How much can you increase the value of your business with good preparation ahead of a sale? Actually, quite a bit, based on our experience. We have seen clients achieve value improvements of 50% or greater with the right preparation. It takes time and work, though, as well as a good understanding of the value drivers of your business.
All businesses have obvious value drivers, including consistent growth, revenue and profit and the uniqueness of product, which we discuss below. Beyond these, though, having a good understanding of the particular opportunities for your business, and where it might be weak is really the differentiator that sets apart those businesses that prepare well and get a great sale.
It’s also crucial to understand the type of buyer likely to be interested. This will be driven by the size of your business and its industry, and also whether it is a high-growth business. For smaller businesses, it might be the “buy a job” market, which larger companies might find themselves looking at competitor buyouts or even financial investors. Understanding the likely type of buyers, and what they will be looking for in a business, is a crucial step in the early planning for a business sale.
Getting it right makes a big difference. As well, the sale process itself will likely go more smoothly and quickly. Unprepared companies may not be able to complete a transaction, whereas properly prepared companies tend to find buyers quickly and for a great price.
Covid has and is highly disruptive to most companies – and there is an understanding of this from buyers. Its important to have a clear narrative around how you have responded to Covid, and if numbers are down, how you will recover and particularly take advantage of the business uptick as things eventually normalize.
Key Value Drivers
We focus on the following checklists of value drivers when advising clients on how to prepare for a great business exit.
Your revenue and profit history, along with your balance sheet management. This also includes the quality of record keeping, including, for example, audits. Obviously, companies that can show consistent revenue growth and at least holding their margins will give confidence to potential buyers. If that have been hiccups, being able to explain these in clear terms – which is a situation many companies find themselves in owing to Covid induced reasons.
Does the company generate cash, or require it (even on a seasonal basis)? Do economic cycles or other events frequently force cashflows negative?
This is a key driver. What proportion of revenues are recurring, usually from the same clients on a repeatable, long-term basis. This is the best quality of revenue and is extremely attractive to potential buyers.
What is the growth potential of the business. Is it in a saturated or low-growth market where there are limited upsides, or is it in a market that has enormous upside potential? If there is growth potential, what are the company’s plans to take advantage of this, and what risks are involved? Has the growth opportunity been secured or is it still speculative?
Is the business highly dependent on one or two main customers? Or is it focused on a single geography that might expose the business to volatility?
Is the business in a generic market (for example plumbing services), or does it sell a unique product or service that is hard to duplicate. This might include unique IP, which can of course be very valuable.
How systemized is the business? Are their defined standard processes for all key areas? Are these systems well known, stored centrally, and used by the entire team? If so, business operations are likely to be more reliable, repeatable and less reliant on the business owner. Good systems and processes are a key value driver that can get many buyers over the line, as it reduces acquisition risk so much.
Key person risk
Is there a single person, likely the business owner, that is indispensable for the day-to-day operation of the business, or owing to their key relationships? Systemization will likely take the key person out of day-to-day operations, but there can still be key person risk in certain industries and given the background of the owner. It needs to be factored in well ahead of time so mitigation plans can be put in place for potential buyers.
Key supplier risk
Is the company dependent on a single supplier? This can be a huge risk, and is best addressed by supplier diversification well ahead of the sale, or at least securing long-term supply contracts with favourable cancellation clauses.
How satisfied are customers with the company’s products, and does the company have good survey data to prove this?
Is the company cleanly structured with now legal, regulatory, shareholder issues?
Business Meeting Cycles
Does the company have a clear reporting structure and a regular and appropriate tempo of annual, quarterly, monthly and weekly meetings?
Quality of team – including of hiring.
How strong is the team, and can management clearly state its strengths and weaknesses to prospective buyers?
Is staff turnover low and stable?
Build for future growth
Investors generally buy companies because of the future performance they expect to get – how much revenue and profit will they make after they buy it, as what risk. The more of these risk factors that are in order, the more confident that a potential buyer will be that the future income will be there.
Its about building the attractiveness of the business (revenue, profit, growth potential) while reducing the risk factors (most of the rest of the drivers). In our experience with numerous clients, preparing the business for sale takes time – and we would suggest allowing at least a year to properly prepare.
Reverse Due Diligence
The first step is to understand where you are at, and the potential upside from the appropriate preparation. We suggest to our clients that they first understand their potential buyers, and also conduct a high-level reverse due diligence to assess where their business is at, and what type of value gap there is between likely current value and their goals.
What does that mean? The reverse due diligence examines all the key business elements and drivers that a real buyer would look at. It identifies problem areas and gaps, from which a plan can be put together to build towards the right outcomes. For example, getting the right HR contracts in place, having a better contracts register, or more effectively systemizing across the business so the company runs itself without the entrepreneur needing to participate in every decision.
Our ValueMax Business Readiness assessment, assess both business attractiveness and also 22 areas of business readiness and scores the company on each. It sets an excellent benchmark for how sale ready the company is, and what needs to be done to get to the target value sought by the business owner.
Once this assessment is complete, we suggest putting in place a program to address the main issues, with 90 day sprints, driven by monthly progress meetings that measure what has been gained and key issue. It’s a great way to stay on track and has repeatedly delivery significant value to business owners.
- Good preparation can increase company valuation leading to a better sale price. We suggest at least 12 months of preparation.
- Its essential to understand what a likely buyer will be looking for, and then building value drivers that address this.
- The value drivers highlighted above are generally the key factors in determining company sale value.
- Our ValueMax methodology assesses both business attractiveness and business sale readiness, as the basis for a business sale plan.
Entrepreneur Purpose assists entrepreneurial companies plan and execute business sale plans. We assist our clients prepare for growth and scale, including business acquisitions or sale. Our experienced advisors assist our clients distil purpose, and then embed it such that purpose, mission and values become shared by all team members. Contact us for a complimentary introductory discussion.