The “Chase a Buck” Syndrome
Many business owners constantly see opportunities to make money and do not hesitate to take advantage of them. One of the great benefits of owning a business is the insight it reveals about what is working well and not-so-well in an industry and how to profit from the issues that develop from time to time. But sometimes entrepreneurs see almost too much opportunity and make money too many ways.
What’s Wrong with Making Money?
In the abstract, there is absolutely nothing wrong with making money. But if an entrepreneur pursues too many disparate opportunities by “chasing a buck” rather than strategically investing in the business, the resulting company can be difficult for buyers to understand, command a lower valuation multiple or become altogether unattractive.
One example involves a company that was founded decades ago as a direct-mail advertising agency. In response to changes in the industry and to newer technologies, the company had evolved into a provider of turnkey promotional programs for salesforces, offering everything from conceptual design to ERP interface, performance tracking and prize/product fulfillment.
Along the way, the company added its own call center and began providing outsourced customer service to its best clients. And over time, instead of investing in the higher value elements of the business, such as the ERP interfaces and the program management software, the owner fell victim to the “chase a buck” syndrome and began to funnel most of the free cash flow into the call center. His rationale was that it provided attractive cash-on-cash returns.
By the time the owner was ready to sell, the call center was as large as the promotional program business and had a material influence on the overall value of the business. At the time, the EBITDA multiple for call centers had fallen to 3x, while the multiple for the ERP integration business was closer to 10x. However, buyers had a difficult time looking past the call center and the owner struggled to get bids north of 5x EBITDA.
Keep an Eye on the Exit
When they are allocating capital and setting objectives for their companies, entrepreneurs and family business owners should fight the urge to “chase a buck” and instead take into account the impact their decisions are having on the valuation multiple buyers might ascribe to the business. We recommend this practice even when the intention is to hold the business forever. It usually leads to faster value creation and provides better options in the event that circumstances change.
Investment bankers, M&A advisors and private equity investors are great sources of information on these issues. While there is some risk that they will do more than simply share their opinions, our experience is that, in the interest of establishing a relationship and positioning themselves for a future opportunity, most of them will be patient, act in a professional manner and resist the temptation to start a de facto sales process.
Bootstrap Capital
If you have clients who could benefit from a point of view about how a buyer might view their businesses or how certain strategic initiatives might impact the attractiveness of the business to potential buyers, please consider introducing them to Bootstrap Capital. Because we invest our own capital, we are not subject to the pressures of a fund’s investment timeline and are happy to share our insights without any expectations about an immediate investment opportunity.