Division of Multiples


9:01: Discussion of sale begins. Strategic plan has been successful; revenue growth, gross margin, and profit margin all aligned and on track based on feedback from Shuster & Schuckster Investment House.

9:16: CFO discusses the desire to push the multiple discussion from a 1x revenue sales model to a multiple of net profit that he believes will work better for all involved. He wants a 10x on net profit, which was $4M last year and projected at $5M this year, for a $50M valuation.

9:22: CEO points out it’s a moot point as revenue is $50M, so at 10x net, it would be the same. And it’s easier to grow revenue than profits. He’s also concerned the industry standard would be far lower than 10x—more like 6x on net—which would result in a lower sale price. What’s the point here?

9:25: CFO discloses that he can work the books to show a much higher net profit; therefore, he can tweak the valuation higher if we can get Shuster & Schuckster to go for it.

9:27: CMO asks CFO how he plans on doing that.

9:29: CFO says it’s not hard and uses whiteboard to map it out. 9:30: CTO asks if this accounting method is legal.

9:33: Controller points out that it’s not within generally accepted accounting principles (GAAP).

9:37: CFO gets agitated and shows how he could potentially get us double the valuation by using this method. And shows how it’s legal.

9:40: CEO asks about tax implications as it seems like they might be significant.

9:42: CFO says no, it would all wash out in the end.

9:45: Controller interjects and says by her calculations it could be very significant in light of the fact that they would be recognizing revenue differently and could be subject to back taxes.

9:47: CFO shuts her down, saying he’s looked into it, and the likelihood of that happening is insignificant.

9:55: Vote is taken to give CFO authority to change accounting practice to increase the company’s reported net profit from 10% avg. to 21% avg.

Ayes – 8

Nays – 1 (Controller)


S&S: Wow, what’s with the new financials? Seems like your net went through the roof!

CFO: Yes, we’re taking advantage of a new accounting principle that allows us to restate our financials this way. We assume that this will allow us to increase our go-to-market price by almost twofold as we’ll be able to take advantage of a ten-times-net model of valuation.

S&S: Well, that is a possibility. But, of course, there will have to be a deduction in the valuation due to the outstanding tax bill you have now accrued due to the new accounting method.

CEO: Wait, what? I thought you said we wouldn’t have any additional tax liability if we went to this method?

CFO: We don’t; you guys are incorrect. I checked it out with the IRS and the State Department of Revenue before I amended our filing, and we fall in a different tax bracket now. I’ve been taking a night course at MSU; all the other CFOs are doing this too.

S&S: Guys, I hate to break it to you, but you’re going to pay more taxes and it really doesn’t change the valuation. In fact, it might lower it since your tax liability just went up exponentially. Did you consult a tax specialist before you did this?

CEO: This is ridiculous. We did this with the intent of raising the valuation, not lowering it! This is just wrong; you guys need to go to work for us and make it right!

S&S: Unfortunately, this is not in our control. The value of the business is the value of the business, regardless of how you guys want to play with the books. You can’t suddenly say that you’re making twice as much as before and think it will boost the value. It’s based on industry standards, your company history, the strategic value to the buyer, and your projections. I’m afraid you guys really screwed the pooch on this one. Might want to go back and see if you can reverse the accounting methods, because we can’t represent you at this stage—it looks like you’re cooking the books! Sorry, guys.

CEO: Go f*&# yourself! This is a f*@&ing disaster!


Buyers are smart—the value is the value is the value. The only way to increase it is to increase your revenue and profits simultaneously and find the strategic buyer that will benefit the most from buying you. No one will pay for cooked books or suspect accounting methods in search of a higher multiple, regardless of whether it’s a revenue model or a net-profit model.

If part of your strategic plan is to sell, research multiples from your industry and have a valuation done every few years, using various methods, to know in advance what a sale might net you. Waiting until you have a buyer or decide to sell is usually not when you should start doing your homework. You’d be taking the final for a class you have not attended.

Get smart and get prepared. Know what your company is worth and know what you can do to improve the valuation— that’s what you want to address in a strategic plan. Be like a Scout always be prepared when you do decide to sell.

To get your copy of “How (NOT) to Create a Winning Strategy” click here.