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Compounding Knowledge and Returns: 2016 Year in Review

Read about the lessons we learned at throughout 2016 as we reviewed acquisition opportunities in the private markets, continued operating and investing in our portfolio companies, and tried not to screw up too often. 

Questions Investors Ask on a Management Call — and Conclusions They Draw

When we are interested in an opportunity, we build two lists of questions: one data-specific list for written response and one with largely open-ended questions for discussion on a management call. We actively avoid processes in which we are not permitted to ask questions before submitting an indication of interest.

A good financial package provides the facts, a great CIM provides the story, but our questions for intermediaries and sellers are not just trying to gather additional details. Here’s what we’re trying to learn, but not explicitly asking, in those question sets:

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The Small Business Crunch

The next 15 years will be the largest intergenerational transfer of private businesses in the history of the world. 2012 marked the first year that “Baby Boomer retirement” was the primary driver of business sales in the private lower middle market. Researchers have estimated that more than $10 trillion in business assets may be transferred by 2025.

We are in the beginning of a transition within the American economy where more than half of all businesses with employees will need to sell, restructure, or close their doors. The numbers are finite and inescapable. Mortality is a real thing. Liquidity issues and estate taxes don’t take care of themselves. Without a plan, the likely result is a legacy of chaos and confusion.

Footwork, Day Trading And Why Our Psychology Prevents Success

If you’ve ever played tennis, you’ve probably noticed that your ability to consistently hit good shots fades in and out. When you’re “on,” shots become effortless, leaving you wondering how you could ever miss. But without warning, the tide shifts, and the game becomes impossible. No matter what you do, you can’t keep the ball alive, and you can’t figure out why.

A good friend of mine, who is an excellent player, always reminds me that tennis comes down to footwork. If you get yourself in position with plenty of time to hit the shot, good things usually happen.

For argument’s sake, let’s say you can hit the ball well 90% of the time with proper footwork. But even when you’re off-balance, wrong-footed, or slow to react, good things occasionally happen. You can still hit a good shot about 40% of the time. That means that four out of every 10 times you’ll do the wrong thing and get a good result — with each accidental success further proving that you don’t really need good footwork after all.

But sooner or later, the odds play out, and poor footwork causes a cascade of errors. This results in frustration, confusion, and a loss. What works well in the short term can create poor long-term results.

This same dilemma is apparent in the divide between investing and trading.

Footwork in the Game of Investments

Technical indicators, such as momentum, mean reversion, and historical correlation, can lead you to believe a security is about to increase in price without thinking about the value of the underlying asset. But just like bad footwork, these things work frequently enough that they fool us into believing they’re sound principles.

The truth is that without understanding the true value of the underlying asset, any “investment” is just a gamble. As anyone who goes to casinos can attest, enough payoff will lead you to believe that gambling is easy money. But in a game of odds, every successful gamble is a false positive — only leading you to bet more money you’ll eventually lose.

There are no easy shortcuts, or as Charlie Munger said about investing: “It’s not supposed to be easy. Anyone who finds it easy is stupid.”

To take it a step further, use borrowed money. In the short term, leverage can help you win big with a modest outlay. If a trade is timed correctly while employing maximum leverage, the returns can be astronomical. (One successful leveraged trade is enough to convince you that you’re a genius.) But if you continually leverage odds against trades, all you’re doing is guaranteeing you’ll eventually go broke. It’s easy to forget that leverage is an amplifier of gains or losses, not the source of them.

So returning to my tennis game: Why do I refuse to focus on good footwork? Because it feels fantastic in the moment. There’s no better feeling in all of tennis than drilling an off-balance, risky shot when the pressure is on. It also leads me to consistently lose matches against players with inferior skills.

Someday, I’ll probably make the connection and start moving my feet. Until then, I’ll keep living for the moment.

This post originally appeared on Forbes.

Our “No Asshole” Rule

Our firm has a strict “no asshole” policy. When we explain the rule to others, they inevitably chuckle and nod. It seems as though everyone can identify with the miseries that invariably accompany such folks. takes a proactive, zero tolerance approach to assholes. We have no tolerance for dishonest, manipulative, belittling, or egocentric individuals. No tolerance for the rude and obnoxious. No tolerance for employees or partners who play politics, or cut corners. No tolerance for those who focus on how to get the most, the quickest.

