This morning started as most mornings do around our house: Blurry-eyed, I went to Starbucks for a Grande Americano. It cost me $2.65.
I suppose I could have ordered a regular drip coffee or even brewed one for myself at home, but I’m lazy and have become addicted to the powerful jolt of three shots of espresso in the morning.
Now $2.65 for a coffee may not sound like a big deal – some might even argue that a healthy dose of daily caffeine is a prerequisite for building a company – but when it comes time to sell your business, that coffee may be costing you three, four or five times that amount.
Here’s the math: when you sell your company, the buyer will likely use a multiple of your pre-tax profit to value your business. If you can get five times pre-tax profit for your company, a $2.65 expense will end up costing you $13.25 in terms of money you would have received when you sold your business ($2.65 x 5 = $13.25). In essence, that coffee is dragging down your profits by $2.65 in the year you sell. Since the acquirer will offer you some multiple (maybe three – five times pre-tax profits) to buy your company you end up paying three four or five times for that coffee.
Now think about your choice of hotel room the next time business takes you to New York: The W Hotel at 49th and Lexington has a great lobby bar, but at $429/night, is it really worth the money when you could stay at the Marriott across the street for $359, instantly saving $70—or $350 once you multiply by five?
How about the new 3G iPhone for $699—is it worth $3,500 to you?
And the new A6?
What expenses have you stripped out of your business in preparation for a sale? What expenses would you avoid cutting for fear they would have an impact on your business performance? What little luxuries do you run through the business that you would never give up?
* * * * *John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies. Most recently John transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to the Corporate Executive Board (NASDAQ: EXBD). In 2008 he was recognized by BtoB Magazine’s “Who’s Who” list as one of America’s most influential business-to-business marketers.