Category Archives for "Selling Your Business Tips"

Ten Ways to Maximize the Value of Your Business

Maximize the Value of Your Business

Achieving the maximum value for the business when it sells is the goal of every business owner.

A business has value when it can exist separately and apart from its owners, when it has taken on a structure and culture of its own, or where there are processes, methods, products, property rights or anything else that allows the business to continue as its own entity. 

These ten ideas can help you determine if you are on the right track: 

1. Develop a strong, stable management team 

A business with a strong management team, allowing for key activities to operate independent of the owner, will command a higher price. The depth and stability of the management team are extremely important factors in the valuation analysis by a buyer. In many businesses, sales and marketing may be very dependent upon the owner, and this can be a significant value detractor. If most of the key account relationships reside with the owner, buyers will factor this risk into the valuation or the deal structure. Part of the price may become contingent upon the owner remaining with the business to maintain continuing customer relationships. 

2. Demonstrate sustainability of earnings 

Revenue and earnings that have been steadily growing over several years, versus earnings that fluctuate dramatically, will drive a higher valuation. Year over year growth demonstrates a solid operation that is gaining new customers and/or market share. Dramatic fluctuations in revenue typically indicate that either product demand may be subject to outside factors, or the business has experienced problems, indicating management is not stable. It makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc. 

3. Develop systems and procedures 

A business must exist separate and apart from the daily actions of its owner to have a valuation, including goodwill, over and above the asset valuation. An owner who takes a week off at least one or two times per year, is exhibiting confidence in the systems and procedures of the business to function while they are away. If the owner is seldom or never away from the business for any length of time, buyers will question the strength of the operating systems, and the management team. The amount of goodwill that a buyer is willing to include in the purchase price will be dependent upon systems and procedures. 

4. Maintain excellent financial records 

Sloppy financials are a worry for both buyers and lenders. Valuation will be based primarily upon the numbers and the more reliable the financial statements, the more chance they will hold up in due diligence. If your business has revenue in excess of $10,000,000, audited financials will be worth the investment. In the absence of audited financials, reviewed financials are preferable over internal financials, as the presentation, account classifications, footnotes, and organization of the statements, in general, will be much more professional than internally prepared financials. 

5. Minimize personal expenses paid by the business 

When the financials are “clean,” with very few “add backs” related to owner’s personal expenses paid through the business, buyers and lenders believe the numbers are more credible. Asking a buyer to believe that various expenses that have been paid by the company are in fact “not necessary” for the business creates uncertainty. Uncertainty is the enemy of a successful sale transaction. When the EBITDA computation is partially based on excessive “add backs” to earnings, the seller will be hard pressed to obtain a favorable valuation. 

6. Transition Planning 

When a seller has a definite plan to “phase out” of the operation, whether that is over one year, or three to five years, the buyer recognizes that sound planning has occurred. The process of developing this transition plan will often generate excellent suggestions for improvement in management’s role in the everyday operations of the business. Many sellers begin to outline their “job description” as part of this process, which highlights areas where there is a need to delegate more to the management team. Quite often this activity will result in improvements to the organization structure of the business and produce tangible benefits. 

7. Diversified Customer Base 

Customer concentration is a significant value detractor. When the revenue from any one customer accounts for over 20-25% of the total revenue of the business, the business will be valued at a discount. Losing 20-25% of revenue in most businesses will typically wipe out most or all of the profit of the operation, so this risk may not be ignored. When the buyer’s valuation is prepared, and this risk is factored into the valuation analysis, the goodwill included in the valuation of the business will be dramatically altered. Working to diversify the customer base will result in significant increases in the value of the business. 

8. Solid Reputation in the Marketplace 

Business acquirers are constantly searching for the leading business in the industry and many sellers refer to their business as an “industry leader”. Savvy buyers can mine the internet for information about what customers actually think about most businesses. It is very easy for buyers to access multiple websites that give “feedback” from customers about businesses; buyers will attend trade shows, industry conferences, and multiple other events, quietly asking competitors and suppliers about a company, using multiple techniques to determine what customers think about a business. 

9. Diversified Base of Suppliers 

A very narrow base of suppliers, or extreme dependence upon one supplier, may cause a decrease in valuation. Many business owners routinely buy from multiple sources; just to manage the risk that one supplier may experience shortages or interruptions in supply. This extends to the labor pool as well, if the business needs specialized skills, such as in healthcare. “What happens if…” is a typical question a buyer may ask – and many sellers do not have a ready answer for that question. 

