Maximizing Your Business Value Before a Sale

The process of selling a business has become more complex today. Buyers are more cautious and much more rigorous in their due diligence efforts due to the Great Recession. A big reason why a deal fails is that owners do not plan early enough to sell their business. GEM Strategy Management’s experience proves that CEOs and owners should maximize the business value before putting it up for a sale.

Many first time sellers fail to realize that it takes time and careful planning to optimize the business value in order to maximize the sale price. This thus leads to a lower purchase price from a buyer, or worse, no sale at all.

The business landscape changes every three to five years, and your company’s exit plan needs to keep up. Regardless of personal goals, there are some key issues every business owner must address to become transaction ready.

The key to increasing business value is to understand how a potential buyer views your business. That is a two-part job.

  • Obtain an independent, professional valuation from an accredited valuation firm.
  • Engage an objective business adviser to conduct a business audit and assessment to reveal the strengths and weaknesses of the business.

The advisor can help you pinpoint the value drivers. This will ultimately increase your business’s value and sale price from 10% to 35% or more. If the assessment reveals that some of your business drivers are weak, prioritize them and begin correcting or improving them immediately. Once you understand the current value of the business and the value drivers, you can identify tactics to increase its value.

Key business value drivers may include:

  • Sales growth trends
  • Balanced and growing customer mix
  • Strength of sales backlog
  • Strength of the market niche
  • Strong products and services brand
  • Highly skilled, efficient and loyal workforce
  • Solid vendor relationships
  • Product differentiation
  • Product innovation
  • Strong management team that can transition to the new owner, up-to-date technology and modern work-flow systems and processes
  • Robust management information systems, continuous growth in profitability, barriers to competitive entry
  • Strong company culture and loyal customer base. Company culture and existing customer relationships are two critical areas that concern most buyers. If a business is sold, it is important to ensure that employees will embrace the culture of the buyer. Both these buyer concerns can be mitigated if the seller stays on as an employee or consultant for a reasonable period of time.

We suggest business owners to take at least two years to increase and improve the value drivers of a business. During this time, you will be able to correct minor cosmetic issues to help build incremental value.

After two or three years of focusing on value optimization, your business worth should increase in the eyes of potential buyers. Understanding your company’s value and building upon it leads to a larger sale price and maximizes the wealth transfer to the business owner. If the business value process has been carefully carried out, the added value will stand up under the most rigorous buyer due diligence.

Continued owner involvement and the development of a strong management team have become even more important to buyers in today’s M&A environment. As earn-out requirements are commonly integrated into a sale price, performance stipulations tied to profits and revenue are frequently included in the sale contract to obtain the full purchase price.

If you are considering selling your company, act now. You must allow sufficient time to prepare for a transaction to correct any issues and build incremental value. While the market is strong now, strong markets do not last forever. Time is of the essence.

Remember, poor exit planning can erode the value of a lifetime of success.

This article written by Gary Miller GEM Strategy Management, Inc. | November 1, 2017 and provided courtesy of Axial at www.axial.net

 

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Selling Your Business? Here’s What Buyers Look for

By Paris Aden | November 13, 2017

Takeaway: Here are the key areas buyers look at when they are assessing whether or not to acquire your business.

When business owners consider a sale of their company, a common first question is: “How much is my company worth?” The answer is guided by the elements that buyers look for when they assess the value of a business. So, from a buyer’s perspective, what makes a company an attractive acquisition target?

A recent study by Intralinks and the M&A Research Centre at Cass Business School in London provides some answers to this question. Additionally, Paul Eldridge, a partner at Fulcrum Capital Partners, shared insights with us, gleaned from his extensive experience as a private equity investor.

1. Growth

Growth is a leading differentiator for potential buyers. According to the Intralinks study, the three-year compound annual sales growth rate for target companies was, on average, 2.4% higher than that of non-targets.

