Sales Management Group

Make Your Company More Valuable – Part II

ValueOur last blog post, Make Your Company More Valuable – Build a Sales Organization described Harry Smith’s effort to increase his company’s (HSC, Inc.) valuation.

Investment bankers told Harry that HSC was not worth his asking price. To make his company more valuable, Harry was considering radically overhauling his sales organization. The goal was to effectively penetrate new markets.

This post will explore what HSC might be worth.

The Problem and the Opportunity

The bankers cited several risk factors that depressed the HSC’s valuation. These included:

  • Owner Dependence – Harry was directly or indirectly responsible for a large percent of the company’s sales.
  • Marketplace Changes – HSC is facing two issues here: (1) Increased competition; and (2) Shrinking customer base due to consolidation.
  • Customer Concentration – HSC generates most of its business from a handful of customers.

They told Harry that the key to a higher valuation was a larger and steadily growing business that would continue to prosper after he leaves. He hoped that investing in a revitalized sales team could accomplish this.

What is HSC worth?

Here is a snapshot of HSC’s projected 2016 earnings.

Chart #1

The bankers told Harry that if he could sell the business at all (and that’s a big “if”), it would be worth no more than four times earnings. That would put the valuation at:

$5.3 million x 4 (earnings multiple) = $21.2 million

They cautioned Harry that even with a depressed valuation, the likelihood of a sale was low. Buyers would be reluctant to purchase a company with HSC’s risk factors. However, the bankers said, if Harry could achieve his sales goals, the company would be far more salable and far more valuable.

The earnings multiple would increase from 4X to 5X. This is because the investment in sales infrastructure will provide sustainable growth and lower risk. HSC will have a much larger customer base and will no longer be dependent on Harry for sales.

The combination of higher sales and earnings plus a higher multiple would yield a much higher valuation. According to Harry’s projections, with an investment of $2 million a year in an expanded sales force, in five years his P&L would look like this:

Chart #2

With a higher multiple and higher earnings, the valuation would be:

$12.6 million x 5 (earnings multiple) = $63.0 million

That’s a three-fold increase over today’s valuation of $21 million.

Harry’s Choices

Harry realizes that he must do something. His already stagnating business will eventually fail if he doesn’t change his sales strategy.

He has laid out three cases:

  • Case “A” – Sell now to a strategic buyer, probably one of HSC’s competitors
  • Case “B” – Sell a majority stake to a private equity (PE) Firm
  • Case “C” – Go it alone and fund the sales organization himself


The chart below shows his how much money he will get in each case

Chart #3

 Case “A” is not a realistic option. The sale price is too low, and he probably couldn’t find a buyer, anyway.

 Case “C” generates the most money for Harry but it entails too much risk for him.

The bankers have told Harry that Case “B” is probably his best bet. A private equity firm might be willing to purchase a majority stake in HSC if the firm’s principals thought his sales strategy was realistic.

Here is how that would work:

  • PE firm buys a 60% stake at the current valuation (4X) – 60% x $21 million = $12.8 million
  • HSC is sold in five years for 5X earnings = $63 million
  • PE firm gets 60% of proceeds – $38 million
  • Harry gets 40% of proceeds – $25 million

The PE firm could fund the sales organization investment out of company earnings. As a result, Harry can keep the entire $13 million he receives up front.

Ultimately Harry gets a total of $38 million. That’s a lot less that the $63 million in Case “C”. But Case “B” eliminates most of Harry’s risk.

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