EBITDA Is 'BS' Earnings

“Beware of geeks bearing formulas.” – Warren Buffett

Earnings before interest, taxes, depreciation, and amortization — discussed more commonly using the acronym EBITDA — has become a popular standard by which to measure business performance. Public companies use it on earnings calls to demonstrate achievement. Reporters use it interchangeably with cash flow to describe earning power. Banks look to it as a way to understand the likelihood of debt repayment. If EBITDA has become the gold standard, what’s the problem?

Buffett’s longtime business partner, Charlie Munger, expressed Berkshire Hathaway’s position on this particular formula best: “I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit’ earnings.”

The Upside

Before diving into why EBITDA is ultimately lacking, let’s quickly review what it actually highlights. As a display of pre-tax, pre-interest, pre-investment earnings, EBITDA can give a good, short-term snapshot of the raw earnings potential of a business. That’s valuable in assessing the potential upside of the business prior to necessary evils like financing, required upkeep, and Uncle Sam.

I keep qualifying these statements with the word “potential” because I’ve never seen a business whose owners have been able to stash away anything close to EBITDA.

EBITDA’s Limited View

In breaking down EBITDA’s shortcomings, the easy place to start is taxes. Depending on the structure of the business and the taxing entities, the government takes between 22.5 percent (federal dividend/capital gains plus Obamacare tax, with no state income tax) and 52 percent of profits (highest bracket for ordinary income, plus California’s state income tax as well as San Francisco’s city income tax) before owners get to save or spend. How the company is structured and where it gets taxed matters tremendously to its real earning power. Again, I’ll leave it to Warren Buffett to explain:

“People who use EBITDA are either trying to con you or they’re conning themselves. Telecoms, for example, spend every dime that’s coming in. Interest and taxes are real costs.”

Like taxes, paying interest on borrowed money doesn’t affect business operations, but it certainly affects the magnitude of earnings. Howard Marks of Oaktree Capital Management explains that “leverage is the ultimate two-edged sword: it doesn’t alter the probability of being right or wrong; it just magnifies the consequences of both.”

If leverage is employed, it’s a crucial component of the business, especially for the equity holders who eat last after profits cascade down through the debt holders. In a debt-free company, a 20 percent downswing in profitability is nothing to worry about. There are still profits accruing for the owners, just at a lesser rate. Contrast that with a highly leveraged company, where a 20 percent decline can force bankruptcy or, at the very least, ensure that the owners don’t see profits for a very long time.

The bottom line is that although debt and taxes don’t directly affect operations, they certainly affect owners, creating opportunities for high-EBITDA companies to have their earning power eroded to nothing.

Emphasis on the ‘DA’

By far, the most dangerous use of EBITDA lies with the “DA.” While technically considered a non-cash expense for accounting purposes, the costs of depreciation and amortization are real. As a refresher, depreciation and amortization are accounting inventions that allow a business to spread the costs of various items over a period of time that (supposedly) mirror their usage. If I buy a piece of equipment (a capital expenditure) with a 10-year life cycle, depreciation allows me to slowly deduct its value from my taxable earnings over that period of time.

It sounds simple enough, and it is. Depreciation can rightfully show the actual earnings power of the business over time, assuming the depreciation schedule and the capital expenditure’s usefulness match up. The challenge lies in dismissing it outright because it’s a non-cash expense after the initial investment is made. That line of thinking makes no sense to anyone trying to estimate future earning power, as Charlie Munger explains:

”There are two kinds of businesses: The first earns 12 percent, and you can take it out at the end of the year. The second earns 12 percent, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.”

When evaluating a business, I break depreciation down into three categories. The first is depreciation as an average proxy for maintenance CAPEX, or the amount of reinvestment necessary to keep the business level. The second is a proxy for growth CAPEX, or the amount of investment made to support projected future growth. Lastly, there is tax-planning depreciation, which can result in 100 percent of the anticipated depreciation being taken in the first year, depending on current tax law.