10. Stable Facility of Operations 

A business may or may not be dependent upon its location, but a buyer will not want to take the risk of moving the business right after the purchase. The business should have the right to remain in their current facility for at least 3 – 5 years through an existing lease, or ownership of the building. The location may be critical to a retail operation or restaurant, but also important to a wholesale or manufacturing operation. Many times key employees live close by, and the buyer having to relocate the business may place loyal employees in peril. If the lease is about to expire, and the buyer will have to renegotiate the lease right after closing, this situation creates uncertainty, which reduces the valuation. Lease options are an excellent method to remove this uncertainty, whereby the business has the right, but not the obligation to extend their lease beyond the current term. 

Build to Sell

You, as a business owner, should have the goal of creating the most value possible in your business. Likewise, an owner should be thinking about their exit strategy from the day they start or acquire the business.

As a wise business owner you will build to sell and time your exit to coincide with the most value created in your business. The psychology involved is much like selling in the stock market – the time to sell is when things are going great, not when they are spiraling downward.

Your business has value when it can exist separately and apart from its owners, when it has taken on a structure and culture of its own, or where there are processes, methods, products, property rights or anything else that allows the business to continue as a going concern as its own entity.

Other things you can do to increase value are: Make certain you have verifiable cash flow. The more cash the business can prove that it generates annually, the more value your business will have to a buyer. That means keeping accurate financial records in the business that can be verified during the due diligence part of the business sale process.

If your business has a history of sustained annual growth it will have increased value to a buyer. If your company is growing profitably at very strong, consistent rates of growth and you can accurately project those rates to continue or even increase in the future, then you have created a lot of value in your business. Likewise, if your company is perceived as recession resistant and you can show years where you have not only weathered a bad economy but have actually grown during troubled times, then you have created more value for a buyer.

Your reputation and image in the marketplace also create value. If you have branded your company and it is recognized and well spoken of in the community then you have added value to your sale. Along with a great reputation you should naturally have customer loyalty with many continuing customers. This gives a buyer comfort that the business will continue to have revenue from customers after the sale and this certainty adds value for the buyer.

You will add value to your company if your customer base is diverse. Buyers are fearful of one giant customer controlling much of the company revenue because there is great risk to the buyer should that one large customer take their business elsewhere after the sale. You should mitigate this concern by adding numerous customers and working to lower the percentage that any one customer controls of the company’s revenue.

Your operational policies and procedures can add value to the business if they are well-conceived and provide a good roadmap to operating your business for new employees and new business owners. That means you should have good systems in place and provide logical training that gets people up to speed quickly when taking on new tasks or business operations.

By hiring and retaining great people in your business you can add much value. The more management depth and breadth that exists in the business, the more valuable the business is to a buyer.

Your market size and penetration rate also affects your business value. Buyers want significant upside potential so the larger the market the greater the value. Also, if the buyer perceives an  ability to obtain a higher penetration into the market after the sale,  the value of the acquisition increases.  

It is also useful to look at what decreases value in order to avoid certain pitfalls. For instance, worn out assets are not desirable to the acquirer. Another value detractor is earnings that are unpredictable, rising and falling drastically from year-to-year. This uncertainty will give a buyer concern and lower the value of your company, as well as the ability to finance the acquisition. If your revenue and profits are descending instead of ascending, the value of your business is declining as well.

A business owner should develop a realistic expectation of the value of the business as it relates to the earnings. Earnings drive value and they must support the price of the business.

You want to create value above and beyond just the value of the tangible assets of the business. This value is referred  to as the goodwill of your business and can include many things such as: your customer relationships, advertising campaigns and marketing materials, computer databases, contracts, training procedures, trademarks, copyrights, trade secrets, supplier list, management, tooling, name recognition, location, reputation, delivery systems, proprietary designs,  loyal customer base, low employee turnover, know-how, credit files, favorable financing, employee manual, procedures and policy manual, skilled employees, technologically advanced equipment, and favorable comparison to industry ratio’s to name a few items considered as part of goodwill. We sometimes refer to these assets as “Phantom Assets” because they tend to be hidden and must be uncovered when analyzing the value of your business. Some of the items in the list simply add value to your business while others are actually considered intangible assets applicable to Code Section 197 of the IRS – Amortization of Goodwill and Certain other Intangibles.

