Seneca, a first-century Roman philosopher once observed, "Luck is where the crossroads of opportunity and preparation meet." Some business owners believe they’ll be able to "get lucky" and sell their companies for higher than the market average. While luck never hurts, preparation is critical if you want to secure a higher price for your company.
Successful middle market business owners have dedicated their lives to building their companies. They understand their industry, are keenly aware of the competition, know how to serve customers and have developed well trained, capable management teams. Most of what they have accomplished is a result of hard work, not luck.
Surprisingly, 65 percent of these same owners do not know how much their business is worth and 85 percent do not have an exit plan. In essence they are relying on fate with a healthy dose of luck to ultimately secure a premium price for their company should they exit by choice.
Experience has taught us that managing these four variables helps to replace luck with strategic preparedness in securing a premium price for your business:
1. Your company should not be dependent on any one person.
If the future success of your business is dependent upon a few star employees or one person on the leadership team, it can impact the financial potential of the company and could degrade valuation. Ensure your company has great processes in place that could be executed by others if necessary. This makes it easier for a potential buyer or investor to envision how the company could continue to grow and expand even without the current owners or key employees.
2. Your company should be recognized as a great place to work.
Investors are attracted to companies that are great places to work. The employees are excited and happy, and turnover is low. Their compensation packages are fair and tied to performance. The company should strive for a reputation of honesty, fairness, and ability to deliver. In great companies, the employees feel lucky to work there and the owners will benefit when it is time to find investors or sell the business.
3. You company should have at least three growth markets identified at all times.
Companies, that sell for higher prices or secure the capital they need to expand, can demonstrate they will continue to grow. Investors are looking for an opportunity to make money. One proven way to make money is to invest in companies that are growing and will continue to grow in the future. To ensure future growth, owners need to adapt to changing technology, identify new markets, and continually train the workforce. Attractive companies know where they are going and have a definite plan to get there.
Companies who are attractive to potential investors or buyers seek out good advisors across all fronts. They seek the advice of experienced financial advisors, lawyers, HR consultants, and investment bankers. They’re among the 15% who have an exit plan in place and probably have had the plan in place for a long time. Their financial records are in order. They do not have any pending legal issues. They have a solid understanding of what their company is worth and they have clear personal and financial goals.
4. Your company should have at least one proprietary product or procedure.
Smart business owners develop new methods to accomplish everyday jobs in a more efficient manner. Really smart owners patent those methods or technology so they own it and it cannot be duplicated by a competitor. This concept is proven almost daily when technology companies that have not even made money, sell for millions and sometimes billions. Owning proprietary technology or patents is a great way to boost the value of your company and attract investors.
If an owner has built a strong, successful company with a great future, the likelihood that they will "get lucky" and sell for a much higher price is much more likely. They’ve simply followed the advice of the Roman philosopher, Seneca. They were prepared when the right opportunity became available.