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Sell A Business 10 Steps To Maximize Selling Price
By Dave Kauppi, Wed Dec 7th
You started your company 20 years ago “in your garage”, workedmany 80 hour weeks, bootstrapped your growth, view your companywith the pride of an entrepreneur, and are now considering yourexit. The purpose of this article is to help you evaluate yourcompany as a strategic acquirer might. From that perspective wewill ask you to focus on ten critical areas of value creation.The benefit to you is that the better your performance in theseareas, the greater the selling price of your business. The mostlikely result is that you will sell at the high range of themultiples normally associated with your industry. For example,during the last 18 months similar companies have sold at anEBITDA multiple of between 4.8 and 5.7 times. Moving yourcompany from the low end to the high end of that range canresult in a significant swing in transaction value. If yourEBITDA were $2 million, the low price is $9.6 million and thehigh price is $11.4 million. The Holy Grail in selling yourcompany is when an acquirer throws out the traditional multiplesand acquires your company based on strategic post acquisitionperformance. Below is our list of STRATEGIC VALUE DRIVERS: 1.CUSTOMER DIVERSITY – If too much of your current business isconcentrated in too few customers that is perceived as anegative in the acquisition market. The concern is that if theowner exits and the major customers leave, the business could benegatively impacted. On the plus side, if none of your customersaccounts for more than 5% of total sales, that is viewed as areal plus. If you find yourself with a customer concentrationissue and are planning an exit, start focusing on a program todiversify. A quick fix would be to make an acquisition of acompetitor with customer diversity, integrate them and then takeyour company to market. 2.MANAGEMENT DEPTH – A common thread in privately heldbusinesses is a concentration of responsibility with the owneroperator. The buck stops here may be a good slogan for apresidential candidate, but it will not help create value for abusiness owner. An acquirer will look at the quality of themanagement staff and employees as a major determinant inacquisition price. A key in preparing for exit is to developyour people so they could run the business after you are gone.You should make the move of assigning your successor a year inadvance of your scheduled departure date. If you have no onethat you feel has the ability then go hire someone that can dothe job. If you have a strong management team in place and youare anticipating an exit, you should try to implement employmentcontracts, non-competes, and some form of phantom stock orequity participation plan to keep these stars involved throughthe transition. A strong management team is a valuable asset inthe middle market. If you have one, take steps to keep it inplace and the market will reward you. If you are weak in thatarea, the acquisition market will punish you if fail to take thecorrective action.
3.CONTRACTUALLY RECURRING REVENUE – All revenue dollars are notcreated equal. Revenue dollars that are the result of a contractfor annual maintenance, annual licensing fees, a recurringretainer fee, technology license, etc. are much more powerfulvalue drivers than new sales revenue, time and materialsrevenue, or other non-recurring revenue streams. It’s all aboutrisk. The higher the risk (future sales) the lower the return.The lower the risk (contracted revenue stream) the higher thereturn. The most extreme case of this occurs in the softwareindustry where companies are typically sold at a multiple ofrecurring maintenance revenue. New license sales, historicallevels of project work and projected install revenue arevirtually eliminated from the valuation formula. The lesson hereis that if you can turn a T&M situation into an annual contract,you will be greatly rewarded when it comes time to sell yourbusiness. 4.PROPRIETARY PRODUCTS/TECHNOLOGY – This is the area where thevaluation rules do not necessarily apply. Strategic acquirersbuy other companies to grow. If they believe that a newtechnology can be acquired and integrated with their superiordistribution channel, they may value your company on a postacquisition performance basis. The marketplace rewards effectiveinnovation. On the flip side, however, the market yawns at “metoo” commodity type products or services. That business isvulnerable to competition, especially after the owner leaves.Continue to look for ways to innovate in what ever industry youare in. Your innovation should not be
limited to productimprovements. The marketplace values innovations in distributionsystems, collaborative product design process, customer serviceand other functional areas that can provide a competitiveadvantage. 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 tobe a buyer of Waste Facilities. All the regulations andapprovals required tend to limit competition. In its simplestform, a large restaurant chain buys a small family ownedrestaurant to acquire a grand fathered liquor license. Owninghard to get permits, zoning, licenses, or regulatory approvalscan be worth a great deal to the right buyer. Your company maybe able to secure approvals on the local level that a nationalplayer may have difficulty obtaining. Selling your product orservice to the government can be quite lucrative, but thegovernment market is extremely difficult to penetrate. If yourproduct or service applies and you can break through thebarriers, you become a more attractive acquisition candidate.The same holds true of a local marquee account that would bedesirable for a larger supplier to crack. One strategy forpenetrating these accounts is to ask the buyer to identify thebest salesman that calls on him. Go hire that salesman to sellyour product to that account. 