Selling Your Business: 10 Steps to Maximize Value
If you are considering selling your business, this article will help you evaluate your company as a strategic investor might. From this perspective, it pays to focus on ten critical areas of value creation. Recognize that the better your performance in these areas, the greater the selling price for your business. The following is a list of STRATEGIC VALUE DRIVERS:
1. CUSTOMER DIVERSITY – If too much of your business is derived from too few customers, this is perceived as a negative in the acquisition marketplace. The term for this is “concentration.” If none of your customers’ accounts for more than 5% of your total sales, it is considered a real plus for your business. If you are faced with a concentration issue, focus on a marketing and sales program to diversify your customer base.
2. MANAGEMENT DEPTH – An investor/acquirer will look at the quality of your management staff and employees as a major determinant in the acquisition price. You should train your replacement a year in advance of selling your business. If you have a strong management team in place, implement employment agreements, non-compete agreements and incentive plans to maintain your key players through the acquisition and transition process.
3. CONTRACTUALLY RECURRING REVENUES – All revenue dollars are not created equal. Revenues from long term contracts, contracts for annual maintenance, annual licensing fees, recurring retainer fees or technology licenses are more powerful value drivers than time and materials revenues or other non-recurring revenue streams.
4. PROPRIETARY PRODUCTS/TECHNOLOGY – This is an area where the conventional valuation rules do not necessarily apply. If strategic investors believe a new technology can be acquired and integrated into their established distribution channel, they may value your business on a post acquisition performance basis. The marketplace rewards successful innovation and yawns at “me too” commodity type products and services. If you create a technological advantage in your company, it could create substantial value for a much larger corporation.
5. PENETRATION OF BARRIERS TO ENTRY – In its simplest form, a large restaurant chain buys a small family-owned restaurant to acquire a grandfathered liquor license. Owning hard to get permits, zoning, licenses or regulatory approvals can be worth a great deal to the right investor. The government market is often difficult to penetrate. If your products or services apply and you can break through the barriers, your business becomes a more attractive acquisition candidate.
6. EFFECTIVE USE OF PROFESSIONALS – Financial statements and tax returns prepared by a recognized CPA firm, casts a positive light on your business. Projections and forecasts prepared by a skilled accountant add credibility to the company while reducing the investor’s perception of risk Using the services of a reputable, experienced attorney reduces the risk even more. A strong team of professional advisers is a great asset for growing your business and positioning you to obtain maximum value when you exit.
7. PRODUCT/SALES PIPELINE – Smaller companies are often more agile and have better R&D efficiency than their high overhead competitors. In technology, time to market is critical. Corporate America evaluates the “build versus buy” question constantly. Small companies that develop new technology are faced with the decision to develop distribution internally or sell to a larger company with established channels. A win/win scenario is to sell at a price that benefits you for what your company has today and rewards you for what your business will produce in the future. This can be accomplished through an earn-out component tied to company’s future success.
8. PRODUCT DIVERSITY – A smaller company that has a quality portfolio of products but is lacking in the area of distribution, can become a valuable asset for a strategic investor. A narrow product mix, however, increases the risk to the investor and drives down the value of the business.
9. INDUSTRY EXPERTISE AND EXPOSURE – Encourage your staff to publish articles in their areas of expertise and speak at industry events. Contact local media people and ask them to use you as the voice of authority for industry issues. This type of exposure can favorably influence a prospective investor.
10. WRITTEN GROWTH PLAN – Reduce to writing, the opportunities available to your company in a two to five page report. This plan should address the following questions: What additional markets can we pursue? What additional products and services can we deliver to our existing customers? What segments of our current market offer the most growth potential? What areas of our business offer the greatest margins? How can we further expand in the high margin areas? Can we license our intellectual property? What strategic alliances can we establish to move the business forward? What are the hard costs associated with implementing the growth plan? What cost savings measures can be executed in the future? Any research materials you can procure to support your growth plan should be included in your report.
When it comes to unlocking the market value of your privately held business, the final selling price is not limited strictly to the bottom line.
This article, which appeared in the IBBA News has been reprinted with permission from its author, David M. Kauppi, MBA, CBI of Mid-Market Capital, Inc.
