In business, there’s a concept referred to as divestiture or divesting. It is almost the opposite of investing. This is where you actually have an investment already, and now you’re going to take money out or gonna sell part of your business. In this episode, Erik shares what he thinks about divesting.
Erik J. Olson (00:01):
Divesting part of your business, what is happening? This is Erik J. Olson in business. There’s a concept referred to as a divestiture or divesting. Divesting is most the opposite of investing or, or an investment. A divestiture is where you actually, you have an investment already, and now you’re going to reverse it. You’re gonna take money out. You’re gonna sell it. You’re gonna sell part of your business. So with really large companies, a lot of times they’re conglomerate and they have many individual companies that service different verticals of an industry or different industries altogether. And for whatever strategic reason, they’re gonna carve out part of their business and identify like one of those businesses and they’re gonna sell it to someone else. They want to exit that business, right? That is a divestiture. Well, recently I was approached by someone who does something very similar to us and he was interested in purchasing part of our portfolio.
And it got me thinking about like, what would like, how would I do this? What would the mechanics of this divestiture be? Now the reason that he approached us, because we have a strategy in place that I’m very vocal about. I share on this podcast, I share with everyone that I speak with at, at Array Digital, we have niched into law firm marketing. We work with law firms now, historically we were a local digital marketing agency and, and we continue to service our clients because we’re very loyal to them and they get the best service possible, but it’s not necessarily our future, right? Our future is basically like law firms. And that’s like, all of our business development is focused on them. We have another podcast. They, The Managing Partners Podcast, if you’re a lawyer and you haven’t heard of that one yet, go check it out.
The Managing Partners Podcast, you can go to the website, managingpartnerspodcast.com. So we’re, we’re all in when it comes to legal. But, but yeah, we, we still continue to work with our, our clients that are non-legal and they’re still part of our family portfolio. And they benefit from everything that we’re learning. They, they get all the new tips and tricks and tools and everything, all our new per people processes, they get it all and we’re gonna continue to serve them unless we divest. So what we’re doing is what I did is I, I looked actually at, at that list and I’m like, okay, well, which one of these kind of fit into the strategy? Which ones do not. So even though like I’m a hundred percent committed to supporting our existing clients, regardless of their industry and their situation, some of them just naturally fit better than others.
So I’m, I’m, I’m looking into that and I’m, I’m actually looking at the numbers and I’m trying to figure out what’s the best way to evaluate this. Like, how do you evaluate? So let’s say, I’m just gonna give you round numbers here. Let’s say that all like whoever I identify as a client adds up to say $10,000 a month in recurring revenue, right? How do I evaluate that? How do I put a price tag on that? If I were to sell it, is it $10,000? Well, that doesn’t make sense. Cause if it were me, like every single time someone was selling $10,000 of monthly recurring revenue, I’d buy it for the same amount. I’d buy it for $10,000. Are you kidding me? That’s a one month investment. The payback period is one month. Oh, I, I I’d buy as many of those as I could.
I would borrow five quadrillion dollars and do that over and over and over and over and over again. Cuz that’s, that’s a no brainer a one month investment a one month payback time. And then you, you’re gonna continue to get the recurring revenue. Recurring revenue is the, the most sought after kind of revenue in order to get it yourself. There’s a cost of sales, right? You have to hire a salesperson, pay them a salary, pay them benefits, pay them a commission. You have to have a marketing engine that gets the leads coming in. And then the salesperson closes. It. There’s a lot of work that goes into that. So you can’t just be like, oh, I’m just gonna sell this to you for one month revenue. That’s ridiculous because the person that’s buying it, it would cost them way more to acquire that and a lot longer to acquire it.
If they can get in one lump sum, there’s a value there. So how do you evaluate that? Well, first of all, you have to take that $10,000 per month and you need to annualize it. Everything that you do in business should be annualized, right? So $10,000 a month becomes $120,000 a year of revenue. So that’s the basis. Now there’s a couple different ways you could do this. You could look at your cost to support the $120,000 or just look at the revenue and you can base it on different things. But if you look at the cost, you’re really kind of talking about an EBITDA situation. EBITDA is earnings before interest tax and amortization, I think <laugh> but basically it’s your earnings. It’s your earnings before tax and depreciation, right? So EBITDA EBITDA is basically your profit. It’s really just a fancy word for colloquially speaking your profit.
