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How to sell your business for more than a multiple of EBIT. “Shoot the inventor” and other tips from Marc Johnstone

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Not so long ago, Marc Johnstone’s business, Shirlaws, was approached by two business owners.

They wanted to exit their event management business. Although the turnover was significant, the margins were woeful. In fact, its profits equated to only $50k per year.

So, how did Marc’s business step in and help these business owners walk away with a sales price of $11 million? (Seriously, what sort of EBIT multiple is that!?)

In his Anthill Academy course, Johnstone has devoted his expertise to the pressing task of valuation: how to scale your business to achieve sustainable growth and add multipliers to increase the dollar amount for when you choose to sell.

“A lot of entrepreneurs are focusing on the profit side of the multiplier,” says Johnstone, “but you can’t scale income beyond a certain point. What you’ve got to do is create assets and scale those. If we reallocate our time driving the assets, we’ll create a much more valuable business much more quickly, and that will create dividends for the future.”

A consultant with the global coaching firm Shirlaws, Johnstone spent years cutting his teeth in Silicon Valley and brings to this course his unconventional track record of digging out assets and multiplying value.

Here are just a few of the nuggets of wisdom shared in the course:

1. Sometimes you have to shoot the inventor

As entrepreneurs, we love our products.Shoot the inventopr

Yet, says Johnstone, we also have to think about the channels to the market.

Take an informal poll of consumers deciding between Apple and Microsoft and most will crown Apple’s products as superior. Entrepreneurs, without hesitation, will agree. Yet it’s Microsoft that dominates the software market, because they have perfected their control of the distribution channels — so much that Silicon Valley entrepreneurs saw Microsoft as the obvious ‘gold standard’ outlet to sell their products when seeking to exit their startups.

“Too many times, we love our product, and quite rightly, but we have to think about its value to someone else,” says Johnstone, citing a  truism from his Silicon Valley days: “At some point you have to shoot the inventor to scale the product because they’ll never want to release the product to market.”

2. Tiffany is in the business of selling blue boxes… not jewellery

The most crucial valuation benchmark is how you position your business.MARC ALIGNMENT

According to Johnstone, a smart positioning strategy means having your ‘arrows’ in the areas of product, pricing, marketplace and customer service all pointing in the same direction. A majority of successful businesses are either aimed at the high end of their market, and thus have a premium product and top-notch service to match it, or at the low end, where cheapness and lesser quality go hand in hand.

Why is Tiffany’s brand so sought after when it retails the most expensive jewels on the market? Because it knows which business it’s really in, says Johnstone.

“Tiffany is not in the jewellery business,” he says. “What it sells are blue boxes. People go to Tiffany’s because they’re often time-poor but cash-rich and want to show a loved one how much they love them.” To no surprise, its devotion to its customers and the exclusivity of its store locations are considered staples of luxury.

In contrast, Harvey Norman specialises in bargain-price goods and does very well — despite the horror stories of second-hand hard drives found in purchased computers and employees dozing off behind the counter. Harvey Norman is a billion-dollar company because Harvey Norman too knows what business it’s in: selling merchandise to consumers who don’t mind sacrificing service and quality for a good deal.

3. Always be evolving

Indeed, businesses don’t survive a decade — or a century — by loving their product to the point of smothering it. They survive by seeing their business as a part of ever-changing trends in technologies and economies, and diversifying their product offering to stay ahead of the game.

At the turn of the 20th century, the Union Pacific Railroad was one of the world’s biggest companies. It’s still around today, but with the evolutions in long-distance transportation that have taken their toll, not exactly a household name around the globe.

“They thought they were in railways,” Johnstone says of Union Pacific a century ago; “they didn’t realise they were actually in transport.” Had they acquired companies in the auto and airplane industries instead of focusing only on their original product, they might still have the same relevance today.

On the other hand, Southern Pacific Railroad Internal Networking Telecommunications is still thriving — known today simply by its acronym, Sprint.

Unlike Union Pacific, Sprint “realised they were in the infrastructure business, not in railroads,” notes Johnstone. What began as a company managing the telephone lines that ran along Southern Pacific’s railways remains a significant player in the mobile networking industry.

Johnstone’s central question to entrepreneurs is this: “What’s the asset that you’ve got? What’s sitting in your business that someone else could buy, that you could scale, that’s got value?” The answer may not be what is most apparent at first, but with the right formula in hand, you can find that asset that will have investors seeing stars.

“Be the guys that keep evolving,” he advises.

Get the full course here.

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