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Article added or updated:
03/30/2008 |
SELLING YOUR BUSINESS-
TEN STEPS TO MAXIMIZE VALUE
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06/08/05
By David M. Kauppi, CBI, President Mid Market Capital
Related Artcles:
Buying a Business
Company Website Value
Strategic
Acquisition
Selling Tech Company
Maximize Business Value
Selling Your Business
Sell Your Business
You started your company 20 years ago “in your garage”, worked many 80
hour weeks, bootstrapped your growth, view your company with the pride
of an entrepreneur, and are now considering your exit. The purpose of
this article is to help you evaluate your company as a strategic
acquirer might. From that perspective we will ask you to focus on ten
critical areas of value creation. The benefit to you is that the better
your performance in these areas, the greater the selling price of your
business. The most likely result is that you will sell at the high range
of the multiples normally associated with your industry. For example,
during the last 18 months similar companies have sold at an EBITDA
multiple of between 4.8 and 5.7 times. Moving your company from the low
end to the high end of that range can result in a significant swing in
transaction value. If your EBITDA were $2 million, the low price is $9.6
million and the high price is $11.4 million. The Holy Grail in selling
your company is when an acquirer throws out the traditional multiples
and acquires your company based on strategic post acquisition
performance. Below is our list of STRATEGIC VALUE DRIVERS:
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1. CUSTOMER DIVERSITY – If too much of your current business is
concentrated in too few customers that is perceived as a negative in the
acquisition market. The concern is that if the owner exits and the major
customers leave, the business could be negatively impacted. On the plus
side, if none of your customers accounts for more than 5% of total
sales, that is viewed as a real plus. If you find yourself with a
customer concentration issue and are planning an exit, start focusing on
a program to diversify. A quick fix would be to make an acquisition of a
competitor with customer diversity, integrate them and then take your
company to market.
2. MANAGEMENT DEPTH – A common thread in privately held businesses is a
concentration of responsibility with the owner operator. The buck stops
here may be a good slogan for a presidential candidate, but it will not
help create value for a business owner. An acquirer will look at the
quality of the management staff and employees as a major determinant in
acquisition price. A key in preparing for exit is to develop your people
so they could run the business after you are gone. You should make the
move of assigning your successor a year in advance of your scheduled
departure date. If you have no one that you feel has the ability then go
hire someone that can do the job. If you have a strong management team
in place and you are anticipating an exit, 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. A strong management team is a valuable asset in the middle
market. If you have one, take steps to keep it in place and the market
will reward you. If you are weak in that area, the acquisition market
will punish you if fail to take the corrective action.
3. CONTRACTUALLY RECURRING REVENUE – All revenue dollars are not created
equal. Revenue dollars that are the result of a contract for annual
maintenance, annual licensing fees, a recurring retainer fee, technology
license, etc. are much more powerful value drivers than new sales
revenue, time and materials revenue, or other non-recurring revenue
streams. It’s all about risk. The higher the risk (future sales) the
lower the return. The lower the risk (contracted revenue stream) the
higher the return. The most extreme case of this occurs in the software
industry where companies are typically sold at a multiple of recurring
maintenance revenue. New license sales, historical levels of project
work and projected install revenue are virtually eliminated from the
valuation formula. The lesson here is that if you can turn a T&M
situation into an annual contract, you will be greatly rewarded when it
comes time to sell your business.
4. PROPRIETARY PRODUCTS/TECHNOLOGY – This is the area where the
valuation rules do not necessarily apply. Strategic acquirers buy other
companies to grow. If they 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. On the flip side, however, the market
yawns at “me too” commodity type products or services. That business is
vulnerable to competition, especially after the owner leaves. Continue
to look for ways to innovate in what ever industry you are in. Your
innovation should not be limited to product improvements. The
marketplace values innovations in distribution systems, collaborative
product design process, customer service and other functional areas that
can provide a competitive advantage. 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 – A wise buyer told me once, “I want
to own companies where I have an edge.” He happened to be a buyer of
Waste Facilities. All the regulations and approvals required tend to
limit competition. 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. Your company may
be able to secure approvals on the local level that a national player
may have difficulty obtaining. Selling your product or service to the
government can be quite lucrative, but 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. The same holds true of a local marquee account
that would be desirable for a larger supplier to crack. One strategy for
penetrating these accounts is to ask the buyer to identify the best
salesman that calls on him. Go hire that salesman to sell your product
to that account.
