a nudge to consider it, and yet it isn’t my place to tell any person what to do.  My hope is that the above illustrates what is possible from acts of generosity, and the relative scale of what can be done by small percentage giving.