What if a company has a record of low historic growth, perhaps due to capital constraints, but has exciting future growth opportunities? According to Mr. Eldridge, this type of company may still be an attractive target to a financial buyer if there are “obvious paths to growth and clear execution plans to achieve these growth targets.” This may explain, at least in part, why companies in the bottom decile for growth are actually most likely to be approached as a potential target (see chart below). These companies may also be attractive to strategic (corporate) buyers, if there are cost-reduction and/or revenue synergies to be unlocked.

2. Profitability

Profitability is not to be confused with growth. While some private equity professionals are willing to overlook profitability for solid growth opportunities, historical results suggest that higher profitability is favored by buyers. The Intralinks report found that the profitability of target companies was, on average, 1.2% higher than that of non-targets in the private market.

From a buyer’s perspective, higher profitability reduces the risk of post-transaction operating failure, as well as providing a faster payback period. However, a company struggling with operating losses may be perceived by some buyers as an opportunity waiting to be realized. As Mr. Eldridge told us: “Many private equity investors look for opportunities to add new capabilities to the management team as a path to improving [operating] performance.”

3. Leverage

Private companies with higher leverage are preferred by potential buyers. The chart below illustrates that the average debt/EBITDA ratio for private targets is three times more than non-targets. What is the rationale for this finding? One private equity investor explains it as follows:

“High leverage ratios come at very reasonable valuations…[so] the situation becomes very attractive for us to invest in, provided the business has potential to improve.”

4. Size

Size is a factor for potential buyers, and has becoming increasingly important over the years. Before 2008, the average size difference between target and non-target companies was merely 14%, with size measured in terms of sales. In the years following, the gap widened significantly, and by 2014, target companies were approximately 2.5 times larger than non-targets.

More recently, however, as valuations soar, buyers are setting their sights on smaller companies, which are typically valued at a discount to their larger peers. In fact, predicated on the latest fundraising numbers, a recent Pitchbook article predicts that the next buyout cycle will be “geared towards the middle market, particularly the lower end.”

5. Liquidity

Target companies also tend to have lower liquidity, as measured by the ratio of current assets to current liabilities. Intralinks data indicate that companies in the bottom two deciles in term of liquidity are, on average, 35% more likely to be identified as acquisition targets.

It may go without saying, but we would not recommend pursuing lower liquidity as a strategy to become an attractive target. Lower levels of liquidity are often associated with financial distress, which makes a company more vulnerable as an acquisition target. Under these circumstances, a target with low liquidity is very likely to have a low valuation relative to its peers.

Conclusion

While certain attributes increase the attractiveness of a target, there is no hard and fast rule. Certainly, some buyers look for high sales growth and profitability, as the Intralinks study suggests, but lower performing companies may be attractive as well, albeit at lower valuations. Financial buyers might target these companies if they see an opportunity to create value, improving performance by providing capital or professionalizing management. And strategic (corporate) buyers are likely to target lower performing companies that offer the potential for revenue and cost synergies.

If you are considering a sale of your business, it’s important to understand who your best buyers are. Consider what your company offers a prospective buyer by taking a clear-eyed look at the strengths and weaknesses of your business, and thinking about how different buyers might regard those attributes in their distinct paths to creating value.

 

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How to Estimate the Value of a Private Business

This article provided courtesy of Kevin Bader, MCM Capital Partners

“What is the value of my business?” This is a common question asked by business owners for estate planning or retirement purposes since, in many cases, most of their wealth is tied up in their business. The definitive means of establishing a company’s true value requires soliciting bids from qualified buyers. However, short of putting your company up for sale, this article describes a relatively simple means of approximating the value of a private company.

The total fair market value of a business is called its Enterprise Value, or the sum of a company’s market value inclusive of its debts, minus its cash and cash equivalents. There are various methods to calculate Enterprise Value including, but not limited to, discounted cash flow analysis, using public company comparables or applying recent industry transactions. A valuation approach commonly used by private equity and investment banking professionals, and the one we will discuss herein, applies a multiple (“the Multiple” or “Multiple”) to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”).

The majority of businesses generating between $10 million and $75 million of annual revenue historically transact for multiples between 5.0x and 8.0x EBITDA. The appropriate Multiple to use in calculating Enterprise Value is dependent on numerous critical factors discussed below.

