How can you ensure you're getting the best value for your business?
Maximizing your company's potential price starts with having a clear vision of where you want to take the company and then ensuring that the underlying key metrics such as revenue growth, price-to-earnings ratios, EBITDA multiples, and others reflect your vision.
But that's not where it ends. Your business is more than a series of equations, and to truly maximize its value, you'll need to keep these four principles in mind.
Focus on the Long Term
Potential buyers want to see that you have been managing your business with a long-term perspective. Obviously what's happening in your business at the moment you're going to market matters, but it's not the most important thing.
"The reality is, when you're going to bring in a new partner, or sell to a corporate strategic, buyers are looking for long-term trends," says John Neuner, a managing director at Harris Williams & Co., a leading global investment bank focused on M&A.
"A potential buyer is going to do their due diligence, and that includes looking at your organization, its structure, and investments you've made to support a larger business in the future," says Neuner.
So if a buyer comes in and sees that you haven't made long-term investments in the business, they could see that as a risk factor. Instead, it's better to show that you're making smart investments for your company's long-term growth, whether it's investing in a systems upgrade, key personnel, or marketing initiatives. "We often work with companies well in advance of a transaction to help them think through things like ways to scale their platform or identifying growth or add-on opportunities."
All of these may affect your short-term profitability, but "if it's going to change the inflection curve of your growth going forward, buyers will understand if there's an impact on profitability," says Neuner. "If you've done the right things, you'll be rewarded for it."
Allow Time for Transitions
If you have major transitions in mind for your business, allow enough time for them to take hold before you enter the market. Depending on the initiative, a few months to several years is a good amount of time to support any strategies you put into place, giving them time to play out, and allowing you to create the data and information you'll need to present your company in its best light.
Start with goal setting and long-term growth planning for your business, with the help of an outside advisor for extra perspective. Give special attention to your company's infrastructure--its breadth, depth, and redundancy--in order to scale up your business. If you need to think about making personnel changes, now's the time to start planning.
"Maybe you need to bring in a new CFO; maybe you want to retire and you need a CEO; or maybe you want to add new sales people," says Neuner. The more lead time, the better. "You just don't want to create elements of risk at the time of a transaction," he adds.
The next owner of your business is going to have many questions about its health, history, and growth prospects. Gathering the information needed to answer those questions can be an enormous, time-consuming challenge. So, even if you're not planning to sell your company in the next decade, be sure to track and log relevant data and key metrics.
"It's much easier to create the data along the way than it is to recreate it," says Neuner. When you have data that proves the success of your specific initiatives and changes, you build trust with your potential buyer. And with that, the odds of a higher valuation increase.
Also plan on tackling items that can be seen as risk factors by a potential buyer: legal liabilities, contractual obligations, environmental issues, and so on. There's an art to presenting that kind of information to a potential buyer, and one part of it is showing how you've handled tough situations.
"It's all in the framing and being transparent--there are bumps in every business, you just need to address them," says Neuner.
Think Beyond Value
By focusing on long-term performance, allowing time for transitions to take hold, and making transparency a priority, you can take great strides toward optimizing the value of your business. But the most successful dealmakers go even further, emphasizing the importance of finding the right partner.
"Value gets a lot of airtime and exposure, and rightfully so," says Neuner. "But you want to make sure that you and your buyer see eye-to-eye on where you want to take the business. Once you give up control, how can you make sure you can still do what you love? How can you find the right cultural fit? In the most successful transactions, the number and all the other factors align," he says.