At Corporate Investment, our grasp of intangible elements as well as our thorough analysis of your historical financial performance enables us to fairly value your business in the current marketplace.

Understanding what creates value, and how to present those items in a positive manner, is the role of the intermediary. When you have built a significant amount of value into your business and are ready to proceed with the sale,  the professionals at Corporate Investment stand ready to assist in this complex marketing, financial and legal transaction. 

A Race Against Time: Exit Planning

Successful, active business owners seldom slow down. Many business owners are both great at planning (for their businesses) and terrible at planning (for themselves).  There are so many great business challenges to tackle, planning for your personal ownership future can get pushed to the back burner.  We all know that the only things likely to reduce your pace are death or terminal burn-out. This is not to imply that you are not well intentioned; quite the contrary. You may be so well intentioned that you’ve taken on more responsibility than you can possibly complete.

Today, our goal is not to alter the number of hours in your workday but to alter your mindset. To do that, let’s look at a fictional business owner.

Renaldo LeMond owned a growing hospitality services business. As business increased, he hired more employees and learned to delegate. Both these improvements freed up time to sell more, to manage more, and to grow the business more.

No matter how much Renaldo delegated, there were always additional tasks and new priorities. Renaldo’s daily activities left no time to plan. Even if he had had the time, Renaldo really didn’t know how to create a plan founded on a clear vision, backed by definite plans that created definable steps subject to deadlines and accountability.

This was Renaldo’s situation when he was approached by a would-be buyer for his business. Renaldo hadn’t actively considered selling his business, but at age 49, he was beginning to think that life after work might have something to offer. He was open to talking about and exploring the idea of selling his business because business growth, and more importantly, profitability, had been slowing for years.

Renaldo found an hour in his schedule to talk to the interested buyer. In only 60 minutes, Renaldo’s blinders were removed and his priorities were turned upside-down.
The buyer turned out to be a large national company seeking to establish a presence in Renaldo’s community. It was interested in Renaldo’s business because of its reputation as well as its broad and diversified customer base. The buyer was looking to acquire a business that could grow with little other than financial support.

Naturally, it sought a business with a good management structure because, like most buyers, it did not have its own management team to place in the business. Renaldo, however, had not attracted or retained solid management (nor had he created a plan to do so). His business lacked this most basic Value Driver.

Like many buyers, this buyer also looked for two additional Value Drivers: increasing cash flow and sustainable systems throughout the organization (from Human Resources to marketing and sales to work flow). Renaldo quickly realized that his business was a hodgepodge of separate systems each created to patch a particular problem.

Finally, the buyer asked Renaldo to describe his plans for growing the business. Renaldo had none. What this buyer and Renaldo now understood was that this business revolved around Renaldo.

As Renaldo left the meeting, he expected that, given his company’s deficiencies, he would receive a low offer from the buyer. He waited weeks but no low offer was forthcoming. In fact, the buyer simply disappeared.

The message to all of us is clear: Unless a business is ready to be sold, many buyers, especially financial buyers, are not interested. They have neither the time nor the in-house talent to correct deficiencies. The look for (and pay top dollar for) businesses that are poised for ownership transition.

It is a fact of life for owners that unless you work on your business, rather than in your business, you will never find time to plan for your future and for the future of the business.

Is there a way to change your priorities before your 60 minutes with a prospective buyer? Of course. You simply acquire new knowledge (about Exit Planning) and apply it to your life.

Exit Planning requires time: time not only to create the plan but also time to implement it and to achieve measurable results. That timeline may be considerably longer than you anticipate because, in creating an Exit Plan, you need to rely on others who are also busy (minimally an attorney, CPA, and financial planning professional). Additionally, you can not anticipate all of the issues that might arise, and it is unlikely that everyone you work with is as motivated or experienced as you are. Finally, and inevitably, not everything will go as planned.

Exit Planning encompasses all sorts of planning: your growth, strategic, tactical and ownership succession planning for your business, as well as your personal financial, and estate planning. By wrapping business, estate, and personal (or family) planning into one process, Exit Planning is all-encompassing rather than a subset of the planning that you are sure you will one day undertake. In short, there is much to do.

It may be helpful here to recognize that planning, properly undertaken, can help enrich your business as well as your personal life. According to Brian Tracy, "A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power." And, in the case of Exit Planning, it works, too. Find out more about exit planning.

