As part of meeting with family-owned businesses, we often get asked how an entrepreneur can create value in his or her business. Similarly, we sometimes see that business owners don't really realize which attributes of their business are the most valuable.
Here are some things that create additional value during a sale process:
I know, this one isn't a huge surprise, but let's just put it at the top of the list to acknowledge that companies that are well-run tend to sell for more money. If you think that the investment in a Black Belt program or an ISO certification won't make long-term sense, think of it in terms of the return you will receive when you decide to sell your business.
Operational excellence is the number one way to create a valuable business.
Using an investment banker to sell the business in a full process that involves multiple bidders gives company owners, on average, a 20% greater valuation for their business. Harder to measure, but equally as important, are the other things that having multiple bidders give sellers. With more than one bidder, a seller has leverage during the negotiations. A business sale is made up of all kinds of terms and conditions and many of them have a potentially large financial impact on the seller. Being able to negotiate from a strong position throughout the sale process on all the terms is invaluable.
Quality of Earnings
If you don't know what this is, my colleague wrote an excellent description of this process. Having a Q of E as part of the transaction allows a buyer to rely on a third party expert's dissection of the numbers that the company and the investment banker have put together. In this day and age where buyers are paying very full prices, they really like to have that opinion. There's probably an element of job security embedded in a Q of E for a buyer that we can discuss in a later blog.
Clear Competitive Advantage
Creating a company with a competitive advantage is really difficult, and buyers know that. For financial buyers, a clear competitive advantage is sexy because they know the business won't get picked off by China or driven out of business during their ownership period. For strategic buyers, a competitive advantage can also be attractive because it saves them from having to do their own in-house development - which is expensive and tricky.
While the typical valuation model is about 6 pages long, if we were to strip it down to the most important Excel inputs, the single most important of those is growth. LBO models (run by most private equity firms) are so sensitive to growth that your investment banker will probably make you uncomfortable with how much he or she focuses on this particular topic when writing your offering memorandum.
Similarly, failing to show growth during a transaction is the number one reason that deals fail or are postponed. While it may be totally inconsequential to your business overall, a down (or flat) month can create havoc with a business valuation.
Type of Revenue
Here at TKO Miller, we are very sensitive to the "type" of revenue a business has. Because we do a lot of work with scaffolding and industrial businesses, we often see companies that have had extreme growth rates due to large project work. If your revenue is one-time in nature it will not be valued as highly as revenue that is recurring.
Proprietary IP or Technology
Lastly, if your company has real proprietary products or services, you will be valued more than your counterparts. IP or technology that is "protected" legally is probably the most valuable but for a variety of reasons that doesn't always make sense for every company. Usually, if you can demonstrate that what you have is unique and defensible, you will get the benefit of having a proprietary offering.
Excellent Management Teams
If you plan to leave as part of selling your business, it is very valuable if you have a set of impressive managers right behind you to inherit running the business.
There are, of course, more aspects of a business that can create or detract from value. The ones mentioned above are certainly worth taking a look at if you are considering a sale. Hiring an excellent investment banker or M&A advisor to represent you is the best way to make sure you get full value for your business.