How to maximise the sale price of your business
Selling your business is a detailed and strategic process and if planned and executed properly, can lead to achieving the highest possible sale price for your business. Here, we briefly explore the key issues which we consider to impact on your ability to attract prospective buyers and more importantly, seeing your business sale through to settlement!
DIVERSIFY YOUR CUSTOMER BASE
If a large percentage of your current business is concentrated on a small percentage of customers, this can have a negative impact on the perceived future trading ability of your business and can lose buyer interest very quickly in the sale of your business! The concern is that if the owner leaves and the major customers leave, the business could lose a substantial amount of its income. It’s no surprise then if none of your customers accounts for more than 10% of total sales, this can be viewed as a real advantage and makes it easier for you to sell your business.
If you find yourself with a customer concentration issue (or a strong reliance on a small number of customers) and are planning to sell your business, start focusing on a program to diversify. A quick fix would be to make an acquisition of a competitor or synergistic business with customer diversity, integrate them and then put your business for sale.
If your business relies on you to run its day to day operations then this may work against you when a buyer looks at buying your business. Many owners don’t realise that although a buyer may look to work in the business themselves and may have their own ideas on how to run it, they will ultimately want to know whether they’ll have a “business” to run should you leave tomorrow. That is, if a buyer perceives that the business’ success has been largely due to your skills and knowledge and your relationships with your clients and suppliers, then chances are that your business will walk out the door with you. This is of little or no value to buyers. A buyer will look at the quality of the management staff and employees as a major determinant in business sale price.
A key in preparing your business for sale is to develop your people so they can run the business after you’re gone. You should make the move of assigning your successor at least 6 months in advance of your scheduled departure date. If you have no one that you feel has the ability to run the business, then you need to hire someone that can. If you have a strong management team in place and you’re anticipating an exit, 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 and this will reward you with more potential buyers and attract a higher selling price for your business.
Guaranteed or recurring income streams are always more attractive to potential buyers than new sales or sales forecasts. If your business for sale lends itself to the possibility of contracted income streams such as licensing fees, retainers, or other contractual arrangements, you should make a concerted effort to lock-in clients before putting your business for sale. The result is increased leverage during the negotiation phase because instead of dealing with possible income figures, you’re dealing with hard numbers. It’s all about risk. The higher the risk (future possible sales) the lower the return. The lower the risk (guaranteed or contracted revenue stream) the higher the return.
BARRIERS TO ENTRY
Owning hard to get permits, zoning, licenses, or regulatory approvals can be worth a great deal to the right buyer. Your business opportunity may be able to secure approvals on the local level that a national player may have difficulty obtaining. If your product or service applies and you can break through the barriers, you become a more attractive business to buy. One strategy for penetrating these accounts is to ask the buyer to identify the best salesman that calls on him and hire that salesman to sell your product to that account.
For a selling company that has a large sales pipeline, the buyer is not anxious to pay for that pipeline at closing and the seller wants to delay his business’ sale until the next big deal. An intelligently structured sales contract with a contingent payment based on closing accounts in the pipeline is a great solution.
A smaller business 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. If you’re planning to sell your business, review your product portfolio. Are there obvious gaps that could be filled quickly? How about buying a small business with a few complementary products? What about buying a product line from a company? Have your customers been asking you to develop a new product? Spread out your product risk as a value enhancing strategy.
INDUSTRY EXPERTISE AND EXPOSURE
This activity is often overlooked because it is difficult to measure its direct returns. We find that it is a value driver when it’s time to sell your business. To the extent possible, encourage your staff to publish articles in industry magazines and newsletters. Get exposure as a presenter at industry events. Encourage local and industry reporters to use you as the voice of authority with industry issues. Your business is viewed in a more positive light, you may get more business referrals, and a buyer from your industry will remember you favourably and is more likely to consider you as a business to buy.
WRITTEN GROWTH PLAN
For any business in any stage, this is a valuable living document to guide you strategically. A growth plan helps create a process that will allow you to break big strategic plans into executable tactical activities. What additional markets could we pursue? What additional products could we deliver to our same customers? What segments of my current market offer the most growth potential? Where are the best margins in our customer set and product set? Can we expand in those areas? Can we re-purpose our products for different markets? Are we getting the best return on our intellectual property? Can we license our technology? Do strategic alliances or cross marketing agreements make sense? Capturing this on paper as part of your exit plan will increase the likelihood that an acquiring company will view you more as a strategic acquisition. It demonstrates that you have identified a path for growth and it may identify opportunities that the buyer had not considered. Those opportunities can add to the purchase price of your business.
Strategic acquirers buy other businesses to grow. If they believe that a new technology can be acquired and integrated with their superior distribution channel, they may value your business opportunity on a post acquisition performance basis. The marketplace rewards effective innovation. Continue to look for ways to innovate in whatever industry you’re in. Your innovation should not be limited to product improvements. The marketplace values innovations in distribution systems, collaborative product design process, customer service and other functional areas that can provide a competitive advantage.
EFFECTIVE USE OF PROFESSIONALS
Reviewed or audited financials by a reputable CPA firm are quite valuable in the eyes of a buyer. Professional financials cast a positive light on your approach to controlling your business while at the same time reduce the buyer’s perception of risk. Bring a good outside attorney into the mix, and the risk drops even more. The thought process is that this attorney has been giving his client good advice for years on protecting the business from litigation. A strong professional team is a great asset in growing your business and in helping you obtain maximum value when you sell your business.
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