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Maximize your Business Value

by Trilogy Partners on Oct 31, 2018 11:54:56 AM

I enjoy working with Trilogy clients, helping them to better understand their financials to set strategy and drive growth. But what happens when owners want to exit the business? How can they ensure that they get the highest value for the business they’ve dedicated their life to build?

As you may know, the industry standard valuation method is a multiple of a organization’s Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The objective of a company in the short-term is to maximize EBITDA any way possible, to improve its value. However, depending on your industry or business model, one may have to decide if EBITDA is the best strategy to value your business as demonstrated by these two examples:

First, let’s look at MakeStuff, LLC, a manufacturing company that has been operating for 25 years and is positioning itself for exit. With a multiplier of 5X, any addition to EBITDA has considerable impact. While there are alternate ways to add to EBITDA from cutting overhead expenses to increasing sales, MakeStuff chooses to discount products heavily to incentivize purchasing and top-line growth. The gross profit margin will decrease, a strategy that may not be sustainable in the long-run, but every extra dollar of gross profit margin would improve the EBITDA. Ultimately, if the company raises the total EBITDA from $1,000,000 to $1,200,000 for the year, with a 5X multiplier, this would yield $1,000,000 more at time of sale.

Now consider Govt Software, LLC, a software company positioning for exit in the government space. Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) are major factors for this type of entity and can be more critical than solely an EBITDA multiplier. Therefore, this company could have a completely different strategy than MakeStuff.

Govt Software’s value lies in its targeted niche, licensing specifically for government agencies and multi-year contracts. There are many larger companies that have better economies of scale with more dollars to invest in infrastructure, so Govt Software becomes very attractive as an added revenue line for a larger company.

In this instance, with the goal of exiting soon, Govt Software would be wise to reinvest all profits in sales and marketing initiatives that would help the company improve the overall MRR. With a revenue multiple of 3X, they would add $300K in company value for every $100K of annual contracts added, regardless of a positive or neutral effect to the EBITDA.

Preparing for exit is not something that should be left to chance or done without professional guidance. Each specific case needs to take into consideration the specifics of the business involved in the M&A transaction. If you’d like to have a conversation to learn more, contact Trilogy Partners at results@gettrilogypartners.com or 609-688-0428.

Negotiation Do’s for Positive Results

by Trilogy Partners on Jul 29, 2016 8:59:01 AM

Your ability to negotiate in business and in life often determines how successful you can be. Successful negotiation means keeping a relationship intact while creating a better deal for yourself and providing satisfaction to the other party. The goal of partnership negotiation is to find workable (not perfect) solutions that are mutually satisfactory to both parties and can be sustained over time. Reaching the lucrative “yes” requires you to navigate strategic approaches while dealing with a wide range of demands advanced by the other party.

There are plenty of resources that teach us how to negotiate, and there are many opportunities to do so, such as negotiating a short or long term contract from a single source supplier or negotiating with employees.

The following are “Negotiation Do’s” for you to use whenever there is a need to create sustainable partnerships for mutual benefit.

  • Take your time. Negotiation is a permanent activity over time. It is not a hurried up operation, and requires one to understand the other party, their business issues and their concerns.
  • Plan, plan, plan. It is the most important activity in negotiation. No other activity has greater payoff.
  • Keep your options open. The process of a partnership negotiation is to create a universe of possibilities and keep your options open, together generating alternative ideas that lead to creating workable solutions.
  • Maintain a proper mindset. It has to be: there is always better deals for both parties, and let’s find it together. Patience and risk will be needed to do this.
  • Define your issues. Unless the issues are clearly defined, there is nothing to negotiate. Negotiation seldom has more than 2 or 3 key issues.
  • Test all assumptions. Doing so will provide clarity and insight.
  • Give to get. You need to put workable cards on the table. Often the parties hold back information thinking that they need to protect themselves – to the detriment of having the other party not understand what they need in order for the negotiation to move forward. You have to give enough truthful information (without hurting yourself) so the other party understands.
  • Pause for a while. Time away from the negotiation is called a caucus and most movement in a negotiation occurs away from the table. In the caucus, you have a chance to think about what happened and how to move forward with your own party.

It is also useful to remember:

  • You must have the ability and desire to get close to the other party and be committed to mutual satisfaction.
  • There are always three negotiations. The first negotiation is with self, the second is with your own organization (so you don’t get undercut or unsupported) and third, being ready to meet with the other party.
  • Give concessions worth value and concede carefully. Ask for things in return before you commit to giving something. Everything should have perceived value even though it costs you nothing. Create value for concessions.
  • Negotiation is about “getting objectives” (dollars, goods and services) as well “proving objectives”. You have to prove to the other party in thought and action that you are working for “the deal” that benefits both.

By taking these tips into account can, you can strengthen your negotiation skills for better results.

If you would like to discuss these points or learn more about negotiation, please contact Jon at Trilogy Partners at jgoldstein@gettrilogypartners.com.

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