The protesters marched on the highway, despondent about rapid inflation.  They shut down the thoroughfare for hours. 1000 miles away, protesters flocked the capital and drove the legislators to safe haven in neighboring territories.

These were fundamentalists in Tunisia or Libya; they were students in California and state workers in Wisconsin.

The impetus for civil unrest in the Middle East is that of the “lost generation” of unemployed misdirected youth.  In some regions of the world, unemployment is 40% or more.  In the U.S. , it is not just the young that face underemployment but generations of workers whose skills have become irrelevant.  The U.S. has the western world’s widest income distribution. The Top 10% make 6 times that of the bottom 10%, compared to 4.2 X for Great Britain and 2.8 X for Sweden[i].  The labor market has hollowed, as wages earned by shop floor workers have actually declined (when adjusted for inflation) over the last two decades.

The labor imbalance in the U.S. has far reaching implications, not only for the unemployed but for our economy as a whole.  The inability of low wage earners to consume is a strain on U.S. growth.

While there is plenty of banter about the need for jobs, there is no systematic solution in place for retraining American workers such as displaced auto and steel workers. President Obama has called on U.S. business leaders to: “generate ideas for creating jobs, sustaining the economic recovery and making America more competitive”[ii].

Of course the notion of “creating jobs” is a little too convenient. Jobs are created when there is a need for them, and Americans get the jobs when they offer the most value. The problem is not that there are not enough jobs; it is that the cost-benefit for the employer often tips towards off-shoring.  If our workers do not offer enough value in the form of specialized knowledge, ability to use technology, etc., jobs will continue to be shipped overseas.

This is not a protectionist rant, and my comments aren’t intended to incite a riot on free trade, or China manipulating currency, etc. I am focused on what we can control.  What our nation needs is a retraining effort. The money we are spending on unemployment and other services would be better spent invested in people so that they can acquire new skill sets that are relevant in an ever changing world.

The question is who will lead, and who will pick up the bill?  To prepare our workers for the future will require collaboration across business and government. Tax and other incentives need to be in place to encourage the retooling of America. So as GE Chairman Jeffery Immelt and the rest of the White House Council of Economic Affairs weighs in on jobs, I hope they emphasize that we need to create opportunities for workers, and provide them will the skill sets required to compete.

Otherwise, the marches may extend to Washington D.C. and a state capital near you.

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[i] The Price of Everything Eduardo Porter

[ii] Obama wants business world’s best ideas on jobs USA Today

Most of our clients aspire to a similar end game; some type of liquidity event (sale). Often, such transactions lead to extraordinary material wealth, and provide a payoff for the entrepreneur’s years of sweat equity.

A recent study validates content previously published in this space. The value of businesses is not proportionate based on size. A $50 Million revenue business could be worth significantly more than 10 times that of a $5 Million business.  Within the current M&A environment, the “size premium” is magnified further by a dearth of “deal quality”.

In 2009, companies with less than $5 Million in EBITDA (earnings before interest, taxes, depreciation and amortization), yielded an average 5.1x multiple, compared to those with more than $5 Million who commanded a multiple of 5.9x.   The premium paid (16%) for profitable larger companies last year was five times the premium paid in 2006 (3%). A study conducted by GF Data Resources concluded that “average performers” (companies with less than a 10% EBITDA) earned a 4.3x multiple compared with 5.7x for above average performers. That is, a company that earns a $5 Million profit before taxes is a far more attractive asset than one with less revenue or lower margins.

As an organization moves through its lifecycle, there is a disproportionate multiplier effect to its value by virtue of which buyers are in play. Private Equity investors and lenders view the $5Million EBITDA business as better prepared to weather economic fluctuations.  We have heard the cries of smaller, poor performing businesses that have very little access to capital. Conversely, the flight to safety has created remarkable competition for businesses of the desired scale ($5 Million+) .

Thus, the entrepreneur needs to be patient and focus on the infrastructure required to support growth.  Taking the time to grow a business delivers an incredible incremental return. Assume a $40 Million business earned an 8% EBITDA ($3.2 Million) and was valued at five times ($16 Million). If the business were to leverage its infrastructure and grow to $50 Million at 10%, it would realize a $5.0 Million EBITDA. If the higher margins and scale were to produce a half turn (multiple) increase, the enterprise value would be: ($5M x5.5=$27.5M) Thus, the 25% increase in sales and 25% increase in profitability yields a whopping 72% increase in enterprise value.

The size premium should give us pause. It provides the entrepreneur with motivation, and the knowledge that his years of work and grit can provide a significant pay off.