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SELLING_YOUR_BUSINESS_FOR_THE_BEST_PRICE
| SELLING YOUR BUSINESS FOR THE BEST PRICE
If you are considering selling your business this article will
help you evaluate your company as a strategic acquirer might.
From that perspective it pays to focus on ten critical areas of
value creation. The better your performance in these areas, the
greater the selling price of your business. Below is our list of
STRATEGIC VALUE DRIVERS:
1.CUSTOMER DIVERSITY – If too much business is concentrated in
too few of your customers, it is a negative in the acquisition
market. If none of your customers accounts for more than 5% of
total sales, that is a real plus. If you find yourself with a
customer concentration issue, start focusing on a program to
diversify.
2.MANAGEMENT DEPTH –An acquirer will look at the quality of the
management staff and employees as a major determinant in
acquisition price. You should make the move of assigning your
successor a year in advance of your scheduled departure date. If
you have a strong management team in place, 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.
3.CONTRACTUALLY RECURRING REVENUE – All revenue dollars are not
created equal. Revenue dollars from a contract for annual
maintenance, annual licensing fees, a recurring retainer fee,
technology license, etc. are much more powerful value drivers
than projected sales revenue, time and materials revenue, or
other non-recurring revenue streams.
4.PROPRIETARY PRODUCTS/TECHNOLOGY – This is the area where the
valuation rules do not necessarily apply. If strategic acquirers
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 and yawns at “me too” commodity
type products or services. Continue to look for ways to innovate
in all facets of your business. 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 –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. 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.
6.EFFECTIVE USE OF PROFESSIONALS – Reviewed or audited
financials by a reputable CPA firm cast a positive halo on your
business while at the same time reduce the buyer’s perception of
risk. A good outside attorney reduces the risk even more. 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 – 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 evaluate the build versus buy question. Small
companies that develop 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.
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.
9.INDUSTRY EXPERTISE AND EXPOSURE – Encourage your staff to
publish articles and to speak at industry events. Encourage
local and industry reporters to use you as the voice of
authority for industry issues. Your company is viewed in a more
positive light, gets more business referrals, and an industry
buyer will remember you favorably as an acquisition candidate.
10.WRITTEN GROWTH PLAN –Capture the opportunities available to
your company in a two to five page written growth plan. What
additional markets could we pursue? What additional products
could we deliver to our same customers? What segments of our
current market offer the most growth potential? Where are the
best margins in our customer base and product set? Can we expand
in those areas? Can we repurpose our products for different
markets? Can we license our intellectual property? What about
strategic alliances or cross marketing agreements? Documenting
these opportunities can add to the purchase price.
When it comes to unlocking the market value of your privately
held company, it 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 you sell 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.
About the author:
Dave Kauppi is a Merger and Acquisition Advisor with Mid Market
Capital, Inc. MMC is a business broker firm specializing in
middle market corporate clients. We provide M&A and divestiture,
succession planning, valuations, corporate growth and turnaround
services. Dave is a Certified Business Intermediary (CBI), a
licensed business broker, and a member of IBBA and the MBBI.
Contact (630) 325-0123, davekauppi@midmarkcap.com or
www.midmarkcap.com.
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