In talking about metrics companies should strive to hit prior to the liquidity event to ensure value is maximized, often the revenue line — and hopefully all the lines underneath except for expenses — get the attention. But from his view, Arthur Steier, President of Schumann Steier Inc. says one key metric that gets his attention, whether he's acquiring or selling a company, is how many of the customers have been with the business more five years.
"The retention rate of your customers is a key sign, to me, of success as much as the revenue line," Steier told attendees at the Houston Smart Business Dealmakers Conference. "I want to see at least 80 percent of my customers with me more than five years. I want to see at least 60 percent of the customers more than 10 years."
Another focus for Steier is on the people in the business. These, he says, are the people who make the money. However, it's difficult to put a figure on good employees in a deal.
"It's intangible," he says. "But it's everything."
When it comes to maximizing revenue, Steier says his approach to doing that is by running the company with a 100-year view.
"Every decision I make, everything I do, will be based upon a 100-year plan," he says. "Will I be here for 100 years? Most likely not. But when I face customers, key customers and key suppliers, I want them to see me as running that company for 100 years."
Comparatively, he says running a company in an attempt to maximize its value over the course of just a few years – three to five — is problematic for CEOs because as they go to meetings with key customers and suppliers who might know him personally will know he'll soon be gone.
"We're putting a lot of lipstick on the company and it's going to be gone," Steier says. "What have we done? I actually think we're devaluing the business."
In operating a business on a 100-year timeline, he says there's no need to hire advisers or investment bankers in preparation for a sale of exit because the offers will come, which happened at least two to three times a year in his experience. So, a few years back when he sold the manufacturing division of a company, he didn't take it to market to get competing offers. Because of that, he says he asked for a premium for not taking it to the market.
"I know the value of my business better than any adviser on the planet that I meet tomorrow," he says. "As far as multiples, it was a 10x multiple of an EBITDA that I was responsible for creating. So, it's a 10x of whatever you want 10x to be as long as you manage it correctly."
He says he did the deal with no advisers, no investment bankers and his once-in-house counsel, which kept his deal costs to a minimum for a transaction that he says worked out very well.
Because the post-deal liquidity can be substantial, he says sellers should expect to make "a whole bunch of friends after you have this event, and they're going to be there to 'help' you. You've got to be a little bit discriminating because that's where you're vulnerable. And that's where your ego is at a peak."
To counter that, he says sellers should look in the mirror and say to themselves "it wasn't me."
"I had a team, a wonderful team, that contributed to this event. It was not me," Steier says. "I did not get handsomer. It's not me. Retain the humbleness that got you to where you are, always. Because by selecting the right adviser or the wrong adviser, you may differ over a year or 5 to 10 percent and the value of a portfolio. That's nothing compared to the 50 percent you're going to lose in a divorce. If you believe it was all you and your ego goes to your head — and I certainly wouldn't ask for a show of hands in this room is how many people that have gone through that — but it's not you. You're still the same person that started the business, ran the business, built it successfully. This, to me, is the most critical aspect of the post-liquidity event."
