Take two Mercedes-Benz sedans of the same make and model, offer them both for sale, and one vehicle will sell at a higher price than the other. There are many reasons this occurs: one car may be newer, have lower mileage, include more amenities, be more collectible, or has a better service record. This phenomenon, of course, is not unique to Mercedes-Benz automobiles. The same reality happens with cars of every brand. Some conditions will universally (at least nearly so) make one car more valuable at sale than a peer of the exact make and model.
The same can be said of businesses too. Take two companies from the same industry and similar size, offer them for sale, and one will sell for a higher price than the other. However, here the differentiating factors usually are not odometer readings or paint color. Yet there are factors or conditions within a business—practically any business—that will increase (or decrease) its value at sale. If you are a business owner contemplating exiting one day in the future by way of sale, it is essential to know what these conditions are, and create them within your company. As you will see from this introductory article, the conditions take time—usually three to five years or longer—to fully achieve, so the sooner you get started, the better.
Pursue these seven steps to make your business potentially sell for a higher price and better terms at your exit:
- Build a strong team. Companies with excellent leaders and managers are highly valuable. Practically every buyer wants top talent. If your organization has a strong leadership team that stays with the company after your exit, your business is likely more valuable.
- Reduce dependency on you. If without you the company will likely have lower sales, weaker operations, or make fewer profits, your company is nearly always going to be less valuable to a buyer. The business’s value cannot walk out the door when you do.
- Organize your financial statements and reports consistent with buyer expectations. Buyers want to see at least three and preferably five years of historical financial statements organized and formatted in a manner consistent with their expectations. Learn what the expectations are in your industry. These requirements could mean audited financials, using accrual and not cash accounting, or following GAAP standards. Make sure your EBITDA is normalized too. All of this work usually improves value at sale, assuming the company’s underlying financial results are attractive.
- Tell a compelling growth strategy and plan. Buyers purchase companies not for their past results, but for their expected future results. Make sure your company can tell a credible and compelling story for how it will achieve significant growth over the next three to five years. This written document is commonly called a strategic plan. Ideally, your industry is a growing industry as well. Companies that can tell this story are nearly always more valuable at sale compared to companies that cannot.
- Diversify your customer base. Buyers do not like risk, and often will either pay less for a riskier company or pass altogether on buying it. Customer concentration creates risk for buyers. When the faces around the table change, customers (even well-served customers) often pause and ask themselves if this wouldn’t be a good time to re-evaluate their options in your market. Ideally, no more than 10% of your sales and profits for the last several years have come from one customer.
- Create a brand that others want, and that you own. Your brand does not have to be the next Coca-Cola, Google, or Nike to offer value to a buyer. If your brand or brands are well-known and respected in your industry, that will nearly always add value at sale. Creating brand value takes time and effort. Make sure you own your brand—having a company, and a website or two is not enough in most situations. Work with experienced advisors to create a valuable and defensible intellectual property (IP) strategy and portfolio.
- Remove obstacles to scale. Buyers do not want companies that have barriers to growth. They are attracted to businesses that seem to be well poised to achieve a significant increase in scale. Review all of your business’s vital systems and processes: sales, operations, customer service, financial, training, etc., identify potential or existing bottlenecks and devise strategies for removing them. Ask yourself and your team if your company doubled in size nearly overnight, could that increase in volume be supported? If not, address the limiting factors. Companies that can support growth are typically more attractive to buyers.
These seven steps will, in nearly all situations, maximize your company’s value at sale. For this reason, we call the business conditions described above the “Seven Areas of Transferable Value.” These seven steps might not make your business bigger regarding revenue or profits, but they usually will make it easier and less risky for a buyer—thus increasing your company’s “transferable” value.
Certainly, there are other important steps to successfully selling a business. It’s important that you know your company’s critical performance metrics, and make sure that they are all pointing in the desired direction. Also, assemble a competent team to advise and assist you—resist chasing the latest “offer” that arrives in your email inbox.
Creating Transferable Value takes years of work prior to exit. To learn more about how to do this, and to review your company’s Transferable Value, contact us at www.navixconsultants.com.