10 Things You Must Do to Increase Company Value Before You Think About Selling
If you are like most business owners, your business is a source of pride, as well as a method in which you have been able to travel, control your salary and schedule, and enjoy many other benefits. If you are considering selling in a few years, there are things you can do to increase company value. The purpose of this newsletter is to help you start looking at your company as a strategic acquirer might, so that you can focus on critical areas of value creation before you are serious about selling.
The benefit to you is that these simple steps have the capacity to increase the selling price substantially. For example, if the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple for your industry is between 5.8 and 6.7, then your goal is to be at the upper end of that range. If your EBITDA is $5 million, then the low price for your company would be $29 million, but the high price would be $33.5 million. That's a difference of $4.5 million. But there's potentially an even BETTER result: Ideally, you walk out with an acquirer that is buying your business for strategic value. These buyers typically throw multiples out the window, and acquire your company for much more than the typical EBITDA multiples.
Below are 10 things to do NOW to increase your company's strategic value
- Contractually Recurring Revenue: When acquirers evaluate revenue, stable and recurring revenue from contracts is valued much higher than one-time revenue. Work on earning revenue dollars that come from licensing, annual maintenance, or warranties. Why? Because buyers worry that key customers will leave once YOU leave, and if you have contracts for continued service with your customers, it reduces risk. Reduced risk= higher sales price.
- Overcome the High Barriers to Entry: Even if time-to-market is not a big factor in your industry, work on acquiring all difficult to obtain permits, regulatory approvals, licenses, zoning variances, trademarks, patents, etc. Even if you don't have a strict necessity for such items, think about obtaining them anyway. As a well-established business with a great reputation, you will have a much easier time working within your community or region to overcome these barriers. Newcomers, especially if they are corporate, have a much harder time acquiring these items and consequently they are highly valued.
- Customer Diversity: If you have a customer or supplier that makes up more than 10% of your business, or have another significant concentration, acquirers will likely discount the value of your company. If that customer leaves after your exit, the buyer will have overpaid. Try to work on ensuring that no more than 10% of your sales come from one single customer. Less than 5% is even better.
- Proper Accounting for Owner Expenses: You are probably running your business for maximum tax-efficiency which means that the company is paying more money for you and such as high salaries, bonuses, retirement benefits, travel, etc. The problem is that even though these deductions and expenses lower the company's tax bill, they also make it look MUCH less profitable for buyers. For the immediate 12-36 months before the sale, we advise restructuring your company's activities to normalize your expenses. For some creative ways to normalize your expenses AND keep your current lifestyle, contact us.
- Build a Great Website: This comes down to "image" and "reputation." Financials and data are important, but "looks" count, sometimes more than we'd like. Buyers analyze your website to see how effectively you market your business, to evaluate your relationship with customers, and to see what your business is really about. We prepare polished, persuasive marketing materials when selling your business, and even other brokers and intermediaries hire us to create their marketing materials. But the best marketing materials in the world are ineffective if your website tells another story because it is outdated, inaccurate, or unpopular. We know very affordable professionals who can help to make your website simply astounding if you'd like help.
- Build a Management Team: If you are heavily-involved in day-to-day decisions and operations, start including other key employees in your decision making process early. Many companies would not be able to continue without the owner's daily involvement. Your goal should be to demonstrate that your company is capable of achieving the same results even if you're not there. If you can show that a key group of employees has been involved in the decision-making process and for the past few years, buyers will be willing to pay much more because a stable management team reduces risk that the company's performance will decline after the sale. Reduced risk= higher price. Offer bonuses, or stock or equity participation to keep your key players around once you leave.
- Become an Expert in your Industry: The more you and your staff are mentioned in media outlets in relation to your business and products, the better. This can be established by encouraging reporters locally, regionally, or industry-wide to use you as their first source when discussing your industry. Not only will your business gain more exposure, but many corporate strategic buyers will think of you when considering potential acquisition candidates.
- Find Simple Ways to Innovate: If you can position your product or service as much different than that of your competitor, then you will have a stronger case for using much higher EBITDA multiples. If you create a process or technology that others in your industry don't have, then you are increasing your chances that a corporate buyer would be interested. Not only would they be interested, but in comparing your company to other potential targets, your company would be a much more attractive candidate.
- Build a Team of Professionals: It is much easier to get a great CPA, attorney, and financial advisor when you are not pressured for time. If you have these professionals in place well before an exit, then you will be in a much better position to evaluate which acquirer is your best bet. Ideally, have your financials audited or reviewed, have your attorney review your contracts, and talk to us well before you think about selling.
- Diversify your Product Mix: Just as with customers, a narrow mix of products represents a big risk. It is better to increase the mix of your products, even if you are not able to market all of them effectively. Remember, for private equity groups, they are looking for companies where their investment will solve a problem. If you can demonstrate, for example, that you have the products, but lack the capital to distribute them effectively, then a private equity group would view your company as a prime candidate because they will see a simple problem and a simple solution.