The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity. Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

Providing Due Diligence

As a business owner your main function is to keep your business running profitably.  However, when an offer is made and accepted through a letter of intent for the purchase of your business, another priority is established – providing due diligence information to the prospective buyer.

You, as the business owner, want to have a team assembled who are competent and knowledgeable professionals familiar with the process of selling a business.  Your accountant/CPA, transaction attorney (not the guy that handled your brother’s divorce), financial advisor and professional business broker (preferably with the designations of BCB - Board Certified Broker and CBI - Certified Business Intermediary) are the team members you want assisting you.

Your professional business broker should be the “quarterback” in controlling and managing the tasks that others are performing in the due diligence process.  The broker will prepare a timeline with milestones that should be part of the letter of intent.  The timeline should be adhered to if at all possible.  Time is a killer in business sale transactions. 

It is to your benefit to have as much due diligence information and documents available as possible prior to the start of the process. Again, time is a killer in deals and you don’t want your slow response to seem as an indication of not wanting to complete the due diligence list.

What will a prospective buyer want to see before they complete the purchase of your business?  Due diligence check lists can consist of one page of information developed by an individual buyer or 30 pages from a private equity group or corporate entity.

Each deal varies, but at a minimum tax returns for at least the last three years as well as the profit and loss statements that were used in preparing the tax returns. Customer lists, vendor contacts and when to meet key employees must be managed carefully.

Your professional business broker will also be in a better position to advise you on when, what kind and how much information to release.  Some buyers find a boilerplate list of due diligence items on a web site. Your broker can remind them that some information is not pertinent to a business like yours. 

“Year to date” profit and loss statements will be expected as well as an up to date balance sheet for the most recent reporting period.

It is best to disclose early any potential “red flag” problem(s).  Pending litigation, outstanding liens or judgments, major personnel problems or loss of major customers are all items that prospective buyers do not like to find as surprises.  Such problems that pop up may cause renegotiation of the price or be grounds for cancellation of the letter of intent.

Remember, even though you are in the midst of selling your business you do not want to mentally “check out” or become “retired in place”.  You should continue to run it as if you were going to keep it for another five years.  You don’t want the buyer to change their mind if something happens during due diligence that negatively affects the business and you have disengaged from the daily operations.

Let your professional sell side M&A advisors work with you and the buyer to make the due diligence process smooth.

Is a Private Equity Group the Best Buyer for Your Business?

Private Equity Groups (PEGs) are currently purchasing middle market businesses at record levels. Middle market companies typically have annual sales of $3 to $100 million, and values from $5 to $50 million.

Most of these middle market businesses are family owned, and selling to a Private Equity Group is a viable exit strategy for the owner wanting to take some or all of their chips off the table. Private Equity Groups are investment funds set up to purchase businesses with stable operating histories and cash flow, grow them for 5-7 years, then sell for a profit.

Returns on real estate investment have fallen to 8% or less, and many investors are now looking for alternatives. That money is flowing into Private Equity Groups at record levels, with investors hoping for returns of 20-30%. PEGs typically invest in established businesses, not impacted heavily by technology. What are types of businesses are they looking for?

Cambria Group, based in Menlo Park, CA, describe themselves as a “private investment company which acquires and invests in small and mid size businesses with established operating histories. The firm seeks four critical elements in every situation – 1) a fundamentally sound and durable business with a history of profitability, 2) availability of a strong management team, 3) a fair purchase price in relation to historical performance, and 4) opportunities for management and Cambria to add value to the business over time.”

A common philosophy heard is "defensible market niche, strong management team, and proven track record,” all of which indicate a solid business. Less interest has been shown by PEGs in recent years in turnaround companies in distressed situations.

PEGs will often purchase 100% of the company, letting the owner retire and cash out his or her equity in the business. Many younger owners just want to take some chips off the table and are happy to combine their valuable knowledge and experience with the equity infusion of the PEG to continue to grow the business. This is a win/win strategy, with the PEG getting an experienced manager with a proven track record, and the owner typically cashing out 80% - 90%, and getting a second bite of the apple five to seven years down the road on a subsequent transaction, as the PEG exits the investment.

PEGs review hundreds of opportunities and purchase less than 10%. “We look at 100 Executive Summaries for every 10 that we actually meet with the owner,” said Vincent Foster, of Main Street Capital Partners. “We will then typically make 5-6 offers on businesses for every transaction we close. We rely on the M&A professional to analyze and present the business to us in a coherent manner.”