Like any other metric, the goal of looking at depreciation is to understand the risks, rewards, and likelihood for outcomes. If a company has an EBITDA of $2 million, yet spends $2 million per year on new equipment to merely stay open, that’s a terrible business. Conversely, a business with $2 million of EBITDA and very little capital expenditure certainly looks attractive from the owner’s chair, depending on the price you’d have to pay for that piece of furniture.

The point is that depreciation and amortization are real expenses that have a variety of implications for the business. To ignore them is to risk providing a deceiving picture of reality to yourself and others. A great example came in 2002, when WorldCom inflated its EBITDA by classifying $3.8 billion in normal expenses as CAPEX. As expected, that didn’t turn out well.


When Groupon was getting ready to go public, it tried to amortize its user acquisition expense, claiming that its customers would continue to buy more stuff over time. While that may have been true, that’s always been the case with marketing expenses. In a perfect world, the expense pays off over a long period of time, generating a high return. Just like depreciating a fixed asset, why wouldn’t we want to evaluate companies without taking into account the marketing expense?

To explain the shortcomings of EBITDA, let’s imagine I invented a concept called EBITDAM to evaluate two companies, with the “M” standing for “marketing.” Company A has $100 million in EBITDAM and $50 million in marketing spend. Company B has $100 million in EBITDAM and $10 million in marketing spend. They both trade for $1 billion.

Now, let’s say I came to you and said, “Hey, I found these two companies trading for 10x EBITDAM!” You’d look at me funny and say, “Brent, why the heck do you care what multiple of EBITDAM they’re trading for? What matters is the multiple you’re paying versus what they’re actually earning.”

Then I’d say, “Oh, I know that B is cheaper, but I’m looking for companies without a lot of required marketing spending, so I use EBITDAM.” It’s fair to say you’d assume I was a nutcase.

If you agree with me there, I’ll ask, “Why treat real depreciation and amortization any differently? Why bother with throwing around EBITDA?” The answer you hear is that “D” and “A” are “non-cash,” and that the real annual cash expenditure may differ from the amount recorded in the statements. So they use EBITDA as a proxy for cash flow and make tables of EBITDA multiples.

But this makes very little sense. Let’s say, in our above example, that they did all of their marketing spend in year one, then amortized it over five years in the income account. Would you start paying attention to EBITDAM multiples? Would EBITDAM become a reasonable proxy for cash flow for you? Would you accept a spreadsheet full of EBITDAM multiples? I sincerely doubt it. You’d be deeply skeptical of what I was pushing. You’d subtract whatever real annual marketing spend was necessary and go on your merry way, not paying attention to EBITDAM.

So my problem is that, in most cases, EBITDA doesn’t mean anything more to me than EBITDAM would to you. I’m not looking for a company with a lot of EBITDA any more than I’m looking for a company with a lot of gross profits. What I want to know is what cash earnings — after accounting for some normal level of capital spending — am I getting versus price paid?

Still the Standard

Despite its shortcomings, EBITDA is still used as the standard for valuing businesses. Financial statements are dense and, especially among private businesses, open to many variations of accounting. EBITDA certainly allows for an easier comparison, but at what cost? I’ll let investor Jeff Annello have the final word:

“EBITDA has some use, I suppose, but I think it’s misleading and used to mislead, not to clarify. Often, I think companies fool themselves as well. It’s just a tool I don’t trust in most hands. I think Munger is right to call it ‘bullshit’ earnings.”

This post was originally published on Forbes.

What Are Buyers Paying for Main Street Businesses?

As of early 2014, about 27 million businesses exist in the U.S. Of those, only 300,000 earn more than $5 million in annual revenue, and only 150,000 earn more than $10 million.

“Main Street” businesses are the large group bridging the gap between small business and the corporate world — earning roughly $2 million to $30 million in revenue and resulting in between $500,000 and $5 million in earnings before interest, taxes, depreciation, and amortization. With such a wide range of numbers, it’s crucial to understand your market position as you prepare to sell your Main Street business.

Calculate Your Multiples

The valuation of any asset is an attempt to estimate the present value and the likelihood of future cash flows and compare it to other opportunities. The most common result for operating businesses is a multiple of EBITDA. For example, if a business has EBITDA of $1 million and the multiple is 3.5, then the valuation would be $3.5 million.

