10 Steps to Maximize Selling Price
You started your company 20 years ago in your garage, worked many 80 hour weeks, bootstrapped your growth, viewed your company with the 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 the better your performance in these areas, the greater the selling price of your business. The most likely result is that you will sell at the high range of the multiples normally associated with your industry. For example, during the last 18 months similar companies have sold at an EBITDA multiple of between 4.8 and 5.7 times. Moving your company from the low end to the high end of that range can result in a significant swing in transaction value. If your EBITDA were $2 million, the low price is $9.6 million and the high price is $11.4 million. The Holy Grail in selling your company is when an acquirer throws out the traditional multiples and acquires your company based on strategic post acquisition performance. Below is our list of STRATEGIC VALUE DRIVERS:
CUSTOMER DIVERSITY - If too much of your current business is concentrated in too few customers that is perceived as a negative in the acquisition market. The concern is that if the owner exits and the major customers leave, the business could be negatively impacted. On the 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.
MANAGEMENT DEPTH - A common thread in privately held businesses is a concentration of responsibility with the 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 the quality of the 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 the business after you are gone. You should make the move of assigning your successor a year in advance of your scheduled departure date. If you have no one that you feel has the ability, then go hire someone that can do the 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 the transition. A strong management team is a valuable asset in the middle market. If you have one, take steps to keep it in place and the market will reward you. If you are weak in that area, the acquisition market will punish you if fail to take the corrective action.
CONTRACTUALLY RECURRING REVENUE - All revenue dollars are not created equal. Revenue dollars that are the 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 the risk (future sales) the lower the return. The lower the risk (contracted revenue stream) the higher the return. The most extreme case of this occurs in the 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 the 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.
Dave Kauppi is a Merger and Acquisition Advisor with Mid Market Capital, Inc. MMC is a private investment banking and business broker firm specializing in providing corporate finance and business intermediary services to entrepreneurs and middle market corporate clients in a variety of industries. The firm counsels clients in the areas of M&A and divestiture, family business succession planning, valuations, minority interest shareholder sales, business sales and business acquisition. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA (International Business Brokers Association) and the MBBI (Midwest Business Brokers and Intermediaries). Contact Dave Kauppi at (630) 325-0123, email davekauppi@midmarkcap.com or visit our Web page www.midmarkcap.com.
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