An intermediary will typically spend 30 to 45 days to prepare an in-depth Confidential Information Memorandum of the business, which may be 25 to 60 pages in length. This document will analyze growth opportunities, historical financial performance, organizational strengths, and market information. The initial contact with the PEG is accomplished with a one or two page Blind Profile of the business, without disclosing the name of the Company. The intermediary then asks the purchaser to sign a Confidentiality Agreement, and have the necessary qualifications before being sent the entire Confidential Information Memorandum.

Walt Lipski, CBI, M&AMI, of Fox and Fin in Phoenix, president of the M & A Source, states, “We have not seen market conditions such as the ones existing today, driven by excess investment capital, low interest rates, and low tax rates, in many years, and savvy owners wanting to cash out for maximum values should be wary of waiting too long.”

Multiples of EBITDA – What Factors Turn a 3x into a 5x?

We all know that “money doesn’t grow on trees.”  

And neither does business value.  You can’t just wait until you are ready to leave your business to find out how much “value” you need or want and how much “value” exists in your business.  By then it will be too late.  The tree metaphor is relevant, though.  Value is something that you can grow, nourish and ultimately harvest in your business.  Let’s look at an example.

Picture three identical companies each engaged in moving time-sensitive freight for customers. All have a national presence, $2M in EBITDA (Earnings Before Interest, Tax Depreciation and Amortization) and about $25M in annual sales. It would be logical to assume that they all have about the same value.

In fact, one had little value, one sold for 3.5 times EBITDA and one sold for 5.5 times EBITDA.  The difference in value was $3M to $7M to $11M. Neither gross sales nor EBITDA alone determined the price and terms of these deals.  The key to the variation in purchase prices was the presence or absence of value drivers in the companies as well as the ability of these value drivers to survive the owner’s departure.

Value drivers are internal characteristics of a company that buyers look for in acquisitions. You’ll see that it doesn’t matter if you plan to keep your business forever, transition it to family members, sell it to your management team or find an outside buyer - value drivers can give you more options, more flexibility and more money from your ownership interest. Strong value drivers are those that are effective and will continue to operate once the original owner departs.  Consequently, those are the value drivers that increase both EBITDA and the multiple of EBITDA buyers may be willing to pay.

We may measure the effectiveness of value drivers in two ways:  1) their positive contribution to cash flow and 2) their ability to continue to contribute to cash flow under new ownership.

Think of it this way: why would anyone want to buy your business if its continued success is dependent on you-the departing owner? Buyers are more likely to pay top dollar for businesses that will not miss a beat when the original owner is no longer in charge.

Success in business is determined not by how well you run the business, but by how well the business runs without you.

Let’s look at the three freight-moving companies more closely to see what motivated buyers either to open their wallets or walk on by.

Company A:  

The owner/operator was responsible for management, operations and his personal and industry contacts were the source for new business. All roads ran through the owner so without him, the business had little value.

Company B:  

This company had a capable management team.  Many of its systems and procedures were state-of-the-art.  There was, however, one glaring weakness: the major customer, responsible for over 50 percent of the company’s revenue, had a decades’ long relationship with the company’s owner, not with the company.

Buyers are much less likely to pay millions for customer accounts that can, and indeed often do, go elsewhere the day after they find out the owner has sold the business.

Company C:

Finding the owner of Company C wasn’t easy.  She spent weeks on vacation or visiting grandchildren and when she was in town, was engaged in a variety of civic and charitable activities.  She made workplace appearances only sporadically and left operations in the hands of her stable, effective management team.

She had deliberately created plenty of diversification in her company’s customer base knowing that one day she’d sell the business.  She had thought about what she would look for in an acquisition so had included customer diversification as one of many attributes or value drivers she wanted in her company. She understood that value drivers were necessary to maximize sale-ability as well as the sale price and amount of cash she could demand from a buyer.

Interested buyers were delighted that she had changed her role in the company over the years so that a new owner could step in, almost unnoticed.  

There are a number of value drivers that are critically important to today’s buyers.  The value drivers that are most important to your business may or may not be the same as those that were identified for Company C.  What we can say with some certainty is that value drivers can help your business value grow to bring you closer to the value that you need.  If you are interested in learning more about them, we will be happy to sit down with you and talk about how value drivers might improve your business value.