According to the Pepperdine Private Capital Markets Project, depending on a company’s size, multiples of Main Street-sized transactions have averaged between 2.6X and 4.5X. The example valuation described above reflects the average multiple (3.5X) for EBITDA of $1 million.

Adjust Your Multiples

While averages can be helpful in framing a discussion, the involved parties are the real determinants of an asset’s worth. So what are the most common factors that lead to increased or decreased valuations?

1. Owner involvement: Everyone loves to feel needed, but for an owner trying to sell his business, this is a major challenge. The more vital the owner is to the business, the more challenging it will be to replace him. Replacement costs for owners involved in day-to-day operations typically fall between $125,000 and $400,000 and are deducted from the estimated EBITDA.

2. Client concentration: The more power any outside force has over the performance of the business, the riskier it is. For instance, if a client represents more than 20 percent of revenue, multiples typically start to drop.

3. Necessary capital expenditure: A business that throws off a lot of cash but requires almost all of the free cash flow to be reinvested in the business isn’t worth much. Rather, a good indicator of the necessary capital expenditure is depreciation, which allows for the assets of the business to be deducted from profits during the course of the asset’s lifetime. Although EBITDA is a commonly used metric, it’s usually only useful when CAPEX is low. The more cash that’s needed for reinvestment, the lower the multiple.

4. Processes: Some successful businesses are run off “feel” by an experienced operator who is substituting her intuition for repeatable processes. The ability to replace such a person is next to impossible. The less a business is process-driven, the lower the multiple.

5. Redundancy: What if a bus hits a key person? The more dependent a business is on a few key individuals with little to no redundancy, the lower the multiple. Any buyer will look at that situation and consider two options: Do nothing (and have elevated risk), or create redundancy (and decrease profits).

6. Consistency: Some businesses have revenue that comes in like clockwork at the same sustainable margin. Other businesses frequently go through fits of feast and famine. Ultimately, all that matters is the performance of the business during a normalized period of time (taking cycles into account), but most buyers prefer consistency.

7. Regulation: Regulation is a double-edged sword. It creates barriers to entry, which increases the value of any existing business, but it also carries significant risk for increasingly arduous requirements that can negatively impact profits (think Dodd-Frank for banking).

Set Realistic Expectations

In the Harvard Business School report, “The Market for Smaller Firms,” Richard Ruback and Royce Yudkoff noted that Main Street multiples are half to a third as large as those for comparable larger companies. The variance in comparison to larger firms is due to several factors, including:

Search costs: While sale prices are much lower, the search costs for lower middle-market businesses are comparable to (or larger than) those of bigger acquisitions due to difficulty in finding viable sellers in the marketplace and complications in financial reporting that must be sorted out prior to a sale. The search costs can represent up to 20 percent of the acquisition cost, which reduces the amount a buyer is willing to pay.

Number of opportunities: Today, most Main Street businesses are owned by baby boomers.As the president of Cornerstone Business Services Scott Bushkie says, “It’s unlikely values will increase as long as there’s a larger number of baby boomers selling than there are buyers looking for Main Street opportunities.”

Size and risk: Main Street businesses lack the benefits of scale that sophisticated buyers of larger businesses are familiar with.“A larger firm, say one worth $10 billion, is not simply a collection of one thousand $10 million firms,” said Ruback and Yudkoff. “Instead, in larger firms, there are bigger product lines, similarities across product lines, and systems to make the $10 billion business much easier to understand.”

Apply Your Multiples

Understanding multiples prior to marketing your business puts you in a better position to negotiate. Buyers appreciate when sellers can articulate why they believe a business is worth a particular price. For example, if you think your Main Street business is worth 5X, you must recognize that you’re positioning your business on the higher end. Be prepared to explain why you believe it’s worth that much.

However, negotiation isn’t simply about multiples. As you set expectations, look at where buyers start — the EBITDA. Analyze your financials, and figure out what factors may cause adjusted EBITDA to be driven down in the course of both initial negotiations and due diligence. A high multiple may sound good, but if the EBITDA is low, it won’t matter.

Think through how you’d like the deal structured from a financial standpoint, as well as your timeline and your preferred level of involvement post-sale. If you can explain these factors to a prospective buyer early on, you’ll save everyone involved a substantial amount of time and set up a constructive environment for negotiation.

