After many years of working closely with mid-market businesses providing valuation, divestiture and acquisition services, I have seen that many otherwise well-run companies are extremely disappointed when it's time to sell because they either don't receive the valuation they expect or, even worse, they don't get any any offers at all.
With an aging baby boomer population, more businesses than ever will be looking for an exit. Buyers will have their pick of the litter, so to speak. That's why it's imperative that sellers make their businesses as attractive as possible. The strategies presented here will not only help you maximize value but will also be necessary to ensure that your business is salable in the future.
Simple Keys to Maximize Value
It can be hard to focus on increasing the value of your business if you have no immediate intention of selling. There are so many other competing demands for your time. But for those proactive business owners who see the end game of cashing out at some point, there are three simple concepts that will help you maximize the value of your business:
- Focus most of your efforts on increasing cash flows
- Put yourself in a buyer's shoes
- Pick the best exit strategy when the time is right and execute
Let's look at each in more detail:
Focus on Increasing Cash Flow
Cash flows are the No.1 factor that potential buyers look at to determine the valuation placed on an acquisition target. Buyers calculate the value of a business by estimating future cash flow and assessing the risk associated with generating that cash flow. A business that has a track record of sustainable or growing cash not only validates its product or service, but also demonstrates the management’s team’s ability to drive growth. Buyers pay more for the higher likelihood of future growth. Historical financial results are important because they provide a good indication of what is possible.
Because of the importance of determining value, I can't stress enough the need for owners to prepare future cash flow projections for their business. Let's look at this logically. Would you rather have a potential buyer determine the value of your company from cash flow projections that they prepare or from ones that are prepared by you, with detailed support around why your projections are achievable? I think the choice is obvious.
Put Yourself in a Buyer's Shoes
Even owners who are not planning on selling their businesses can learn a lot from how potential buyers perceive an acquisition target. Based on my experience, these are five areas buyers scrutinize most when buying businesses:
Quality businesses have a well-thought out and documented strategic plan. A written plan gives any outside party (be it a bank, investor or potential buyer) the confidence that a business owner knows where a business is going and how it is getting there. If your business doesn't have a strategic plan, make one.
A properly trained and widely knowledgeable management team is desirable for any company. A truly valuable team is deep (you have several key players with job-specific experience) and the knowledge of the business does not reside with any one individual. It is important to honestly assess the strength of your management team.
Are you able to leave the business for extended periods of time and feel comfortable that the business will run as efficiently or even better than if you were there? If not, start building a deeper management team through training, improved corporate alignment and, if needed, hiring. It may impact profitability in the short-term but it will more than make up for it by creating future value. On top of that, wouldn’t it be nice to take an extended vacation with that peace of mind?
Diversified and Recurring Revenue Base
A company that has one customer representing 30 percent or more of its revenue is too risky for most potential buyers. If that customer were to leave, it would significantly impact revenue and cash flow. As such, customer concentration is an area that can have a significant impact on value.
Review your sales per customer. If any revenue is too concentrated among a few customers, find a way to get more revenue from others. One of the best ways to do this is by establishing a recurring revenue service that also builds up your value.
High Barriers to Entry
Barriers to entry can be created though intellectual property, such as patents or trademarks, economies of scale, significant capital investment, customer loyalty, supplier or distribution agreements, etc. Companies that can deter competition from entering the market will be able to better sustain leading status. Find that unique element in your company and use it to create an economic moat to protect you from your fiercest competitors.
Buyers like companies that make significant investments in systems to serve customers, produce products, handle customer complaints, etc. Scalable, measurable and repeatable processes make it easier and less expensive to hire and train employees and allow you to better service customers. All businesses have functioning systems in place, but getting your employees to document and refine these systems will give your company the ability to grow much more quickly.
Pick the Right Exit Strategy and Execute
Selecting the appropriate exit strategy — and executing it — is a significant consideration for a business owner who wants to maximize value. The following needs to be considered:
To be successful at value creation, business owners must plan ahead. When more time is available to implement these strategies, more value can be created. Working on these tools today will also allow business owners to evaluate and take advantage of opportunities that present themselves in the future like a favorable market environment (i.e., high valuation multiples) or unsolicited offers to be purchased.
Creating an effective auction process with the use of a professional intermediary is critical to achieve the appropriate deal terms and value. These experts will better position your company, support your valuation, get more qualified buyers to the table and negotiate favorable terms. Other professionals, such as tax and M&A advisers, must be involved early in the process to maximize the after-tax dollar realized on exit. This is the time when a business owner’s years of efforts are monetized, therefore this process should not be taken lightly.
Even with proper planning and execution, if the market is not right for M&A activity, you might not find the best buyer or get the valuation you deserve. Be vigilant about staying on top of what is happening in the marketplace by talking to your bankers, accountants and others who have their ears to the street. If you're ready to sell when the M&A market heats up, that's the best time to pull the trigger for value maximization.
Increase Your Chance of Success
These concepts sound simple and I know most entrepreneurs intuitively know them. The difficulty is staying focused and making these three simple ideas a priority in the day-to-day management of your business. Find any means necessary to help you remain dedicated to the worthy cause of increasing the value of your business. The rewards of being able to cash out on your terms (whatever they might be) is worth the effort.