Corporate Investment is unique in that we take a holistic approach to working with business owners. Exit planning is a part of our process. We help business owners plan for one of the biggest financial events of their lives - the transition out of their business. 

What factors determine the “Multiple” of earnings?

A multiple of earnings is a valuation method whereby the value of a company is expressed through the use of a multiple applied to the Company's earnings.  For instance, a company that has Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of $2,000,000, that has a "value" of $10,000,000, was valued at  5 x EBITDA. The appropriate earnings multiple that should be used to value any particular company depends upon a number of factors, or attributes.  One way to drive a higher value for your company is for it to possess some of those attributes that warrant a higher earnings multiple.  Predictability of revenue, sometimes referred to as "stickiness" of revenue, is one of those attributes that impacts the earnings multiple.

Companies with highly predictable or recurring revenue streams sell for much higher multiples than companies whose revenue is not recurring, or is dependent upon constantly generating transactions with new customers for its revenue stream.

Some of the factors that demonstrate a higher level of predictability of revenue include:

  • Contractual agreements with customers for repetitive sales of goods or services, such as manufacturing companies with long term purchase orders, or service companies that have annual recurring service contracts.
  • Operating in an industry where the barriers to entry are high. 
  • A solid and growing customer base with very little turnover.
  • Serving a market, either industrial or geographic, that is growing. 
  • In the case of distribution companies, protected territories or exclusive rights to product lines.
  • A revenue model that resembles a razor/ razor blade concept - where customers are "locked in" to a company's product or services. 

Factors that indicate revenue is not highly predictable include:

  • The majority of the customer relationships are managed by the owner of the business, or a small group of sales executives (the risk being that if the owner is no longer involved, or if the sales executives leave, the customer base may no longer have loyalty to the company). 
  • The barriers to entry are low - new competitors can easily enter the market, thus increasing the competitive landscape. 
  • Revenue is project dependent. 
  • There are pricing risks, either from changing technology or governmental regulation.

There are many other factors that come into play, way too many to outline in this article. As a business owner, we recommend that you review the sources of revenue for your company and, if possible, take steps to improve the "stickiness" of your company's revenue stream.

In future articles, we will discuss other factors that impact a company's earnings multiple, such as strength and depth of the management team, the company's operating systems, reliability of the financial reporting system, opportunities for growth, the make-up of the customer base, intangible assets, strength of cash flow, scaleability, the amount of capital investment required to sustain or grow a business and preparedness for the due diligence process.

If you have any questions or would like to discuss your particular company and how you can improve your valuation multiple, contact us, we would be happy to share our knowledge with you.

Creating value in your business to get top dollar when you leave it

Did you ever wonder why one business has buyers lined up willing to pay top dollar while another sits on the market for months, or even years? What do buyers look for in a prospective business acquisition?

There are many opinions about what attributes or characteristics buyers seek, but here’s what we know: the characteristics buyers seek must exist before the sale process even begins and it is your job as the owner to create value within your business prior to the sale. We call characteristics that impact value “Value Drivers.”

Walk A Mile In A Buyer’s Shoes

To get an idea of the importance of Value Drivers when preparing to sell your business, it is important to put on the buyer’s shoes for a minute. Let’s look at a hypothetical case study that illustrates how a buyer might compare two similar companies with a different emphasis on Value Drivers.

The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its sales. The owner is the center point of the company, holding both the CEO and CFO positions. With this level of responsibility, the owner is burning out quickly.

In comparison, The B Factor Company also has EBITDA of $2 million and a solid management team that runs the business, systems and processes. The management team creates efficiencies within the business and the owner vacations for six weeks a year.

The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its sales. The owner is the center point of the company, holding both the CEO and CFO positions. With this level of responsibility, the owner is burning out quickly.

In comparison, The B Factor Company also has EBITDA of $2 million and a solid management team that runs the business, systems and processes. The management team creates efficiencies within the business and the owner vacations for six weeks a year.

If you were a buyer comparing these two companies, which would provide a more attractive business opportunity? How much more would you pay for a business with a strong management team (one of the most important Value Drivers)? Would you even be interested in buying a business whose management team (the owner) walks out when you walk in?

Investment bankers understand that companies that lack strong Value Drivers also lack a bevy of buyers. Those buyers that do come to the table do not arrive with pockets full of cash.