What Multiple Should I Use?

The appropriate EBITDA Multiple in calculating Enterprise Value is influenced by numerous factors including, but not limited to, level of customer concentration, company and industry growth rates, profit margins, size of the company and strength of the management team. Such factors need to be assessed individually and considered in totality when determining the appropriate EBITDA Multiple. For example, customer concentration (e.g., single customer > 20%) often dictates a lower  EBITDA Multiple. Conversely, companies with little customer concentration participating in attractive end markets such as medical or aerospace, or utilizing unique materials or processes, typically command higher than average Multiples.

What EBITDA Should I Use?

It is common practice to utilize the most recent trailing twelve months EBITDA in calculating Enterprise Value, albeit in certain circumstances it may be more appropriate to  use an average EBITDA of the last 2 or 3 years in the calculation. For example, if the company has experienced a temporary spike or dip in EBITDA due to, e.g., a customer or market issue, an average EBITDA may be more appropriate.

Further, it is common practice to normalize EBITDA, resulting in a term called “Adjusted EBITDA.” Adjustments to EBITDA include non-recurring revenues and expenses (e.g., litigation expenses, changes in accounting methods, certain professional fees, etc.), non-business/personal-related expenses (e.g., car leases not used in business, payments to family members outside the business, country club memberships etc.), facility rent and/or owner compensation above or below fair market value. EBITDA adjustments likely not accepted by the buyer are ineffective marketing campaigns, research and development expenses related to failed product launches or bonuses paid annually but considered “discretionary.”

Understanding the Difference Between Enterprise Value and Shareholders Value

The product of using a multiple of EBITDA results in an estimate of Enterprise Value, not to be confused with Shareholders Value. Since businesses typically transact on a cash-free, debt-free basis, Shareholders Value is calculated as the Enterprise Value (i.e., Multiple x Adjusted EBITDA) plus cash and cash equivalents minus third party debt (e.g. bank debt and capital leases).

The following example merely illustrates how to calculate Enterprise Value using the Multiple of EBITDA method from the foregoing concepts:

Summary 

This article has provided the framework for calculating a company’s estimated Enterprise Value whose true value can only be established by soliciting bids from qualified buyers. However, it is possible to provide a reasonably close approximation of Enterprise Value with the help of a qualified professional who can assist in identifying and quantifying critical valuation factors.

The next article explores our view on critical factors affecting Enterprise Value including:

  • EBITDA Size
  • Revenue Trends
  • Profit Margins
  • Customer Concentration
  • Industry Growth Rate
  • Strength & Depth of the Management Team
  • Competitive Advantages

 

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5 Lessons From Home Depot’s Acquisition of Blinds.com

Jay Steinfeld built Blinds.com into a $100 million e-tailer before selling out to Home Depot. Here are five things that made it a spectacular exit.

Win The Make vs. Buy Battle

Companies like Home Depot have a “make or buy” decision when they see a competitor winning market share. They can opt to buy the competitor or choose to simply re-create what they have built.

An acquirer will likely opt to buy your company if you are so dominant in your niche that recreating what you have built would take too long and cost more than acquiring it from you.

Blinds.com got acquired, in part, because they were a big fish in a small pond. At more than $100 million in revenue, they were the largest online retailer of blinds in America by a long shot. Even though Home Depot has close to $90 billion in sales, Blinds.com were outperforming them in their tiny niche and that made Blinds.com irresistible to Home Depot.

Run It Like It’s Public

At the time of the Home Depot acquisition, Blinds.com had 175 employees, yet Steinfeld had been running the company as if it were public for years. He had put together a top-drawer management team and taken the unusual step of assembling an outside board of directors. He had quarterly board meetings with formal presentation decks, and Steinfeld hired a Big Four firm to complete a full audit of his financials each year.

Steinfeld credits this rigorous approach to running a relatively small company as a major reason Home Depot was interested in Blinds.com and able to close on the acquisition so quickly.

