{"id":2405,"date":"2015-09-24T10:00:30","date_gmt":"2015-09-24T17:00:30","guid":{"rendered":"https:\/\/berkonomics.com\/?p=2405"},"modified":"2015-09-22T09:23:53","modified_gmt":"2015-09-22T16:23:53","slug":"sell-when-growth-is-high-even-if-cash-flow-is-low","status":"publish","type":"post","link":"https:\/\/berkonomics.com\/?p=2405","title":{"rendered":"Sell when growth is high, even if cash flow is low."},"content":{"rendered":"

Dave’s note: \u00a0Our guest author this week is\u00a0<\/em>John Huston,\u00a0<\/em><\/strong>\u00a0founder of the 300+ member Ohio TechAngel Funds and a past Chairman of both the Angel Capital Association and the Angel Resource Institute. \u00a0\u00a0\"Time-to-sell\"<\/a><\/em><\/p>\n

By John Huston<\/strong><\/p>\n

There are only two types of companies -those which have achieved positive cash flow and those which have not.\u00a0 (Earnings before Interest, Taxes, Depreciation and Amortization, or EBITDA is the most commonly used definition of cash flow.)<\/em><\/p>\n

While it is easy to divide all companies into just these two groups, this simplification ignores whether management has made a conscious, strategic choice about their growth.\u00a0 Perhaps you have decided to continue growing top line revenues at the expense of cash flow (EBITDA.)\u00a0 For high growth ventures being groomed for a lucrative liquidity event, this is usually a wise choice, presuming additional growth capital can be successfully raised on agreeable terms.<\/p>\n

The issue is whether your company could pare back expenses and live within the cash it is currently generating – if you had to do so.\u00a0 This should be a major milestone goal of all start-ups.\u00a0 Until it is reached, survival still hinges on the kindness of outside funding sources.<\/p>\n

[Email readers, continue here…]<\/em><\/span> \u00a0But this too is an overly simplistic view. \u00a0Usually leading up to the time positive cash flow is initially reached, the management team is not taking a market wage, payables are stretched, and any slowing of receivables collections would likely cause layoffs.\u00a0 The team knows their current expenses are being so closely managed, that at some point they would be unable to continue in this mode.\u00a0 They have achieved a level of cash generation which enables \u201csurvival\u201d – but it is not sustainable.<\/p>\n

Now that you are more mature as a business, management can decide how to balance building revenues versus building cash flow.\u00a0 There is a point at which building cash flow above revenues yields diminishing investor returns considering the amount of capital and time it consumes.\u00a0 Furthermore, having substantial positive cash flow may sub-optimize investor returns at the exit.\u00a0 This is because potential acquirers often act like mere financial buyers when they see a significant positive cash flow stream.\u00a0 This prompts them to merely apply a multiple (often 5 \u2013 8X) to the EBITDA or cash flow of the business, always a smaller number than when pricing an acquisition for strategic reasons.\u00a0 So, rarely will this strategy or outcome enable investors to reap their target in a sale.<\/p>\n

Ventures which have negative EBITDA, but could turn it positive if they chose to do so<\/em>, are exhibiting the growth which attracts more bidders.\u00a0 Those which generate high returns at the exit are often not sporting positive cash flow when sold, but they could dial back to be positive if required. <\/em>\u00a0They are demonstrating by their actions that bidders cannot bid low, because by bidding low buyers would be assuming that a sale is necessary due to the company\u2019s negative cash flow.<\/p>\n

The bottom line: Looking at best example companies in a sale, their acquisition strategy was to avoid growing their cash flow before the exit.\u00a0 Counterintuitive perhaps, but demonstrated to be effective.<\/p>\n","protected":false},"excerpt":{"rendered":"

Dave’s note: \u00a0Our guest author this week is\u00a0John Huston,\u00a0\u00a0founder of the 300+ member Ohio TechAngel Funds and a past Chairman of both the Angel Capital Association and the Angel Resource Institute. \u00a0\u00a0 By John Huston There are only two types … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"footnotes":""},"categories":[13],"tags":[],"class_list":["post-2405","post","type-post","status-publish","format-standard","hentry","category-the-liquidity-event-and-beyond"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts\/2405","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2405"}],"version-history":[{"count":0,"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts\/2405\/revisions"}],"wp:attachment":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2405"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2405"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2405"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}