Let’s look at several of the more important Value Drivers common to all industries:

  • A stable and motivated management team. If you can wait a year to sell your business, we suggest that you consider an incentive compensation system, cash or stock-based, that rewards key employees as the company performs (usually measured by increases in pre-tax income). Sophisticated buyers know that with a solid management team in place, prospects are good for continued business success. Without a strong management team, it may be very difficult to sell your business to a third party or transfer it to an insider.
  • Operating systems that improve sustainability of cash flows. Operating systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, (i.e. create cash flow), as well as the methods used to track how customers are identified and how products or services are delivered. The establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale.
  • A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10 percent of total sales. A diversified customer base helps insulate a company from the loss of any single customer. If the majority of your customer base is made up of only one or two good customers, consider reinvesting your profits into additional capacity that will make developing a broader customer base possible.
  • A realistic growth strategy. Buyers tend to pay premium prices for companies with realistic strategies for growth. Even if you expect to retire tomorrow, it makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc. It is this detailed growth plan, properly communicated, that helps to attract buyers.
  • Effective financial controls. Financial controls are not only a critical element of business management, but they also safeguard a company’s assets. Effective financial controls support the claim that a company is consistently profitable. The best way to document that your company has effective financial controls and that its historical financial statements are correct is through a certified audit or perhaps a verified financial statement by an established CPA firm.
  • Stable and improving cash flow. Ultimately, all Value Drivers contribute to stable and predictable cash flow. It is important, especially in the year or so preceding the sale of the business, that cash flow be substantial and on an upswing. You can begin increasing cash flow today by simply focusing on ways to operate your business more efficiently by increasing productivity and decreasing costs.

You can install these Value Drivers and better position your company to secure a premium price upon your exit with the help of a trained Exit Planning Advisor. Find out more about exit planning today.

Five Key Issues to Address in a Business Sale Transaction

Austin M&A Advisory

These five issues are key to consider when you are contemplating selling your business.

1. Non-Disclosure Agreement

This agreement contains a few key elements that may easily be overlooked by an uninformed Seller. The first of these is the “non-solicitation” of employees, which should be coupled with a time frame of a minimum of two years, we suggest three years. A second important provision will state that “all obligations under this agreement shall survive for a period of ___ years (we suggest three), except that sections _ , _, _, and _ shall continue at all times. One of these specifically enumerated provisions states that the entire discussion must remain confidential. When a business owner goes to market, if they do not sell, they surely want that fact to remain confidential, even after two years, so this provision is extremely important. Buyers sometimes strike this provision, and a Seller must understand its importance.

2. Excluding Certain Types of Buyers from the Marketing Process

The goal of the business owner is to receive maximum value in the sale of their business. Strategic buyers typically pay a premium of 10% – 20% ( or more ) than pure financial buyers. A Seller should let their M&A professional contact the universe of qualified acquirers, including strategics, to insure that they receive the maximum value. If strategics are not included in the marketing effort, the Seller will never know if they received the highest price that was possible.

3. Letter of Intent – Timeline

One of the pitfalls that a Seller may experience when dealing with only one buyer, is the buyer’s total control of the timeline of the transaction. “Time is the enemy of a transaction.” That is not to say that the parties should rush to closing, but stretching out the timeline of due diligence and closing typically benefits the buyer, not the seller. The letter of intent should include a timeline of critical dates for important milestones, such as confirmation from the bank that a loan is approved, date for buyer to deliver initial contract draft, and closing date. The letter should contain language that the binding provisions of the LOI are contingent upon the buyer’s adherence to the timeline.

4. Letter of Intent – No Shop Provisions

Most Buyers insist upon a “No-shop” provision in the letter of intent. The Buyer is committing time, energy, paying CPA’s and attorneys, and as a reasonable request, typically asks the Seller for exclusivity (as long as the timeline is met !). However, many Buyers will include an additional sentence in the no-shop provision that the Seller must inform the Buyer if they are contacted by another party during the due diligence period, including the name of the potential buyer. We do not recommend our clients accept this specific provision.

5. Contacting Employees Early in the Due Diligence Process

Many Buyers will ask to speak to key employees early in the process – this should not happen. Discussions with key employees should only occur after financial due diligence is complete, a draft of the contract is received, evidence that financing is in place is received, and we are at the 11th hour. The Seller should always attend these meetings, which can be an issue for the Buyer. This is an extremely sensitive issue and must be handled carefully.

 Considering selling your business? Corporate Investment M&A Advisors can advise you in how to start the process.