Keep Most Of The Equity

Steinfeld invested $3,000 of his own money into a basic online presence for his blinds store back in 1993 and grew Blinds.com to more than $100 million in sales without diluting himself by taking three or four rounds of institutional investment, as would be typical of an internet start-up. Steinfeld took a small investment from friends and family and used bank debt to help him buy distressed companies for pennies on the dollar. It wasn’t until 2012—almost 20 years after starting the business—that he accepted his first round of “professional” money from a private equity firm who wanted to invest more, but Steinfeld refused, only taking enough to buy out a few of his original investors and pay off some debt.

Keep Investors Aligned

One of the reasons Steinfeld accepted an investment from a private equity group was that he had become misaligned with two of his original investors. The investors saw the success of Blinds.com and wanted Steinfeld to start declaring regular dividends. Steinfeld, by contrast, was focused on building a growth company and needed the cash to fuel his 25% per year growth. After a while, his investor’s expectations got so far out of whack that Steinfeld opted to buy them out.

Share The Love

One of Steinfeld’s best memories is the day he told his employees Home Depot had acquired Blinds.com. Steinfeld had made sure every one of his 175 people had Blinds.com stock options and so stood to gain financially from the sale. Steinfeld went further and gave each employee $2,000 of his own money to start an investment account as a personal thank you for all they had done.

 

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Is a Private Equity Sale Right for Your Business?

By Jane Johnson Business Transition Academy | September 12, 2017

Private equity firm (PEF) recapitalization has become one of the top reasons that businesses valued at $2-50 million are going to market, according to the Market Pulse Report, which is published quarterly by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Markets Project.

Private equity is definitely an attractive possibility for some owners who are looking to transition out of their businesses. With the PEF injection of capital into the business, the owner cashes in some of his or her equity (usually a majority stake) but also maintains some ownership. The owner usually stays on to help grow the business under the supervision of the PEF and bolstered by its financial and business resources. However, as with any sale transaction, there are a lot of complexities that owners need to understand before exploring this business transition option.

Understanding Recapitalization

Financial buyers such as private equity firms are looking to invest in businesses and get a handsome return. Their goal is to scale the company, increase its value over the next three to five years, and then sell it in the future at a much higher value. If things go well, this two-step process can result in a second payday for the owner when the business is sold again.

Financial buyers typically invest in companies that have a capable management team, a solid team of employees, and high growth potential. A private equity sale almost always involves the owner remaining involved, generally in an operational capacity. This type of sale can be beneficial for owners because it reduces their risk and allows them to sell a portion of the business, but still retain some equity that may grow in value.

Who Are Good Candidates for PEF Investment?

This type of transition isn’t for everyone, and there are a few things you need to consider:

  • It may be difficult to find a PEF with the right resources and expertise to help you grow the business.
  • You have to be ready to work for someone else and be accountable to them for at least one to three years.
  • You and your team have to be fully committed to operating and growing the business for the next several years.

A 2014 article “Equity-worthiness and equity-willingness: Key factors in private equity deals,” published by the Kelley School of Business, Indiana University, reports that “less than 3% of pre-negotiations between privately held companies and PEFs lead to a closed deal. This means that the process is exacting; roughly 97% of negotiations initiated by PEFs collapse.” It is important for business owners to understand what makes a company an attractive target for private equity firms and what goes into making a deal successful.

What Private Equity Firms are Looking For

PEFs are looking for good investment opportunities that are “equity-worthy” and will produce solid returns. They expect the value of their stake in a company to increase significantly as a result of their efforts to increase capacity and revenue, provide complementary resources and capabilities, and improve corporate governance and processes.

Increasing Your Business’s Equity-Worthiness

PEF investors are looking for future return on investment and growth potential, so remember to emphasize this rather than dwelling on past performance. Growth opportunities, reputation, and industry leadership are some of the many qualities investors value. Other ways to increase your business’s equity-worthiness include:

  • Documenting improvements that can be made with new capital
  • Providing clean financials
  • Reducing the risks in your business
  • Understanding your competition
  • Setting specific goals to improve your business and drive to achieve them

As you can see, the process will likely be time-consuming, intensive, and not of interest to an owner who wants to walk away from his or her business.