This post was originally published on Forbes.

7 Types of People Who Buy Main Street Businesses

If you’re wondering what will happen to your business when you retire, you’re not alone. According to a recent survey, the most pressing challenge facing small business owners is developing an exit strategy.

If your business has stable, significant revenue, a diverse client base, and consistent EBIT (earnings before interest and taxes) of between $500,000 and $3 million, you’re a successful Main Street business owner.

Many articles will tell you how difficult it is to sell a Main Street business. Some will even tell you it’s impossible. The process can be challenging, but it’s certainly not impossible. According to PitchBook, as of September 30, 39 percent of all deals this year were under $25 million in transaction size.

Here are seven types of buyers who actively pursue Main Street deals:

1. Individuals

The most basic type of buyer is one private individual. She may be recently retired and looking for a way to spend her time, or she may be looking for a way to generate higher returns on investable resources.

The advantages of an individual buyer include the possibility that she may be interested in day-to-day management, does not have conflicts from a board or outside investors to whom she’s accountable, and will have a direct, vested interest in the company’s success. Depending on her background, she may also bring valuable expertise and relationships to the business.

But individual buyers also have downsides. Available capital is limited to her personal wealth, sometimes creating financial strain if the business were to temporarily struggle. Her risk tolerance may be overly limited, and your entity’s future will now be dependent on the health and capacity of the new owner. By definition, she won’t have a staff to help provide additional consulting or resources, and she may become distracted during personally challenging times.

According to Pepperdine Private Capital Markets’ Q1 2014 MarketPulse Report, individuals who had not previously owned a business purchased 40 percent and 36 percent of firms $1 million to $2 million and $2 million to $5 million in transaction size, respectively. Individuals who had previously owned a business purchased 20 percent of firms in the $1 million to $2 million sector, 21 percent in the $2 million to $5 million sector, and 13 percent of those in the $5 million to $50 million sector.

2. Family Offices

As the name implies, a family office manages the wealth of a single family. Recent trends indicate that family offices are increasingly investing in private businesses as an investment class.

The advantages of a family office are the availability of capital and, depending on how your business is best run, a lack of involvement from the new owner.

The disadvantages of a family office include their limited interest in the business as anything more than an investment and, depending on the deal structure, their requirements to operate the business in a particular manner.

3. Search Funds

Search funds are made up of one or two individuals (usually recent MBA graduates or entrepreneurs) who are being compensated by a pool of investors to seek out a viable deal over usually two years. Once the search team identifies a good deal, they must then go back to investors to raise the capital needed to purchase the business.

The advantage of a search fund is their ability to replace outgoing management that will focus solely on the business.

The disadvantages of a search fund — beyond the fact that they don’t have guaranteed capital — include an investor group with high expectations and a short time horizon and a leadership team that is inexperienced. The buyer group will be hands-on and usually directive in their approach.

Search fund buyers are great fits for more easy-to-run businesses, with outgoing management and ownership that is intertwined.

4. Private Equity Firms

More private equity firms are starting to create funds to target the lower middle market. A traditional private equity firm first raises money from investors (limited partners) to create a fund and then deploys the capital raised.

The advantages of PE are the availability of capital, the resources they’ll bring to bear on the business, which differ by firm, and expertise and experience of those involved in the deal.

The disadvantages of PE are extreme selectivity in their targets (meaning you’re less likely to fit their criteria), expectations on returns, the heavy use of debt to finance the deal, and a short holding period of almost always less than 10 years. This can cause decisions to be made that are against the business’s long-term best interest.

Additionally, PE firms don’t actively manage the day-to-day of a business, which may be preferable if your company already has capable non-owner management.

According to the MarketWatch Report, in Q1 of 2014, PE firms bought 10 percent of firms in the $1 million to $2 million sector, made no purchases in the $2 million to $5 million sector, and represented 67 percent of closed transactions in the $5 million to $50 million sector.

5. Competitors

Although it can sting, a competitor may be an excellent option. They know your industry, have familiarity with your practices, and understand the risks and rewards of your business model without doing extensive research. Plus, transitional management is rarely a concern.

