We meet new business owners in a wide variety of business sectors virtually every week. The companies’ sales and profitability levels, and overall success are all over the map.
During our conversations, I usually ask the owner if he/she has an idea of their company’s value (in buyouts). More often than not, the owner responds that “companies in their sector sell at ___x (some metric like operating income).” In other words, there is a common multiple that presumably sets the bar for future deals.
Later, when checking the database, I typically find a range of multiples, sometimes broad, instead of a single number. Which then leads me to the question, “wouldn’t you like to position your company to be at the high end of the range?” The difference between the high and low end of the range can mean the difference of millions of dollars in the owner’s pocket when the company is sold.
Positioning your company to be at the higher end of a valuation range takes work, a little luck, and time. (This is why we advise business owners to allocate, if possible, two or more years to exit planning.)
There are many ways to enhance the value of your business. I’ve compiled a list of several company value drivers that I find applicable in almost every case. (For other drivers, check out our resources on https://www.navixconsultants.com/resources.)
- Rising sales and earnings. This is particularly important if the economy is growing. Buyers will pay more for companies showing signs of success (i.e., gaining market share, keeping profitability high, etc.). I know this isn’t always so easily done. However, I find that many owners don’t plan 1-3 year budgets, which, if done, would require them to take the necessary steps (like hiring a new salesperson or piece of equipment) to reach higher sales levels. As a result, earnings can drift sideways and seemingly be at odds with a growing economy. At the same time, while there is conventional wisdom that owners should “sell at the top,” but we disagree here. Buyers will pay more for companies that seem poised to achieve new highs than those that have peaked.
- A Strong Narrative. When business owners meet with potential buyers, they need to be able to convey how the industry is performing and how the company can outperform going forward. I tell business owners to visualize what they would do if they were buying the company today, given their 20/20 hindsight. For example, would they add product lines, invest in a new factory, or outsource some of their functions? The owner should be able to provide the buyer with a roadmap to future success.
- Airtight Financials. The quality of financial reporting varies greatly among private companies. Most aren’t audited, and relatively few are routinely “reviewed.” If the financials are not in a format that’s familiar to potential buyers and seem at all inconsistent, buyers will be reluctant to pay up.
- Owner Independence. If the business owner is critical to forming company strategy, landing big deals, or is the primary face to valuable customers, that’s a problem. The buyers will probably try to tie the owner into working post-deal, but that’s not ideal to either side. Some owners don’t mind staying with the company, but we think all owners would like to have the option to leave. At the same time, buyers may or may not want the owner there post-deal- there is a risk to company morale if the former owner becomes disgruntled at now being an employee. Buyers will pay more for companies with strong teams that don’t need the owners to succeed.
- Diversity. In customers, products, and suppliers. There are some cases where this may not be as important in strategic acquisitions (e.g., where a large acquirer is primarily interested in gaining access to a particular customer or supplier). Still, it’s difficult to “plan” to have an acquirer like that. In most cases, if a company is overly-reliant on any given customer, product, or supplier, the buyer will regard it as a red flag.
- Contracts. Buyers love businesses that operate with (transferrable) contracts, particularly those that renew automatically.
Questions? Please contact us at DM Buck Advisory, LLC (david@dmbuck.com).
Based in Atlanta, Georgia, DM Buck Advisory, LLC provides business owners valuation/appraisals, stronger messaging with investors, or, through our partnership with NAVIX Consultants, a working roadmap towards a more efficient and successful ownership exit.