6.EFFECTIVE USE OF PROFESSIONALS – Reviewed or auditedfinancials by a reputable CPA firm are quite valuable in theeyes of a buyer. Professional financials cast a positive halo onyour approach to controlling your business while at the sametime reduce the buyer’s perception of risk. Bring a good outsideattorney into the mix, and the risk drops even more. The thoughtprocess is that this attorney has been giving his client goodadvice for years on protecting the company from litigation. Astrong professional team is a great asset in growing yourbusiness and in helping you obtain maximum value when you exit. 7.PROCUCT/SALES PIPELINE – Large pharmaceutical companies arewell known for buying smaller pharmaceutical companies that havea robust product pipeline for very generous prices. Smallercompanies often are more agile and have better R&D efficiencythan their high overhead big brothers. In technology, time tomarket is critical and big companies are constantly evaluatingthe build versus buy question. Small companies that develop ahot new technology are faced with the decision of developingdistribution internally or selling to a larger company withdeveloped channels. A win/win scenario is to sell out at aprice, in cash and stock at closing, that rewards the smallercompany for what they have today, plus an earn out componenttied to product revenues with the new company. The same earn outphilosophy can be employed for a selling company that has alarge sales pipeline. The acquirer is not anxious to pay forthat pipeline at closing and the seller wants to delay hiscompany’s sale until the next big deal. An intelligentlystructured sales contract with a contingent payment based onclosing accounts in the pipeline is a great solution. 8.PRODUCT DIVERSITY – A smaller company that has a qualityportfolio of products but may lack distribution can become avaluable asset in the hands of the strategic buyer. A narrowproduct set, however, increases risk and drives down value. Ifyou are planning to exit, review your product portfolio. Arethere obvious gaps that could be filled quickly? How aboutbuying a small company with a few complementary products? Whatabout buying a product line from a company? Can you lock updistribution rights for North America for the best product froma Finnish manufacturer? Have your customers been asking you todevelop a new product? Spread out your product risk as a valueenhancing strategy. 9.INDUSTRY EXPERTISE AND EXPOSURE – This activity is oftenoverlooked because it is difficult to measure its directreturns. We find that it is a value driver when it is time tosell the business. To the extent possible, encourage your staffto publish articles in industry magazines and newsletters. Getexposure as a presenter at industry events. Encourage local andindustry reporters to use you as the voice of authority withindustry issues. Your company is viewed in a more positivelight, you may get more business referrals, and a buyer fromyour industry will remember you favorably and is more likely toconsider you as an acquisition candidate. 10.WRITTEN GROWTH PLAN – If I could get you to do one thing thatwill cost you nothing but brain power and your time it would beto capture the opportunities available to your company in a twoto five page written growth plan. Even if you are putting yourcompany on the market tomorrow, it is not too late to identifyall the opportunities your company has created. For any company,in any stage, this is a valuable living document to guide youstrategically. Small companies with limited staff are forced toput out fires and live tactically. A growth plan helps create aprocess that will allow you to break big strategic plans intoexecutable tactical activities. What additional markets could wepursue? What additional products could we deliver to our samecustomers? What segments of my current market offer the mostgrowth potential? Where are the best margins in our customer setand product set? Can we expand in those areas? Can we repurposeour products for different markets? Are we getting the bestreturn on our intellectual property? Can we license ourtechnology? Do strategic alliances or cross marketing agreementsmake sense? Capturing this on paper as part of your exit planwill increase the likelihood that an acquiring company will viewyou more as a strategic acquisition. It demonstrates that youhave identified a path for growth and it may identifyopportunities that the buyer had not considered. Thoseopportunities can add to the purchase price. The bottom line when it comes to unlocking the market value ofyour privately held company is not limited to the bottom line.Profitability is hugely important, but the factors above canresult in significant premiums over traditional valuationapproaches. When one buys or sells Microsoft stock, there is noroom for interpretation about the market price. The market forprivately held businesses is imprecise and illiquid. There isplenty of room for interpretation and the result for the bestinterpretation by the marketplace is a big pay off when youdecide to sell. About the author:Dave Kauppi is a Merger and Acquisition Advisor with Mid MarketCapital, Inc. MMC is a business broker firm specializing inmiddle market corporate clients. We provide M&A and divestiture,succession planning, valuations, corporate growth and turnaroundservices. Dave is a Certified Business Intermediary (CBI), alicensed business broker, and a member of IBBA and the MBBI.Contact (630) 325-0123, davekauppi@midmarkcap.com orwww.midmarkcap.com. |