Multiples: A Dangerous Tool in the Wrong Hands
November 8, 2010
Back in college I fondly remember a conversation two roommates had regarding the value of a landscaping business. My buddy assumed control of his older brother's lawn mowing operation. Another friend took co-ownership contributing a few lawnmowers and a truck. It was actually pretty impressive, at the time; not Facebook impressive, but not bad for a couple of freshman who spent most of their time playing Battle Toads.
By senior year, though, one of them was looking ahead to other things, while the other planned to carry on with the business for the time being. At one point, valuations started getting tossed around, culminating with someone throwing out a price tag in excess of $1 million.
I spent some time mowing lawns with these guys. There was one day when I was paid for a day's work with a bag of Combos. On other occasions, I'd finish up a portion of lawn only to find the back untouched because the "CEO" was practicing wrestling moves in the leaves. Either way, it was pretty laughable that anyone would think the operation was worth more than the price of the four or five used lawnmowers.
I was talking to an executive the other day at a large consumer company, and he commented that he's still seeing a lot of family-owned businesses with an inflated sense of value, even coming out of the crisis. The problem, he says, isn't necessarily the same situation involving the now defunct Mike's Mowing. But it's often the case, he said, that there's is real value in one part of the business, but these companies have expanded around the "good assets" to create revenue involving other so-so assets that wouldn't interest anybody. These business owners anticipate that they're going to fetch a multiple based on the total earnings or revenue of the company.
This is why the analysts will often put together a breakup model of publicly held companies, but it underscores how multiples can be a dangerous tool in the wrong hands.
10 Comments
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Posted by: wz w | November 1, 2011 9:51 PM
This is why a friend of mine decided to become a Boston handyman on his own. He didn't want to have these issues. Thanks for the great article. I will pass it along.
Posted by: Bill B B | October 1, 2011 10:10 PM
I think Mike's Mowing owes me money too!
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