Determining if a PEF Sale Is Right for You

There’s no guarantee that there will be a second pay day for the owner as the result of a PEF sale. If it’s something you’re considering, you will need to do your own due diligence and look for PEFs that have a track record of success with similar companies. And, because you’ll most likely be heavily involved in day-to-day operations for some time, you want to make sure that your vision and goals for the company are closely aligned with those of the PEF. Start the process well in advance to achieve the best outcome.

Before going down this path, we suggest that owners:

  • Develop a Business Ownership Transition Planthat allows you to determine which transition options are right for you
  • Understand prospective PEF buyers and what they are looking for
  • Work with business advisors who can assist you with improving your business and presenting it to PEF investors
  • Determine what is attractive about your business in light of PEF buyers’ unique considerations, and position your company in the most beneficial way

If you are thinking about selling and realize you need outside capital and expertise to significantly grow the value of your business, you may want to consider a private equity investment. However, we encourage owners to seek independent and objective advice before making any decisions. There may be other ownership transition strategies that will enable you to achieve your goals. You want to be sure you consider all of them before taking this big step.

 

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5 Reasons Why Now Might Be The Right Time To Sell

Are you trying to time the sale of your business so that you exit when both your business and the economy are peaking?

While your objective to build your company’s value is admirable, here are five reasons why you may want to sell sooner than you might think:

1. You May Be Choking Your Business

When you start your business, you have nothing to lose, so you risk it all on your idea. But as you grow, you naturally become more conservative, because your business actually becomes worth something. For many of us, our company is our largest asset, so the idea of losing it on a new growth idea becomes less attractive. We become more conservative and hinder our company’s growth.

2. Money Is Cheap

We’re coming out of a period of ultra-low interest rates. Financial buyers will likely borrow money to buy your business so—at the risk of over simplifying a lot of MBA math—the less it costs them to borrow, the more they will spend to buy your business.

3. Timing Your Sale Is A Fool’s Errand

The costs of most financial assets are correlated, which is to say that the value of your private business, real estate and a Fortune 500 company’s stock all move in roughly the same direction. They all laid an egg in 2009 and now they are all booming. The problem is, you’ll have to do something with the money you make from the sale of your company, which means you will likely buy into a new asset class at the same frothy valuation as you are exiting at.

4. Cybercrime

If you have moved your customer data into the cloud, it is only a matter of time before you become the target of cybercrime. Randy Ambrosie, the former CEO of 3Macs, a Montreal-based investment company that manages $6 billion for wealthy Canadian families decided to sell in part because he feared a cyber attack. Ambrosie and his partners realized they had been under-investing in technology for years, at a time when cybercrime was becoming more prevalent in the financial services space. Ambrosie decided to sell his firm to Raymond James because he realized the cost for staying ahead of hackers was becoming too much to bear.

5. There Is No Corporate Ladder

In most occupations, the ambitious must climb the ladder. Aspiring CEOs must methodically move up, stacking one job on the next until they are ready for the top post. They have to put in the time, play the right politics and succeed at each new assignment to be considered for the next rung.

By choosing a career as an entrepreneur, you get to skip the ladder entirely. You can start a business, sell it, take a sabbatical and start another business and nobody will miss you on the ladder. Your second (or third) business is likely to be more successful than your first, so the sooner you sell your existing business, the sooner you get to take a break and then start working on your next.

It can be tempting to want to time the sale of your business so that the economy and your company are peeking, but in reality, it may be better to sell sooner rather than later.

 

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6 (More) Tips to Create Company Value

A few months ago, I shared six tips for creating value in your business.

Here are six more best practices to keep in mind. These are useful for all owners, regardless of whether you’re looking toward a transaction in the near-term.

Check out the first six tips here, then read on for tips #7-12.

  1. Invest in HR

Company owners often underestimate the value of a having a human resources professional or (if your firm is large enough) a human resources department.

In fact, HR can create value for your company by increasing employee engagement, enhancing employee skill sets, improving employee morale, increasing employee commitment, and improving collaboration and teamwork results.

