What is the single best thing I can do to sell my business at a premium?
I’ll break it into two broad categories and I’ll give the underlying assumption. The underlying assumption is that at some point, all deals will come down to certain metrics. In the world that we operate in, we’re not talking about Facebook buying WhatsApp for $19 billion. Those are done on strategic metrics. But in the lower middle market, it comes down to some form of revenue and cash flow. So if you look beyond that, we say, "Well, what can you do to increase value?" There are two things, one is that if you have a company that has issues in the business that need to be fixed, it creates a discount on value. How to get a premium off the discount is one question to answer. Then, how to get a premium above the norm is the other. Those are the two buckets.
In the first bucket, if you know that some fundamental issue within the business is broken, having the willingness or fortitude to fix that in advance of a sale process can make a huge difference to eliminate that discount, which is in effect getting a premium from where you are. For example, we found businesses that do not charge their customer base's full market value for their services and the company's earnings are below the norm in their industry. A seller is leaving that tough issue for the buyer to address. If the seller is able to improve margins before selling or even to demonstrate a plan to address that fundamental problem, that goes a long way to being able to improve the valuation.
The second bucket is where a business owner wants to get a premium because they believe they have a better run business for some reason. So as an example, these owners would like to achieve 6.5x or 7x multiple even though average multiples are 5x in their industries. The single answer to achieve a premium in these instances is being able to sell the growth story. Not just selling it in terms of presenting it a PowerPoint but having a real growth strategy that is being executed on. It is built into the business and it is happening. A prospective buyer can pick up and run with after the acquisition. It is not just the paper explanation of what the growth opportunity is but actually what management is doing to execute on the growth strategy. In these scenarios, a seller can negotiate additional consideration in a transaction to that growth strategy in order to obtain a premium valuation.
Written by Kenneth H. Marks
More Q&As from our experts
- What should a business owner look for when selecting an investment banker?
- How do you determine the right amount of working capital that should be left in the business?
- Do you think that timing the market is more important than value creation activities?
Re-Trade and Best Practices to Avoid Them
Flirting with a Single Buyer for Your Business
5 Core Tenets of Exit Planning
Subscribe To the Divestopedia Newsletter!
Stay on top of new content from Divestopedia.com. Join one of our email newsletters and get the latest insights about selling your business in your inbox every week.
- Business Valuations 101 - For Mid-Sized Business Owners
- Divestopedia’s M&A Fee Guide 2022 - 2023
- Purchase and Sale Agreement Considerations for Acquirers - Handouts
- Seyfarth Shaw LLP - Survey of Key M&A Middle Market Deal Terms
- Firmex’s M&A Fee Guide 2021 - 2022
- Your Guide to VC Funding
- Financial Services M&A: Consolidation & Innovation January 2021