You started your company 20 years ago “in your garage”, worked many 80 hour weeks, bootstrapped your growth, view your company with
pride of an entrepreneur, and are now considering your exit. The purpose of this article is to help you evaluate your company as a strategic acquirer might. From that perspective we will ask you to focus on ten critical areas of value creation. The benefit to you is that better your performance in these areas, greater selling price of your business. The most likely result is that you will sell at high range of multiples normally associated with your industry. For example, during last 18 months similar companies have sold at an EBITDA multiple of between 4.8 and 5.7 times. Moving your company from low end to high end of that range can result in a significant swing in transaction value. If your EBITDA were $2 million, low price is $9.6 million and high price is $11.4 million. The Holy Grail in selling your company is when an acquirer throws out traditional multiples and acquires your company based on strategic post acquisition performance. Below is our list of STRATEGIC VALUE DRIVERS:1.CUSTOMER DIVERSITY – If too much of your current business is concentrated in too few customers that is perceived as a negative in acquisition market. The concern is that if owner exits and major customers leave, business could be negatively impacted. On plus side, if none of your customers accounts for more than 5% of total sales, that is viewed as a real plus. If you find yourself with a customer concentration issue and are planning an exit, start focusing on a program to diversify. A quick fix would be to make an acquisition of a competitor with customer diversity, integrate them and then take your company to market.
2.MANAGEMENT DEPTH – A common thread in privately held businesses is a concentration of responsibility with owner operator. The buck stops here may be a good slogan for a presidential candidate, but it will not help create value for a business owner. An acquirer will look at quality of management staff and employees as a major determinant in acquisition price. A key in preparing for exit is to develop your people so they could run business after you are gone. You should make move of assigning your successor a year in advance of your scheduled departure date. If you have no one that you feel has ability then go hire someone that can do job. If you have a strong management team in place and you are 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 transition. A strong management team is a valuable asset in middle market. If you have one, take steps to keep it in place and market will reward you. If you are weak in that area, acquisition market will punish you if fail to take corrective action.
3.CONTRACTUALLY RECURRING REVENUE – All revenue dollars are not created equal. Revenue dollars that are result of a contract for annual maintenance, annual licensing fees, a recurring retainer fee, technology license, etc. are much more powerful value drivers than new sales revenue, time and materials revenue, or other non-recurring revenue streams. It’s all about risk. The higher risk (future sales) lower return. The lower risk (contracted revenue stream) higher return. The most extreme case of this occurs in software industry where companies are typically sold at a multiple of recurring maintenance revenue. New license sales, historical levels of project work and projected install revenue are virtually eliminated from valuation formula. The lesson here is that if you can turn a T&M situation into an annual contract, you will be greatly rewarded when it comes time to sell your business.
4.PROPRIETARY PRODUCTS/TECHNOLOGY – This is area where valuation rules do not necessarily apply. Strategic acquirers buy other companies to grow. If they believe that a new technology can be acquired and integrated with their superior distribution channel, they may value your company on a post acquisition performance basis. The marketplace rewards effective innovation. On flip side, however, market yawns at “me too” commodity type products or services. That business is vulnerable to competition, especially after owner leaves. Continue to look for ways to innovate in what ever industry you are 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. 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 to be a buyer of Waste Facilities. All regulations and approvals required tend to limit competition. In its simplest form, a large restaurant chain buys a small family owned restaurant to acquire a grand fathered liquor license. Owning hard to get permits, zoning, licenses, or regulatory approvals can be worth a great deal to right buyer. Your company may be able to secure approvals on local level that a national player may have difficulty obtaining. Selling your product or service to government can be quite lucrative, but government market is extremely difficult to penetrate. If your product or service applies and you can break through barriers, you become a more attractive acquisition candidate. The same holds true of a local marquee account that would be desirable for a larger supplier to crack. One strategy for penetrating these accounts is to ask buyer to identify best salesman that calls on him. Go hire that salesman to sell your product to that account.