The disadvantages of strategic acquisition by competitors include unknown capital limitations on the buyer’s part, exposing sensitive information without a guarantee of purchase, and the risk that a competitor may buy to dramatically alter the nature of the business, including significant layoffs due to synergies.

6. Suppliers

Another type of strategic acquirer consists of the entities that supply to you and that you supply to. For suppliers, buying your company represents an opportunity to vertically integrate.

Like competitors, suppliers will have a good understanding of your industry. Unlike competitors, however, suppliers have a vested interest in seeing your offerings maintained.

Beyond unknown capital limitations, the primary disadvantage of strategic acquisition by supplier include the likelihood of a radical restructuring to absorb your offerings into their existing structure.

7. Nontraditional Entities

There are other entities that don’t perfectly match any of the descriptions above but also buy Main Street companies.

As an example, uses excess cash from its existing portfolio to purchase companies, searching like a PE firm but without the pressures of limited partners or a need to divest a certain period of time.

Nontraditional entities may be harder to identify, and their advantages and disadvantages are unique to their structure.

Finding the right buyer is a process, but it’s possible. Reaching out to family offices, investment firms, and brokers are good first steps to gauge interest.

This post was originally published on Forbes.

11 Key Questions Prospective Buyers Will Ask About Your Business

When you put your business up for sale, be prepared to talk about it in different terms.

For you, this business has consumed — if not all, then the majority of — your time. It’s made of your blood, sweat, and tears, product/service lines, employees, stories, accounts lost and won, systems and processes, and so much more. And while a good buyer can certainly appreciate your tireless efforts, they’re going to evaluate your business under a different lens.

You see, unless you’re being rolled into a larger company or dismantling individual assets, you’re essentially selling the present value of future cash flow, an imperfect estimation based on both objective and subjective factors.

You may work with a broker who will prepare a detailed offering memorandum about your business by reviewing each part of the company and compiling it into one pitch, broadly answering “Why is this particular entity worthy of our consideration?” for buyers.

With or without a broker involved, a buyer must decide whether to bid after careful examination of both negative and positive aspects. Depending on structure and interests, a negative to one buyer may be a positive to another (e.g., existing non-owner management, real estate). You won’t be a good fit for everyone, and that’s OK.

Find the Answers

Buyers have three primary lenses for initially determining whether your business is a good fit.

First, they want to understand how you’ve built the business, how you think, and, truthfully, whether or not you’re a reasonable and decent person. We’ve found that no deal terms are good enough to justify dealing with difficult people.

Second, they want to put themselves in your shoes and view the business as the owner/operator would. Depending on how the buyer looks at management, they’ll want to get a clear view of everything from day-to-day operations to long-term strategic planning.

Finally, they want to talk about what a change in ownership would look like and how the business may sustain, grow, or fall apart in the future. Every business is unique, with risk factors and opportunities. The buyer’s goal is to structure the deal as to maximize the upside and minimize the downside, without losing the deal entirely.

The specific questions will be dependent upon many factors, but in general, the buyer will be trying to glean the three areas above by asking you direct questions about how your business operates.

Here are eleven example questions buyers may ask:

1. Why did you get into this business in the first place? What excites you about it?

2. What is your day-to-day role in the business?

3. What would your ideal transition look like? What do you want to do post-sale?

4. What would be your expectations of a buyer?

5. What problem does your company solve for your customers? Why do your customers buy from you rather than others?

6. Can you walk us through the entire process of your service/product line — from sourcing to distribution to serving the end customer?

7. Other than you, who are the leaders/executives in the company? What are their current and potential roles?

8. How long have your employees been with you, and why do they stay?

9. What types of problems arise in your business (external and internal)? Who deals with them, and how?

10. At what capacity level do you currently operate? What capital expenditures should be made in this business annually, and on what?

11. What opportunities exist in this market through the next three, five, or 10 years?

When preparing for and responding to prospective buyer questions, it’s critical to be honest, not impressive. If you’re dishonest, they’ll find out in due diligence (if not sooner), and if you try to convey how ridiculously smart you are, they’ll start to question whether the business will be worth anything without you.

