Selling a Business
Nine Steps for Maximizing Sale Value
You started your company 20 years ago "in your
garage", worked many 80 hour weeks, bootstrapped your growth, view
your company with the pride of an entrepreneur, and are now
considering your exit. The purpose of this article is to help you
evaluate your company as a strategic acquirer might. From that
perspective we will ask you to focus on ten critical areas of value
creation. The benefit to you is that the better your performance in
these areas, the greater the selling price of your business. The
most likely result is that you will sell at the high range of the
multiples normally associated with your industry. For example,
during the last 18 months similar companies have sold at an EBITDA
multiple of between 4.8 and 5.7 times. Moving your company from the
low end to the high end of that range can result in a significant
swing in transaction value. If your EBITDA were $2 million, the low
price is $9.6 million and the high price is $11.4 million. The Holy
Grail in selling your company is when an acquirer throws out the
traditional multiples and acquires your company based on Strategic
Post Acquisition Performance. This is how a good broker will try to
position your business in the market. Again, this is to ensure the
greatest sale price. Below is our list of STRATEGIC VALUE DRIVERS:
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CUSTOMER DIVERSITY -If too much of
your current business is concentrated in too few customers
that are perceived as a negative in the acquisition market.
The concern is that if the owner exits and the major
customers leave, the business could be negatively impacted.
On the plus side, if none of your customers accounts for
more than 10% of total sales, that is viewed as a real plus.
If you find yourself with a customer concentration issue and
are planning an exit, start focusing on a program to
diversify. A quick fix would be to make an acquisition of a
competitor with customer diversity, integrate them and then
take your company to market.
-
MANAGEMENT DEPTH -A common thread in
privately held businesses is a concentration of
responsibility with the owner operator. The buck stops here
may be a good slogan for a presidential candidate, but it
will not help create value for a business owner. If you have
a strong management team in place and you are anticipating
an exit, you should try to implement employment contracts,
non-competes, and some form of phantom stock or equity
participation plan to keep these stars involved through the
transition. A strong management team is a valuable asset in
the middle market. If you have one, take steps to keep it in
place and the market will reward you. If you are a small to
mid-size business you probably don't have this in place. Not
to worry. Just ensure that you are willing to stay on for a
while to ensure that you will have time to orient the new
owner.
-
CONTRACTUALLY RECURRING REVENUE - All
revenue dollars are not created equal. Revenue dollars that
are the result of a contract for annual maintenance, annual
licensing fees, a recurring retainer fee, technology
license, etc. are more powerful value drivers than new sales
revenue, time and materials revenue, or other non-recurring
revenue streams. It's all about risk. The higher the risk
(future sales) the lower the return. The lower the risk
(contracted revenue stream) the higher the return. An
extreme case of this occurs in a landscape business that has
40-50 HOA contracts for the last 10 years. This can be sold
at a multiple of recurring maintenance revenue.
-
PROPRIETARY PRODUCTS/TECHNOLOGY - This
is the area where the valuation rules do not necessarily
apply. Strategic acquirers buy other companies to grow. If
they believe that a new technology can be acquired and
integrated with their superior distribution channel, they
may value your company on a post acquisition performance
basis. The marketplace rewards effective innovation. On the
flip side, however, the market yawns at "me too" commodity
type products or services. That business is vulnerable to
competition, especially after the owner leaves. Continue to
look for ways to innovate in what ever industry you are in.
Your innovation should not be limited to product
improvements. The marketplace values innovations in
distribution systems, collaborative product design process,
customer service and other functional areas that can provide
a competitive advantage. If you create a technology
advantage in your company, think what that could mean to a
much larger company.
-
PENETRATION OF BARRIERS TO ENTRY - A
wise buyer told me once, "I want to own companies where I
have an edge." He happened to be a buyer of Waste
Facilities. All the regulations and approvals required tend
to limit competition. In its simplest form, a large
restaurant chain buys a small family owned restaurant to
acquire a grand fathered liquor license. Owning hard to get
permits, zoning, licenses, or regulatory approvals can be
worth a great deal to the right buyer. Your company may be
able to secure approvals on the local level that a national
player may have difficulty obtaining. Selling your product
or service to the government can be quite lucrative, but the
government market is extremely difficult to penetrate. If
your product or service applies and you can break through
the barriers, you become a more attractive acquisition
candidate. The same holds true of a local marquee account
that would be desirable for a larger supplier to crack. One
strategy for penetrating these accounts is to ask the buyer
to identify the best salesman that calls on him. Go hire
that salesman to sell your product to that account.
-
EFFECTIVE USE OF PROFESSIONALS -
Reviewed or audited financials by a reputable CPA firm are
quite valuable in the eyes of a buyer. Professional
financials cast a positive halo on your approach to
controlling your business while at the same time reduce the
buyer's perception of risk.
This can be done during the sales
process.
-
PRODUCT DIVERSITY -A smaller company
that has a quality portfolio of products but may lack
distribution can become a valuable asset in the hands of the
strategic buyer. If possible, it's nice to have a variety of
products or services to sell so that if one falls out of
vogue you will not suffer.
Your buyer may pick up on this.
-
INDUSTRY EXPERTISE AND EXPOSURE -This
activity is often overlooked because it is difficult to
measure its direct returns. We find that it is a value
driver when it is time to sell the business. To the extent
possible, encourage your staff to publish articles in
industry magazines and newsletters. Get exposure as a
presenter at industry events. Encourage local and industry
reporters to use you as the voice of authority with industry
issues. Your company is viewed in a more positive light, you
may get more business referrals, and a buyer from your
industry will remember you favorably and is more likely to
consider you as an acquisition candidate.