That, in turn, increases operating efficiencies, enhances customer value, lowers costs (especially employee replacement cost), creates greater creativity, and allows owners and managers to spend less time on employee problems.

Depending on your circumstances, an HR professional or unit can help you:

  • Build employee brand equity
  • Generate a culture that values teamwork
  • Implement a mentoring program
  • Engage Millennials more effectively
  • Align employees to job positions via competency and personality trait matching
  • Use social media to publicize employee achievements
  • Match employee compensation/rewards to organizational goals
  • Promote workforce diversity
  • Advance employee wellness programs.

Most importantly, HR can help you recruit and retain top talent, which means faster growth. And companies that attract top talent become harder to compete against, which also creates company value.

  1. Avoid Commodity Hell

Let me introduce you to an important marketing concept: Commodity Hell. That’s where you end up when your segment of the business is so crowded with competitors that every product and service offering is virtually the same.

Commodity Hell always means price wars, because all other things being equal, price becomes the only differentiator between competitors. Price wars mean lower profits, where lower profits destroy the value of your company.

The classic case of Commodity Hell was the PC industry in the 1990s. Originally there were dozens of PC manufacturers, all of which were operating profitably. When Microsoft Windows became a standard, every manufacturer’s PC offering looked the same. Margins plummeted into the low single digits, and only a few huge vendors (like Dell) survived the carnage.

The only PC manufacturer that escaped, if not unscathed then at least positioned to grow, was Apple. Rather than follow the crowd into Commodity Hell, Apple differentiated its computers and created new products (iPod, iPhone, etc.) and services (iTunes). As a result, they became one of the most valuable companies in the world.

In the same way, companies can avoid Commodity Hell (and maintain and grow their financial value) by satisfying more of their customers/clients desires and needs than competitors do. The challenge (think Apple again) is knowing the difference between what customers say they want and what they really want, and even knowing what customers want before they know they want it.

For example, how many healthcare customers/clients knew they wanted remote monitoring 30 years ago? Or even ten years ago?

Here are some strategies that have worked in the past for our healthcare clients:

  • Re-design products for simplicity, user-friendliness, cool-looking, performance, serviceability, and reliability
  • Offer customers easy, anytime, anywhere access to relevant product/service related information
  • Provide clients with online interactions through web portals, mobile devices, and social networks
  • Allow customers access to the price of services (transparency)
  • Provide customers with a telemedicine option for virtual client visits
  • Build company/products/services branding
  • Add complementary products and services that enhance client visits
  • Design a client-centered facility/office that reduces customer stress and enhances the client’s experience

In our experience, the more a company differentiates its products and services from competitors, the more economic value it creates for the company and the better it can serve its customers.

  1. Create a Better Value Chain

Companies rely on third-party providers of materials, supplies, billing services, contract labor, etc. These providers are part of a “value chain.”

Too often, companies spend less time thinking about their value chain than other parts of their business. This is unfortunate because companies operate the most effectively and create the most value by creating a strong working relationship with value chain partners.

In my experience, the most successful companies focus on what they do best and rely on third party providers to meet other company/customer needs. To do this effectively, however, companies must stop thinking of third-party providers as purely a service providers but rather value-added partners in a value chain system. Taking a “value chain” perspective of your third-party providers requires you demand they:

  • Provide just-in-time delivery of products and services.
  • Be more timely in responding to changes or customization requests.
  • Anticipate your upcoming needs and the needs of end-user customers/clients.
  • Recommend product or service enhancements that best meet the desires of end-user customers/clients.
  • Be transparent about prices, quality, delivery schedules, etc.
  • Meet regularly with you to best understand your changing needs.
  • Provide you with products or services that create competitive advantages.
  • Understand third-party payor reimbursement requirements and integrate those requirements in the delivery of products and services (for healthcare businesses)

When done correctly, the activities of the value chain create customer value, company value, and third-party provider value.

A strong value chain should be part of your value creation business strategy. Any third-party providers who are unable or unwilling to be part of your value chain should be replaced.

