I recently described how over-dependence on the role of the owner within the business can have a negative impact on the amount a business may bring at sale or even its salability in general. Today, I’d like to share a case study that illustrates the opposite side of the coin.
Our client was a small chain of six fast food restaurants in a middle-sized metropolitan market. The owners were the founders. They had split off from a third partner who had taken national franchising rights for the concept while our client took the rights to the state they were located in.
The client had come to The Podolny Group because they wanted get out of food service and move into another business venture. We were asked to review the company from the standpoint of their exit options.
In our evaluation of the company, we noted the following:
Profitability – The company was very profitable compared to its peer ratings especially in its prime costs (a food service term for direct labor and direct costs such as food and other disposables).
Replicable Processes – The company had superior management and training systems and processes along with a distinct corporate culture. Most notable, although it was a small company, it had a non-owner general manager who was key to the day-to-day implementation of theses systems and processes. There was ample documentation for the systems and processes.
Potential – A specific and logical growth plan existed that identified the locations the company could expand into that would double it in size. However, after the existing growth plan was executed, the number of logical expansion growth opportunities diminished.
Return on Investment – Projected return on invested capital for the potential new locations was very high compared to industry standards.
Evaluating the Value Potential
Looking at all the factors, we advised the client that their value potential was probably at its maximum already. There was a clear potential to be leveraged under the current circumstances. However, once the company started building out the potential new locations, sales and profits might rise but the potential for still further growth would be less.
The company put itself on the market. Our analysis was verified as a successful sale was consummated for a substantial premium of 6.6 times IBITDA in an all cash transaction.
A business that can clearly demonstrate non-dependence on the owner for growth is more likely to obtain a higher value at sale. As evidenced in this successful outcome, the replicable processes, the highly competent manager independent from ownership and the clearly outlined an attainable growth plan provided the winning combination that made this business so attractive to buyers.