Selling Your Business
Ten Steps to Maximize Value
By David M. Kauppi, CBI, President Mid Market Capital
If you are considering selling your business this article will help you
evaluate your company as a strategic acquirer might. From that perspective it
pays to focus on ten critical areas of value creation. The better your
performance in these areas, the greater the selling price of your business.
Below is our list of strategic value drivers.
1. Customer Diversity If too much business is concentrated in too
few of your customers, it is a negative in the acquisition market. If none of
your customers accounts for more than 5% of total sales, that is a real plus. If
you find yourself with a customer concentration issue, start focusing on a
program to diversify.
2. Management Depth An acquirer will look at the quality of the
management staff and employees as a major determinant in acquisition price. You
should make the move of assigning your successor a year in advance of your
scheduled departure date. If you have a strong management team in place, 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.
3. Contractually Recurring Revenue All revenue dollars are not
created equal. Revenue dollars from a contract for annual maintenance, annual
licensing fees, a recurring retainer fee, technology license, etc. are much more
powerful value drivers than projected sales revenue, time and materials revenue,
or other non-recurring revenue streams.
4. Proprietary Products/Technology This is the area where the
valuation rules do not necessarily apply. If strategic acquirers 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 and yawns at me too commodity
type products or services. Continue to look for ways to innovate in all facets
of your business. If you create a technology advantage in your company, think
what that could mean to a much larger company.
5. Penetration of Barriers to Entry 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. 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.
6. Effective Use of Professionals Reviewed or audited
financials by a reputable CPA firm cast a positive halo on your business while
at the same time reduce the buyers perception of risk. A good outside attorney
reduces the risk even more. A strong professional team is a great asset in
growing your business and in helping you obtain maximum value when you exit.
7. Product / Sales Pipeline Smaller companies often are more
agile and have better R&D efficiency than their high overhead big brothers. In
technology, time to market is critical and big companies evaluate the build
versus buy question. Small companies that develop new technology are faced with
the decision of developing distribution internally or selling to a larger
company with developed channels. A win/win scenario is to sell out at a price,
in cash and stock at closing, that rewards the smaller company for what they
have today, plus an earn out component tied to product revenues with the new
company.
8. 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. A narrow product set, however, increases risk and drives
down value.
9. Industry Expertise and Exposure Encourage your staff to
publish articles and to speak at industry events. Encourage local and industry
reporters to use you as the voice of authority for industry issues. Your company
is viewed in a more positive light, gets more business referrals, and an
industry buyer will remember you favorably as an acquisition candidate.
10. Written Growth Plan Capture the opportunities available to your
company in a two to five page written growth plan. What additional markets could
we pursue? What additional products could we deliver to our same customers? What
segments of our current market offer the most growth potential? Where are the
best margins in our customer base and product set? Can we expand in those areas?
Can we repurpose our products for different markets? Can we license our
intellectual property? What about strategic alliances or cross marketing
agreements? Documenting these opportunities can add to the purchase price.
When it comes to unlocking the market value of your privately held company,
it is not limited to the bottom line. Profitability is hugely important, but the
factors above can result in significant premiums over traditional valuation
approaches. When you sell 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.
David Kauppi is an M&A Advisor with Mid Market Capital, Inc.
Dave is a Certified Business Intermediary (CBI), a licensed business broker, and
a member of IBBA (International Business Brokers Association) and the MBBI
(Midwest Business Brokers and Intermediaries). For more information contact him
at (630) 325-0123, email
davekauppi@midmarkcap.com or visit
www.midmarkcap.com.
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