10 Ways to Make Your Business More Valuable - Part 1
If you are considering selling your company, you are likely wondering how much your company may be worth and what makes a business attractive to potential buyers. To help you understand these dynamics, we have assembled this two-part series as well as a checklist to help you self-assess your situation and plan for the future.
First, it’s important to conduct a comprehensive self-assessment to identify gaps and opportunities that can increase your company’s value. Potential buyers are looking for well-prepared businesses that have good prospects for growth. So, the more you know about your company’s strengths and weaknesses, the better off you will be during any deal process. It’s also important to be constantly preparing for an exit because you never know when the right selling opportunity may come your way.
Keep in mind that institutional buyers, or investors, are actively looking for solid businesses to acquire or invest in. They are not looking for “a job” or “a fixer-upper”. Investors are looking to purchase a company at a fair price in hopes they can grow it and sell it for an even greater price in the future.
So, let’s see what makes a solid foundation for growth that is attractive to buyers.
1. Financial Performance
To be a highly attractive acquisition that will achieve a premium price, you should have three solid years of demonstrated financial performance with top-line revenue growth exceeding 10% per annum and adjusted EBITDA (Cash Flow) margins exceeding 15%. Companies with these metrics are attractive because they represent significant upside growth opportunities that can be funded from internal resources. They also are more likely to have the ability to weather economic bumps or downturns. Businesses with less than $25 million in revenue often lack these internal resources for growth and may require a buyer to invest additional capital to support the original investment if faced with a downturn. And, as you might imagine, additional investment is a situation that a buyer strives to avoid.
2. Proven and Developed Management Team
Your company should include a management team. You don’t need an oversized team with lots of overhead, but you do need a tenured group that can run the business, ideally without the continued involvement of the founder.
For example, you should have a Controller/CFO, Sales Leader, Human Resources professional, and a Chief Operating Officer. As the company grows, more functional heads and, perhaps, regional leaders can be added. All of these positions working together present a transferable management team able to lead the company to new levels of financial performance.
In building a management team, it is ideal that they have been in place for a while and they have proven their worth. Just hiring a new CFO or VP Sales that may or may not work out, doesn’t have the same credibility as a proven, tenured team that has managed planning and economic cycles as well business surprises and challenges.
Believe it or not, banks and institutional investors really back the management team when evaluating a business because they realize the team will help them accomplish their future growth goals. Relying on any one person is risky and unhealthy.
And, speaking of health, the business owner’s quality of life improves dramatically with a great team in place. If you can take four vacations a year and not spend any time on emails and phone calls, then you probably have built a great management team. If you are tied to your phone and emails, then you probably still have some work to do.
3. Audited Financials
We strongly believe that you should invest in an annual audit or review of the financial statements by a respected independent accounting firm. Don’t use a one-man accounting firm owned by a relative, such as the one used by Bernie Madoff. Independent oversight of your financials demonstrates to the world that you are serious about the integrity and presentation of your company’s financial reporting.
Also, if you have audited financials then you have a CPA. It’s important to keep your CPA in mind as they can be a valuable partner in helping capital providers understand your business when they are evaluating it. Like it or not, even when you and your CPA provide the same answer, buyers will generally place more weight on your CPA’s response than yours. That’s just life.
Along with your audited financials, you may want to consider having a pre-sale Quality of Earnings (QoE) study conducted that helps buyers better understand the stability of the business cash flow and working capital requirements. By the way, all Buyers will conduct a QoE so it is a good idea to have one done prior to going to market thereby being prepared for a buyer's QoE findings. We believe that is better to identify issues on your time rather than during a Buyer’s due diligence as these are items that could lead to a decrease in company valuation or even a deal collapsing altogether.
4. Timely/Accurate Financial and Operational Reporting
In line with audited financials, a solid financial and operational reporting process helps to measure, report and manage the business. Some examples of what Buyers will want to see on a monthly basis are financial statements, sales reports by product and customer, production and inventory reports, and accounts receivable/payable aging reports, margin by product, margin by customer, purchases by vendor, and a myriad of other key metrics. Potential buyers want to see a well-run company with all players marching toward the same goal.
Also important is that all of your reports tie out in a coherent manner. We often see Finance, Sales, and Operations report the same metrics differently when in fact they should all be in agreement. In some instances, measures are different based upon who requested the report and which IT person crafted the report. Be sure to check that your internal reporting is consistently aligned. If there are discrepancies, take the time to understand why differences exist and are able to explain justifiable differences while simultaneously correcting any erroneous reporting. It’s also a good exercise for the management team to agree upon definitions and how to view the business in a way that is valuable to everyone.
So, before you launch your company into the market, be sure that all of your documents accurately report (and tie out) the information you present.
5. Diversified Revenue Streams
Business concentration is one of the riskiest parts of middle-market companies. Many companies begin with a single product or customer. However, over time, the business must grow beyond those initial revenue sources and withstand the inevitable customer and product issues. Having a product/customer revenue concentration in one area is risky for all sorts of obvious reasons. Remember, buyers are looking for a foundation for growth. Demonstrating a diversified revenue base establishes that the foundation is attractive to buyers as it reduces the business’ risk profile.
It is important to note that we’ve encountered instances where buyers will not look at companies where any one customer is more than 5% sales. Likewise, being dependent upon one, or a small group of, products is risky in the event of raw material disruptions or market shifts.
We hope the first half of our ways to make your business more valuable has provided you with useful information. Stay tuned for part two to learn the final five ways you can make your company more attractive to potential buyers and secure the highest price.