Optimizing the Market Value of Your Business
Two businesses that make the same amount of money do not necessarily have the same value.
Unless situated in a unique market condition, such as the recent technology boom, the primary indicator of value for a business is earnings or cash flow. For business-to-business services firms, which typically have relatively few assets, the impact of cash flow on total value is even more heavily pronounced.
That being said, two companies with the same cash flow may vary greatly in value for a multitude of reasons.
Obviously demand is a huge factor that will drive valuation multiples up in certain sectors and down in others. For example IT Services and Internet Service Providers were in demand in 1999-2000 and, as a result, their multiples were relatively high in relation to other service industries.
Even within an industry, companies with similar cash flows can fluctuate greatly in value. What are the factors that determine these fluctuations and what can business ownership do to enhance the value of their business prior to a sale? The answer to these questions will enable business ownership to realize optimal value in the sale of their business.
Run It Like a Business
The less reliant you are on any one customer or client or employee and the more transferable your revenues are, the more attractive you are likely to be to an acquiring party.
As an extreme example, if you have one client that comprises all your revenue and that client came to do business with you because you’re family and you underbid the market by x% and it’s a handshake deal… an acquiring party is going to find the situation frightening and devalue the handsome amount of cash flow you have been generating.
On the other hand if the revenues are widely dispersed among customers who have contractual agreements to continue business with your firm over time (maybe on a subscription basis), at market rates, and the customers perceived relationship is with your company rather than you… an acquiring party will feel they have a good chance of retaining the revenue base and will perceive greater value.
Present It like a Business
In order for an acquisition prospect to determine their level of interest and to make an assessment of value, they will review whatever information is provided to them pertaining to the business. The benefits of complete, accurate and well documented information will enhance the value of your business in numerous ways:
- Reduced risk usually justifies a greater value. If the acquiring party knows in great detail what they are getting there should be less perceived risk involved in the acquisition.
- You increase the likelihood of finding the right match – a buyer who truly wants the business you are offering for sale. Higher demand usually equals higher value.
- The simple fact that the business is well organized will generally enhance perceived value.
- “Time is of the essence.” Even after the parties reach initial agreement, transactions run the risk of not being successfully completed. The more arduous, time consuming and complicated the Due Diligence period the less chance the deal has of making it. If your information is well prepared the Due Diligence process will go more smoothly.
- You virtually eliminate the element of expensive post-closing litigation due to confusion about the nature of what is being conveyed because you have accurately portrayed the business.
It pays to be well prepared. And even if you don’t sell, you’re likely to be more efficient and profitable by virtue of being organized and informed.