Seven Acquisition Value Drivers to Boost a Company Sale Price
Most owners of mid-sized businesses have an end-game in mind when it comes to exiting their business one day. For many, the eventual goal is a liquidity event — in other words, to sell their company either wholly or partially in order to generate funds to support their desired retirement lifestyle. Others may want to cash out to generate funds they can use to start or purchase another business.
In most scenarios like these, owners want to sell their company for as much money as possible. The key to maximizing the sale price of a closely held business starts with focusing on acquisition value drivers long before the owner decides to put the business up for sale. You should be taking steps now to increase the value of your business when you’re ready to sell — whether this will be next year or 10 years down the road.
Long-term planning for a liquidity event requires making management and financial decisions today that will best position your company for sale in the future. However, many owners make these decisions based on short-term financial goals like reducing taxes. For example, some owners deduct the cost of personal vacations and country club memberships as business expenses. While this may lower net income and current taxes, it doesn’t position the company as well for a future sale.
What Acquirers Want to See
The primary acquisition value drivers that buyers are looking at when deciding how much they’ll pay for a business are future earnings and cash flow. In particular, they want to know how certain future earnings and cash flow will be and when they will materialize. So two of the best ways to boost the future value and selling price of your business are to pursue opportunities that offer the greatest potential for high returns and spread out your risk among different types of customers, products, services and market areas.
There are a number of other acquisition value drivers that can increase the value and eventual selling price of your business, including the following:
Your company’s financial performance.
Not surprisingly, this is the area that acquirers are usually most interested in examining and where they will perform the closest due diligence. In particular, they typically want to see strong cash flow, steady sales and revenue, and growing profit margins. Identify several key performance indicators (KPIs) that best reflect your financial performance and focus on improving these during the months and years leading up to your planned departure.
The quality of your financial statements & integrity of your accounting processes.
This is one of the most common reasons why many owners fail to realize the selling price they thought they’d get for their businesses. Acquirers will usually want to see high-quality financial statements that have been reviewed or audited by a CPA, not slipshod statements produced in improperly configured QuickBooks.
The depth & strength of your management team.
Too many owners inadvertently end up making themselves indispensable to their businesses, which can significantly decrease the value of the business in the eyes of acquirers. To guard against this, start strengthening your management bench long before it’s time to sell your company so they’re prepared to help ensure a smooth transition to new ownership. This includes delegating real decision-making authority and responsibility to your managers and executives.
Your prospects for rapid growth.
Acquirers don’t usually buy businesses with the goal of maintaining the status quo. They are in search of businesses where they can ramp up growth quickly in order to boost sales, profits and market share. Draft a strategic growth plan that lays out growth opportunities, such as exploiting underutilized markets, expanding into new territories or capitalizing on new technologies and trends.
Your competitive advantages.
What is your company’s unique selling proposition, or USP? Why do customers do business with you instead of your competitors? It could be outstanding service, high quality or low price — but whatever it is, make sure you emphasize this in your sales and marketing efforts. Also be prepared to demonstrate that your USP is sustainable over the long term.
Your customer concentrations (or lack of them).
Is a large percentage of your sales and revenue dependent on just one or a handful of large customers? If so, this represents a big risk for acquirers since the loss of a large customer could threaten the business financially. Strive to diversify your customer base beyond a single large customer in order to reduce concentration risk.
Your supplier & vendor relationships.
These relationships form the backbone of many businesses — especially manufacturers and wholesalers — so it’s important to solidify them before putting your business up for sale. Introduce managers to your key suppliers and vendors to start transitioning these relationships to your successors. And lock in as many long-term contracts as you can for delivery of raw materials in order to help stabilize your cost of goods sold.
Most owners of mid-sized businesses have an end-game in mind when it comes to exiting them, such as selling the company to generate funds to support their retirement. But maximizing the sale price of a closely held business starts long before the day you decide to put it up for sale. You should be taking steps now to increase the value of your business by focusing on key acquisition value drivers. A part-time CFO or project CFO, acting in an on-demand capacity, can team with you to identify and focus on the most important acquisition value drivers – the critical ones that will increase the value and eventual sale price of your business.
Arthur F. Rothberg, Managing Director, CFO Edge, LLC