On the other hand, if you honestly explain how the business works, you will likely find the right buyers present themselves. And that means you can make your exit on good terms.

This post was originally published on Forbes.

10 Simple Tips To Make Your Business Acquirable

The last time I checked, the mortality rate continued to hover right around 100%, which means your business isn’t going to be yours forever. You’re going to sell it, shut it down, or pass it down a generation. An estimated 70% of businesses don’t have a family member capable or willing to assume responsibility. What are you doing to plan for the sale?

Here’s what you should do:

1. Check Your Ego: If you’ve built an acquirable business, you’ve had success. Congrats. You should be proud of your accomplishments. However, you should also be realistic in your self-assessment. As Charles de Gaulle once remarked, “Graveyards are filled with indispensable men.” Have a clear understanding of your role and how that role can be transferred.

2. Be Irrelevant: It’s counterintuitive, but one of the best things you can do to be acquired is prove that you’re irrelevant. Why? Your business is only worth what someone else can do with it. If you’re the glue, the strategy, the HR department, and the driving force, you’re screwed. A healthy layer of quality, non-owner leadership is key. The more you’re involved, the less your business is worth.

3. Become Known: Think of acquirers like clients. How will they find you? Being visible is the key. Attend conferences, participate in the community, and become a thought leader. There’s an old adage in acquisitions that says, “Never buy anything that’s for sale.” It’s highly unlikely the right buyer will magically appear, so treat potential buyers like potential clients and become known.

4. Develop Great Systems: Great systems allow you, or a potential buyer, to run the business without being present. Systems institutionalize expertise, leading to organizational consistency, quality, and true residual value. Again, your organization is only worth what someone else can get out of it. Spend time and resources on developing systems. It will pay off.

5. Clean Up the Financials: Van Halen, the legendary rock band, was notorious for its diva-like behavior, requiring a pre-concert bowl of M&Ms with all the brown ones removed. If they showed up and there were brown M&Ms, they refused to play. What does that have to do with your financials? Well, this high-maintenance behavior was genius. Van Halen’s setup required tremendous precision — even the smallest deviation could endanger fans and the band. If there were no brown M&Ms, no worries. But a single brown M&M meant other details were also likely skipped. It was their canary in the mine. For acquirers, financials are the canary. I’ve never seen a well-run firm with messy financials. Have them done professionally. Know them intimately. Be able to answer questions about them with ease.

6. Make a Profit: Despite gobs of wishful thinking, the value of all businesses comes down to one valuation methodology. Businesses are worth the present value of future cash flows. Let me repeat that: Every business is worth the present value of future cash flows, without exception. Your users, real estate, machines, systems, personnel, and customer relationships are worth the cash they will generate, discounted back to the present. Being profitable today clearly demonstrates earning potential and provides a clear pathway to a fair valuation.

7. Develop Reasonable Expectations: Unless your profits are exploding, or the business is pushing over $100 million in revenue, your company isn’t worth anywhere close to 10x EBITDA. For an average business, as measured by customer diversity, industry, and past consistency, with less than $1 million of earnings, your expectations should be between 3x and 5x EBITDA. As the size of revenues and profits increase, or the business becomes clearly less risky, the multiples can push upwards to 7x. Expect a portion of the sale price to be seller-financed and for some of the amount to be contingent on future performance.

8. Focus on Continuity: This applies to clients, partners, employees, and vendors. Little turnover shows stability, cohesiveness, and long-term value. The biggest danger in an acquisition is a lack of stability. The longer the tenure of your relationships, the deeper the roots, the better the communication, and the more grace you’ll have for the challenges that will inevitably pop up.

9. Be Transparent: During a recent potential acquisition, we received the requested information, and the deal looked great. We started due diligence and, lo and behold, the more we dug, the fuzzier things became. He calculated his net income by picking a number. He fudged his top line. He didn’t disclose big settlement payments for a significant legal liability. Ultimately, the truth comes out, so be transparent. Your acquirer will find it. Just disclose it — it will save you time and preserve your credibility.

10. Maintain Perspective: Please don’t send potential buyers reports about industry multiples derived from billion-dollar cash and stock transactions executed by multinational corporations. Not only is it not the same ballpark, it’s not even the same game.

This post was originally published on Forbes.