Positioning your company for prospective buyers is the most critical element in maximizing your company’s value. Without the knowledge of what the buyers want you can’t make the appropriate strategic decisions and you may leave a lot of money on the table.
Several years ago I worked with a company that provided information technology to the health care market. In what the owner thought was a logical growth pattern, the company expanded geographically into New York and New Jersey. He opened several sales offices in the area and hired salespeople to staff them. The cumulative cost of opening offices, hiring & training salespeople, travel, etc, was nearly a Million dollars. The company also had to pay trainers a premium (in addition to a per diem) as they didn’t like to train in NY & NJ. Also, he found that the market there wasn’t willing to pay their standard rates, so the system prices had to be decreased.
Ownership was also being urged by some of their “early adopter” clients to develop an electronic medical record (EMR). The company proceeded to do this at a cost of approximately $750K and installed the system in three of their clients’ facilities at an extremely reduced price. The extra support and maintenance required produced an additional set of costs not reflected in the above.
The ultimate buyer already had sales offices in NY & NJ. The buyer was interested in penetrating New England and was having a hard time doing it. Also, they had their own EMR. They were not interested in my client’s technology; they were interested in his customer base, especially in New England.
So how does this affect value? In most cases, a company’s value is a multiple of cash flow or EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization). If my client had NOT expanded into NY & NJ and NOT developed the EMR, he would have saved $1.75 million which would have been added to EBITDA. Since value is a multiple of EBITDA, the company value would have increased substantially. An even better strategy would have been to take a fraction of the money that was spent penetrating NY & NJ and add a couple of more salespeople in New England, thus increasing the customer base in the buyer’s desired territory. This most likely would have increased the multiplier effect, further increasing the company’s value. So what’s the lesson learned here? Research the type of buyer that is most likely to buy your company. By knowing that, you can make the correct strategic decisions that will.
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