Value Drivers that Maximize Business Value

Alan Dinnie
Alan Dinnie
Value Drivers that Maximize Business Value

Too often, sellers liken the sale of a business to the sale of real estate. Whilst a real estate license is required for both business and real estate sale transactions, that is where the similarities stop. Selling a business is a process that takes place over time as opposed to an event that takes place at a time.  Creating the perfect deal is challenging and achieving a successful sale requires both parties to be creative in negotiating and flexible in achieving their goals. The aim is for an amicable win-win situation for both sides and to keep moving towards settlement.

Smaller businesses are priced differently from larger businesses. For businesses valued less than $1 million multiples typically are in the range of 1 - 3 times the Sellers Discretionary Earnings. Larger companies can obtain higher multiples, often in the range of 4 – 10 times EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization.) 

A key element of achieving the sale price is financing. When banks tighten their restrictions on credit, financing becomes difficult and this impacts negatively on values. Other price and valuation factors are more based on each company’s unique attributes. A company’s Risk and Cash Flow profiles are key determinants in business valuations. 

So what differentiates the “lower multiple” company from the “higher multiple” company? 

The answer is VALUE DRIVERS.

Value drivers lower the risks associated with the business and increase the likelihood of strong future cash flow. The value drivers that buyers look for can include: 

  • Depth of Management – If the owner is fearful of taking an extended vacation because of the likelihood of returning to a business that is performing poorly, then a buyer will consider that buying your business is like buying a job with heavy overtime. The key is to have properly trained and trustworthy management. A business needs to limit its reliance on the owner.
  • Well-developed and documented business systems - If a potential buyer can grasp the concepts of the business and learn how the business operates, the more likely they will decide to move forward. Buyers will look for reasons to say no. 
  • A diversified customer base – If one or only a few customers account for a large percentage of sales, there is increased risk that the business could fail, especially if the customer relationship is with the owner. Avoid the reliance on just a few customers (and in turn on only a few suppliers). 
  • Revenue growth – Steady past growth can be a predictor of future growth. Steady growth increases financing opportunities and indicates lower risk. 
  • Backlogs and regularly replenished sales funnels – Does the company have a well developed customer pipeline? How are potential customers identified? How are they “screened” and determined to be an excellent prospect? 
  • Excellent community relations – Being recognized in the community and press for being a valued community leader or contributor adds value. 
  • Favorable comparisons to industry performance standards – Buyers often evaluate acquisition candidates by comparing financial performance of targets with industry norms. 
  • Fully developed strategies for growth – Value growth starts with the company’s vision. The vision leads to the mission which is supported by the business plan. In building the business plan, strategies for growth and application of tools to measure the effectiveness of the strategies can dramatically affect a business’s value. 
  • Business Plans – Plans can get stale. Continual market changes, new competitors entering the market, new products and services becoming available and technological innovations are all reasons to revisit and revise the business plan.
  • Employee manuals with policies and procedures – Business value is based on two primary factors – cash flow and risk. Reducing the chances of employment law violations reduces risk. Also, having properly trained and motivated employees not only reduces risk but also contributes to cost reductions and improved productivity.
  • Mix of products and services – When businesses have several “niches”, value is enhanced since the company lessens the risk of obsolescence. Businesses should become “niche-aholics.” 
  • Excellent industry reputation – This goes without saying. Acquirers will research the company’s industry reputation as a key component of their due diligence investigation. A poor reputation is a deal and value killer. 
  • Competitive advantage – Owners should perform a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats.) The strengths and opportunities underscore and highlight the competitive advantages of the business. These are the selling points to be included in the “elevator speech.” Any identified weaknesses and threats should rise to the top of the “to-do” list for elimination or minimization as quickly as possible.

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