-
WRITTEN GROWTH PLAN -If I could get
you to do one thing that will cost you nothing but brain
power and your time it would be to capture the opportunities
available to your company in a two to five page written
growth plan. Even if you are putting your company on the
market tomorrow, it is not too late to identify all the
opportunities your company has created. For any company, in
any stage, this is a valuable living document to guide you
strategically. Small companies with limited staff are forced
to put out fires and live tactically. A growth plan helps
create a process that will allow you to break big strategic
plans into executable tactical activities. What additional
markets could we pursue? What additional products could we
deliver to our same customers? What segments of my current
market offer the most growth potential? Where are the best
margins in our customer set and product set? Can we expand
in those areas? Can we repurpose our products for different
markets? Are we getting the best return on our intellectual
property? Can we license our technology? Do strategic
alliances or cross marketing agreements make sense?
Capturing this on paper as part of your exit plan will
increase the likelihood that an acquiring company will view
you more as a strategic acquisition. It demonstrates that
you have identified a path for growth and it may identify
opportunities that the buyer had not considered.
Those opportunities can add to the
purchase price.
The bottom line when it comes to unlocking the
market value of your privately held company is not limited to the
bottom line. Profitability is hugely important, but the factors
above can result in premiums over traditional valuation approaches.
When one buys or sells Microsoft stock, there is no room for
interpretation about the market price. The market for privately held
businesses is imprecise and illiquid. There is plenty of room for
interpretation and the result for the best interpretation by the
marketplace is a big pay off when you decide to sell.
A
good broker can help you with all of these points!!!
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Questions
Prospective Business Buyers Will Ask
Businesses should not be put up for sale; they
should be put up to be sold. Think like a buyer will. These are
actual questions a buyer faxed in before he would fly in to look at
this business. He had a better plan than most buyers I meet. Again,
a good broker can steer a buyer through these questions. The detail
a buyer may want is another reason to use a professional business
broker vs. selling on your own. Not only can the broker negotiate a
higher sales price, they can deal with this detail while you are
staying focused at work. It is critical to have the business
performing optimally. If you are selling the business on a full time
basis, you cannot be running it on a full time basis.
1) Is the business computerized?
2) Who are the targeted customer bases?
3) Does the business have any distributors?
4) How many distributors, if any?
5) Where are
the distributors located? (City & State)
6) How many
accounts does the business have?
7) What
percentage is the largest account?
8) What
percentage is the second largest account?
9) How many
different products are offered?
10) What is
the detailed inventory?
11) How old
is the inventory?
12) What is
the percentage of the largest selling item?
13) What is
the percentage of the second largest item?
14) What is
the inventory of the two largest selling items?
15) How many
employees do you have?
16) How many
managers do you have?
17) How many
sales people do you have?
18) Salary
Of each employee and position?
19) Does the
business have a toll free number?
20) Does the
business have a FAX number?
21) Does the
business have a web site? What is it?
22) How are the orders received?
23) How are
they shipped?
24) How many
vendors do you have?
25) Where
are they located?
26) Does the
business own any molds?
27) How many molds?
28) Who is
holding the molds?
Questions
Serious Business Buyers Will Ask The
Broker.
Serious buyers
will ask sellers very serious questions. We need to be prepared.
This list is just a guide to get you thinking of looking at your
business through a buyer's eyes.
Competition
1) Can your customers avoid using your product
or service by obtaining it from another source?
2) What kind of competition exists in your
marketplace?
3) Is the competition a new aspect in the
marketplace or has it been there long enough for you to recognize
and understand its impact on your business?
4) Do you consider the competition a healthy
factor (does it broaden the product or service visibility)?
5) How will you explain the value of your
business's competition to potential buyers?
6) Is there room in the marketplace for
additional competition, and will it substantially affect your
business in a positive or negative fashion?
7) Is there a niche that you or your buyer can
create that will minimize the impact of additional or existing
competition?
8) Is there any equipment or inventory source
that would give your business a better competitive advantage? Be
able to describe it and how it could be acquired; or how and why you
know you are as competitive as possible.
Location lease
1) Explain the appropriateness of your
location to the business's future growth.
2) Explain the appropriateness of your lease
with regard to the cost, term & options, parking, exclusivity or
non, space and expansion.
3) How important is your location to your
customers?
4) If you were to remain and money was not an
issue, what would you change about your location? The business?
Growth Potential
1) Describe how changes in the following
scenarios might affect your business's growth potential.
2) Customer needs & tastes.
3) Acquisition of a competitor.
4) New equipment or concepts on the horizon.
5) New products or services on the horizon.
6) Competing franchise that is not in your
service area at present?
7) How much does your average customer spend
with you per purchase?
8) What is the quality and quantity of the
items purchased?
9) If possible, assess how much time per
dollar purchased, you or your staff spends with each customer.
10) What is the ratio of inventory on hand to
gross sales? Where could it be improved for more profit?
Franchise Alternative
(You are not a franchise)
1) What franchise facilities or advantages, if
any, could you avail yourself of?
2) Do these advantages supplement your own
capabilities or duplicated them?
3) In your business, what buying advantages if
any exist in a franchise relationship?
4) How significant are franchises as
competitors in your industry.
(You are a franchise)
1) What services does your franchiser provide
and how valuable are they?
2) How much would it cost to obtain those
services without the franchise?
3) Describe the experience of being part of a
franchise family and its value to you as an entrepreneur.
4) What are your royalties, franchise fees,
advertising and territory? Minimum and maximums.
5) When does your franchise agreement expire
and what is the cost of renewal?
6) Will there be new build out requirements to
renew the franchise agreement?
And remember, the broker may have to go
through this level of detail for as many 7-10 buyers before a deal
is closed. So this does take tremendous time on the broker's part.
But by providing this level of detail to the broker, they can now
sell the business with little interruption to you.
