Last year, 13 percent of business owners selling businesses valued between $5MM and $50MM sold as a result of an unsolicited offer, according to the Q4 2017 Market Pulse Report published by the International Business Brokers Association, M&A Source, and the Pepperdine Private Capital Market Project. The report also forecasts a continuation of this trend into 2018, due to recently passed corporate tax reform, meaning quite a few business owners may find themselves in a position to sell sooner than they thought possible.
Whether you’re considering a sale, merger, recapitalization or other private capital market transaction, identifying your business’s internal value drivers should be your very first step. A surface level snapshot of your business is not enough for buyers and investors. They will want to know exactly how and why your operation is successful. Understanding your company’s unique value will ensure that you arrive at the negotiating table prepared.
Even if you have not made a decision to exit or to seek a recapitalization, it doesn’t hurt to look at the following areas of your business to get an idea of your internal value drivers.
Revenue, Cash Flow and Profits
If you can demonstrate strong, sustainable, and reliable revenue, cash flow and profits, you are more likely to end up with the lucrative deal you are hoping for. However, if your company is weak in any of these areas, you may want to wait to put it on the market until things improve. Buyers almost always see financial underperformance as too risky. Even if they are willing to overlook the risk, they will be expecting a steep discount.
Buyers and investors will without a doubt require substantial evidence that you have a proven and reliable customer base. How many customers do you currently have? What is their demographic profile? How do you acquire new customers, and how are you keeping them engaged? What are you doing to earn their loyalty? Be prepared for investors to ask these questions, and possibly more, depending on your business type and industry.
This is one of the most easily overlooked internal value drivers. The long-term stability of a business rests more heavily than most realize on having a variety of places to source the materials, products and services necessary to run your business. Having options in terms of suppliers on hand makes your business appear reliable. Investors and buyers do not want to see you dependent on one single supplier with limited or no backup options. Regardless of how long and how good of a relationship you have with your current suppliers, it would be beneficial identifying several that could replace them should the need arise.
Management and Financial Recordkeeping
Management teams can make or break a deal, and competence, organization and professionalism are key factors in determining their value. Think like a buyer to identify weak links, and do not hesitate to repair or replace them.
As for financials, showing off-the-charts revenue is not a make-or-break factor. While high revenue helps, it’s more important to have detailed, accurate and honest bookkeeping. It is much easier to prove your business has value if your finances are meticulously documented. Messy books can be seen as a red flag, regardless of what they show.
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About the Author
Charles Botchway serves as Chief Executive Officer and is Founder of Madison Street Capital, an international investment banking firm committed to the highest standards of integrity and service in providing corporate financial advisory services, merger and acquisition expertise, financial opinions, and valuation services to publicly and privately held businesses. A 20-year veteran of the investment banking industry, Charles completed his undergraduate studies in accounting at George Washington University. In 2016 he received his Master of Arts in Leading Innovation and Change from York St. John University in York, England. Charles holds a Series 79 investment banking license, a Series 24 general securities principal license, and is also a licensed operations professional. Charles has lived and worked in North America, Europe, Asia and Africa.