You’d like to sell your company in 3 years. You’ve heard that fewer than 25% of companies that go to market actually sell and that makes you nervous. Your retirement money is locked up in the company and if you can’t get it out you can’t retire. That’s one problem – another problem is that even if you could sell the company at its current value it wouldn’t yield sufficient funds for a decent retirement.
You need to increase the value of your company and position it for sale. But what’s the best way to do that within that 3 year period? Some would say to increase your top line revenue by investing heavily in marketing and sales and grow the company as fast as possible. This is a good strategy if your company survives. The business landscape is scattered with the skeletons of companies that grew too fast without the proper infrastructure to support rapid growth. That’s like placing a beautiful playroom on top of a sinkhole! Also, it might not meet your time frame.
Buyers want to Minimize their Risk
Who defines value in a company? That’s right – the buyers. Not the accountants, not the lawyers, not the consultants – the buyers. And what are the buyers looking for in an acquisition? Well, that depends on the buyer type (Strategic, financial, Lifestyle) but a major common thread is a company devoid of a great deal of risk. That’s why risk is a major component of most valuation methodologies used in the lower middle market. In a simple valuation algorithm value is directly proportional to cash flow and indirectly proportional to risk, so as you decrease risk you increase value
OK, risk is a major factor in determining business value. And we would like to minimize it in the eyes of prospective buyers. Bur how do you minimize risk? Companies are comprised of functional areas that define the business. Buyers refer to these functional areas as “value drivers”. Some core value drivers are customer base, management depth, product/services, scalability, intellectual property to name a few. The value drivers define a company whether it be poor, fair, good or great and improving these value drivers decreases risk and increases value. And if you improve your value drivers it makes sense that you’ll increase your earnings thus enhancing value even more!
Risk Reduction is a Major Factor in Value Enhancement
Valuation experts contend that there are 3 primary ways to increase value – increase revenues (increase business size), increase margins, and reduce risk. If you reduce risk (improve your value drivers) it is very probable that you will increase your margins, so you’ll improve 2 of the primary factors involved in increasing business value.
You can also increase your revenues during your 3 year window by investing more in marketing and sales. Just do it gradually and make sure that you have adequate infrastructure to support the growth. If you reduce risk (improve value drivers) you will enhance your company infrastructure, so it makes sense to start risk reduction before you ramp up marketing and sales.
Your first task is to determine what buyer types may be interested in your company. That will define what value drivers are most sensitive to your business value enhancement. You will want to prioritize these value drivers and work on the most sensitive first. You will want to plan to improve the other important value drivers over your 3 year window. In this way you’ll be developing a complete road-map for your value enhancement project. If you’re totally committed to this project, it is very possible for you to double your company’s value in that 3 year period.
Additional Benefits of Risk Reduction
Is this undertaking just for the purpose of selling the company? Of course not. You’ve increased the company’s value and you’re making more money. You can take more salary, bonuses, and perks. You’ll be under less stress and be able to take vacations without fielding phone call after phone call about minor problems that your staff can now handle. Your company will be “sales ready” in case some external factor that you can’t control forces you to sell the company.
Don’t go it Alone
I would not advise you to undertake this important project without professional help. It’s too important and you need a professional to help you create your road-map, develop a timeline with benchmarks, and hold you accountable. This will be a major commitment on your part. You ask, is it worth it? The chance to double your company’s value – that’s a no brainer! Retaining a professional to quarterback this project will increase your commitment and help ensure that the project runs to completion.
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