Thinking About Selling Your Company? Focus on Value, Not Price
Much of our value as M&A advisors is found in redirecting your focus, from what your business is worth today, to what it could be worth when it is ultimately ready to sell.
When business owners decide to put their company on the market, it’s natural for them to wonder What is my business worth? and What should be my asking price?
Those are fair questions – but consider the possibility that the first is premature, and the second is irrelevant.
If that sounds like heresy, let’s try to put both responses in perspective.
The Danger of an Asking Price. Tackling the second question first, it’s important to understand that, at IBG Business, our normal approach is to go to market without a price – and it’s almost never failed us.
That strategy recognizes two important realities: We don’t know who your potential buyers are, and we don’t know their motives.
Your buyer may be:
- a similar business for which your company satisfies a strategic objective;
- a local or distant competitor seeking to gain your customers, expand their market share, or enter your region;
- a private investor looking to purchase a project as an income generator for themselves; or
- a private equity group.
For your company, its perceived value and ultimate selling price can vary dramatically depending on the nature of the buyer and what that buyer seeks to achieve by acquiring your business. And it’s important to recognize that your company might be worth even more to that one stand-out buyer than it is to you. Therefore, don’t fixate on setting a price that inadvertently places a cap on how much your business will bring.
The Evolution of Market Value. As for speculating as to what your business is worth, much of our value as M&A advisors is in redirecting your focus – from what your business might be worth today, to what it can be worth when it is ready to sell – and to helping you implement changes in your company that will help it arrive at peak value by the time it goes on the market.
Achieving that objective can take time, which is why the optimum sale period for a business – including the building-value phase – can be as much as two years.
During the preparation time, while we are doing our part – i.e., assessing your company and the market, recasting your financials, identifying potential buyers, and preparing to package and market the company – there are vital steps that only you as the owner can take.
Those steps are often company-specific, and we will customize our recommendations to your situation. However, on a more generic level, here are 12 proven approaches to:
- increasing the market value of your business and
- enhancing its ultimate selling price.
1. Build a solid management team. A business with sales of $5 million and up needs a complete and solid lineup of officers and directors. Such a team might include a chief operating officer (COO), chief financial officer (CFO), sales manager and, if the nature of the business calls for it, chief technology officer or IT director.
It is also beneficial to create a board of directors that has at least two outside members. This professionalization of management can remove the stigma of the “one-man band” and communicate to potential buyers that your company has viability, value and desirability apart from your involvement.
2. Retain loyal employees. A company’s greatest asset is its employees and perhaps its biggest value-increaser, and happy and loyal employees make for a strong company. Top management should have non-compete and/or confidentiality agreements, and solid benefit plans should be in place for all employees.
3. Grow in scope. Some smaller companies are kept small to maximize the owner’s benefits – the proverbial “cash cows.” However, if building value is the goal, it may be important to develop new products or services, build market share, and expand markets or open new ones. Achieving strong, quantifiable growth builds value that justifies your investment of time and energy.
4. Grow in size. While some corporate buyers and private equity firms see the advantages of purchasing smaller businesses, companies with less than $5 million in sales and an EBITDA of less than $1 million may be more dependent on continuing outside financing and lack the critical mass for both buying and selling power. As a consequence, many buyers may perceive smaller companies as too small for acquisition or undervalue them.
5. Stay on top of your market. The value of a company may be contingent on its industry, its place in the industry, and the direction of the industry itself.
- How big is the industry?
- Is it headed up or down?
- Who is the competition?
- How big is the company’s market share?
- Is it time to change direction or diversify?
6. Demonstrate your agility. Small companies can be very adept at pivoting, i.e., changing course and implementing change. You can add value to your business by recognizing and quickly seizing opportunities to reach new markets, fill voids in existing markets, and add or change products or services.
- See: “Drink Makers Dump Juices, Water That Have Diluted Profits,” The Wall Street Journal, August 4, 2021
7. Raise your name and brand identity. You don’t have to manufacture Kleenex, Band-Aids or Coca-Cola to have a strong brand identity. While the value of becoming a household name probably wouldn’t justify the cost to your company, you can and should pursue strong, positive name recognition within your industry. Through targeted advertising, trade association involvement, giving back to the community, and other strategies, your company’s name can become recognized as a leader in your industry vertical, and that can enhance its perceived market value to potential buyers.
8. Put your plans on paper (or screen). Business plans, financial plans and personnel plans should all be in writing and kept current. Terms of employment agreements should be spelled out and in writing. Business planning and company objectives, etc., should also be in writing, visually communicated, and reviewed periodically. Contracts should be reviewed and maintained on a current basis.
9. Broaden your customer base. Many smaller companies reduce their market value by becoming too dependent on a handful of customers or clients. Ideally, no customer or client should represent more than 10% of sales. Be intentional about expanding to new markets, introducing new products, and finding new customers that align with your company’s core business.
10. Take advantage of proprietary and other assets. Patents, brand names, copyrights, alliances, and joint ventures are all examples of potentially valuable assets. So are innovative business practices, systems, procedures, and leveraged capacity. For instance, a commercial landscaping company turned a “down” time of year – winter – into a profitable season by installing snow plows on their trucks, utilizing their rolling stock and existing workforce to become a snow-removal resource that expanded their value to existing landscaping customers and broadened their customer base.
11. Be “lean and mean.” Many companies lease their real estate needs, outsource their payroll, have their manufacturing done offshore, or have UPS handle their logistical needs. Since all non-core requirements are done by someone else, the company can focus its efforts on what it does best.
12. Start the process. While creating business value is critical to the long-term success, many business owners are held back by believing that “I don’t have time now; I’ll do it tomorrow” or “I’m too busy putting out fires.” Consequently, valuable opportunities to build the business and grow its value get sidetracked or put off indefinitely.
Written by: Jim Afinowich, Managing Partner at IBG/Fox & Fin
M&A Source “Advisor of the Year” for 2021, Jim Afinowich has more than a quarter century of successful experience in the M&A industry and has managed and supervised more than 500 transactions. He is well-known as a creative problem solver.