So if you look at like, let’s say outta the 120,000 it takes you $40,000 in order to support that a year, meaning that your profit’s 81, 20 minus 40 equals 80. Now you can do a multiple of that. So the multiple of, of the $80,000 is now you need to figure out, well, what’s the multiple, what do businesses sell for multiples of their EBITDA in my business is typically three to five X. So if it’s three X, that’s 240,000, if it’s five X, that’s $400,000. So now you’re in a ballpark, right? If you look at just a multiple of the revenue, then it’s, it’s something different right now. This is where I, I don’t, I don’t actually know what the revenue multiples are, cuz I’ve always only done EBITDA as a matter of fact, I’m glad I’m recording this because going into this, I
Was only thinking revenue multiples, and I was making it up. I was thinking two to three X of revenue. But now that I’ve actually talked through, this is what’s great about this podcast. If you don’t have a podcast, you should probably get one because what’s great about this is I’m literally talking to you now, I’m talking through this problem that I have, that I’m struggling with. And the reason I decided to talk about this is cuz I have a spreadsheet right here in front of me that lists out these numbers right now I’m, I’m making up the actual value of the number as I go. But I, this is like what I’m thinking of doing. And I’m I’m now I’m talking through the problem. This is like my own little fricking mastermind here talking to you, right? You’re literally getting the benefit of hearing what I’m thinking through to try to solve this problem.
How do I evaluate this proposition that someone brought to me? Hey Erik, I wanna buy a book, a part of your book of business. Hmm. I don’t know. What does that mean? How do I evaluate? I don’t even know. Like I haven’t even agreed. I haven’t agreed. I don’t know. I thought I was gonna do it based on revenue. Why would I do that? I’ve never done that before. All I know is that when you sell a business is based on EBITDA your profit basically. Right? So if I were to do this, if I were to evaluate it based on, on revenue, I, I don’t know what those numbers are, but EBITDA that’s well documented because that’s how you buy and sell businesses. This is a book of business that we’re talking about here. So I’m just gonna scratch what I was actually planning on talking about, which was the multiple of revenue it’s based on EBITDA.
All right. And it really is three to five times. So again, hypothetical numbers, if it were 10,000 a month, that really turns into like 250,000 to $400,000 lump sum. Right? And that’s what you need to think about. Like, what is, what is your work? What is your business valued at? Your goal should be to increase the value of your business. Almost like you’re going to sell it. Now. You don’t have to even want to sell it. I do not wanna sell this book of business. I do not wanna sell Array Digital. But if I operate Array Digital and this book of business, as if I were going to sell it and I could sell it at any moment, what does that mean? That means I’m running a great business, right? Cause you can’t sell a business unless it is tight. Like you’ve done everything you’re supposed to do the right way because when a new buyer comes in, they’re gonna look and they’re gonna be like, all right, Erik, show me all this shit you did.
That was stupid. And if you could be like, no, no, no. Like, no, dude we’re clean. Like these are clean numbers. We’re running a tight ship, then they’ll buy it. But if they come in and they find like all these little skeletons and all this bullshit that you do and you charge your trip to France, to business. Well, all that stupid shit, they’re gonna be like, no, no, no, no, no, no. They’re gonna not pay you for it. It’s gonna be a chargeback to the EBITDA calculation. And they’re gonna lose confidence that you’re running a tight ship, run a tight ship now. So that if an opportunity like I’m talking to you, which has come to me, Hey Erik, I’m thinking about, Hey Erik, would you ever consider selling part of your book to business? Eh, maybe maybe not. Right, but at least I’ve thought through it.
And now I’ve talked through it with you. And now I have an idea if I want to, how I could evaluate it. So, Hey man, I’m glad that I recorded this episode. I don’t know if anyone’s even listening. If you are, let me know, let me know that you are my sounding board. Let me know that you’re part of my invisible mastermind. Who are you reach out because I’m talking to a computer screen right now. I need to know who you are, man. Connect with me. Right? Tell me your problems. I wanna hear where your problems are too. I don’t wanna just talk to you about mine and work through them. As I record this podcast, reach out to me, hit me up on Instagram. My handle. There is erik.j.olson. E R I K dot J dot O L S O N. Identify yourself. Let me know who you are. This podcasting thing is great for me. I get my name out there. Right? I get some attention. I get to work through my problems as you just heard, but I don’t know who you are, man. I’m staring at a little dot on the top of my laptop screen. I wanna stare at you. So identify yourself. Let me know who you are. Podcasting is the lonely thing it’s helping me. You heard me work through the problem, right?
Let me know who you are. erik.j.olson