6. EFFECTIVE USE OF PROFESSIONALS – Reviewed or audited financials by a
reputable CPA firm are quite valuable in the eyes of a buyer.
Professional financials cast a positive halo on your approach to
controlling your business while at the same time reduce the buyer’s
perception of risk. Bring a good outside attorney into the mix, and the
risk drops even more. The thought process is that this attorney has been
giving his client good advice for years on protecting the company from
litigation. A strong professional team is a great asset in growing your
business and in helping you obtain maximum value when you exit.
7. PROCUCT/SALES PIPELINE – Large pharmaceutical companies are well
known for buying smaller pharmaceutical companies that have a robust
product pipeline for very generous prices. 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
are constantly evaluating the build versus buy question. Small companies
that develop a hot 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. The same earn out philosophy can be employed for a
selling company that has a large sales pipeline. The acquirer is not
anxious to pay for that pipeline at closing and the seller wants to
delay his company’s sale until the next big deal. An intelligently
structured sales contract with a contingent payment based on closing
accounts in the pipeline is a great solution.
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. If you are planning to exit, review your
product portfolio. Are there obvious gaps that could be filled quickly?
How about buying a small company with a few complementary products? What
about buying a product line from a company? Can you lock up distribution
rights for North America for the best product from a Finnish
manufacturer? Have your customers been asking you to develop a new
product? Spread out your product risk as a value enhancing strategy.
9. INDUSTRY EXPERTISE AND EXPOSURE – This activity is often overlooked
because it is difficult to measure its direct returns. We find that it
is a value driver when it is time to sell the business. To the extent
possible, encourage your staff to publish articles in industry magazines
and newsletters. Get exposure as a presenter at industry events.
Encourage local and industry reporters to use you as the voice of
authority with industry issues. Your company is viewed in a more
positive light, you may get more business referrals, and a buyer from
your industry will remember you favorably and is more likely to consider
you as an acquisition candidate.
10. WRITTEN GROWTH PLAN – If I could get you to do one thing that will
cost you nothing but brain power and your time it would be to capture
the opportunities available to your company in a two to five page
written growth plan. Even if you are putting your company on the market
tomorrow, it is not too late to identify all the opportunities your
company has created. For any company, in any stage, this is a valuable
living document to guide you strategically. Small companies with limited
staff are forced to put out fires and live tactically. A growth plan
helps create a process that will allow you to break big strategic plans
into executable tactical activities. What additional markets could we
pursue? What additional products could we deliver to our same customers?
What segments of my current market offer the most growth potential?
Where are the best margins in our customer set and product set? Can we
expand in those areas? Can we repurpose our products for different
markets? Are we getting the best return on our intellectual property?
Can we license our technology? Do strategic alliances or cross marketing
agreements make sense? Capturing this on paper as part of your exit plan
will increase the likelihood that an acquiring company will view you
more as a strategic acquisition. It demonstrates that you have
identified a path for growth and it may identify opportunities that the
buyer had not considered. Those opportunities can add to the purchase
price.
The bottom line when it comes to unlocking the market value of your
privately held company 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 one buys or sells
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 a Merger and Acquisition Advisor
with Mid Market Capital, Inc. MMC is a private investment banking and
business broker firm specializing in providing corporate finance and
business intermediary services to entrepreneurs and middle market
corporate clients in a variety of industries. The firm counsels clients
in the areas of M&A and divestiture, succession planning, valuations,
corporate growth and turnarounds. 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 or a free
consultation please contact Dave Kauppi at (630) 325-0123, email
davekauppi@midmarkcap.com or visit our Web page
www.midmarkcap.com.
Related Artcles:
Buying a Business
Company Website Value
Strategic
Acquisition
Selling Tech Company
Maximize Business Value
Selling Your Business
Sell Your Business
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