  1. Differentiate Yourself from Your Competition

Companies can increase their value by cultivating unique skills, processes, and procedures, as well as by delivering unique customer/client experiences.

To do this, company owners and senior managers should seek innovative ways to address the question: “Why would customers/clients come to our company/practice rather than our competitors?”

These are some differentiators that have worked well for many companies:

  • Intentionally designing a system of client interaction that addresses customers’/clients’ physical, intellectual, emotional, and spiritual needs.
  • Create a simplified client onboarding process that makes it easier to acquire new clients and starts the relationship on a positive note.
  • Provide value-added services, such as travel and housing assistance for long-distance customers/clients.
  • Implement an automated re-ordering and re-scheduling system that makes it easier for clients to have their needs met.
  • Provide access to high-speed, free, wireless internet throughout your facility.
  • Implement a system to periodically checks with clients to verify proper use of products.
  • Provide an online library for customers/clients and their families with educational content about products and services.

While this listing is far from exhaustive, it provides a framework for thinking about differentiation.

Incidentally and not coincidentally, the best differentiators involve a positive, effortless, and enhanced customer experience, which results in increased customer satisfaction, loyalty, advocacy, and customer lifetime value.

  1. Prioritize Good Documentation

Potential buyers won’t accept a company’s stated value unless there’s solid documentation that proves it. Conversely, poor documentation can destroy value.

Case in point: How would you feel if someone were trying to sell you a piece of equipment, but they had no original invoice, no proof of payment, no owner’s manual, and no product statement of warranty? I expect you’d be very suspicious of the true value of the equipment. Moreover, you’d be concerned about the risks associated with purchasing the unit without proper documentation.

Poor documentation decreases value because it increases risk, so buyers will expect to pay less for companies with poor documentation.

Here are some examples of good documentation from the buyer’s perspective:

  • Up-to-date corporate/LLC documents, such as articles of incorporation, bylaws, permits, and registrations, members’ records, minutes of directors’ meetings, etc.
  • Updated policies and procedures manuals
  • Accurate and complete client records
  • Accurate and transparent financial statements (i.e., historical balance sheets, income statements, and related general ledger account records)
  • Accurate and complete account receivable, inventory, accounts payable, and fixed asset reports
  • Original invoices, proofs of payment, owner’s manuals, etc. for all capital assets
  • Detailed and accurate employee records, including payroll, PTO, employment applications, background checks, etc.
  • Current commercial lease/rental agreements
  • Three to five years of bank statements
  • Full documentation of currently outstanding and retired loans and leases
  • Copies of all insurance policies, including workers’ compensation, malpractice, etc.
  • Three to five years of corporate tax returns and all related correspondence with the IRS and state taxing authorities
  • Trademarks and patent documentation or certification
  • Copy of strategic or business plan
  • Copies of all past legal issues, including past legal disputes, if any

Though not exhaustive, this list provides a framework for how to approach a solid documentation record for your firm. Keep in mind that there are no shortcuts to good documentation.

Good record keeping is a reflection of sound management practices, attention to detail, and company owner pride. Good documentation is invaluable in proving the value of your company/practice.

  1. Don’t Forget the Fundamentals

Company owners create value by investing in their future. That future is best expressed not in terms of the current balance sheet but in terms of Return on Invested Capital (ROIC). Since this is a term familiar more to accountants than to business owners, a brief explanation is necessary.

ROIC is the cash flows a company returns to the owners of capital (i.e., debt holders and equity owners) as a percentage of total invested dollars.

For example, suppose you bought a company for $100,000 and you personally put up $50,000 and your brother lent you the other $50,000, with the understanding that you would pay him $3,000 a year in interest.

If your company made $20,000 after expenses the first year, your firm’s ROIC would be 20% ($20,000 on $100,000). Your ROIC would be 34% ($17,000 on $50,000) and your brother’s ROIC would be 6% ($3,000 on his $50,000).

However, if your company only made $3,000 after expenses the first year, your firm’s ROIC would be 3.0% ($3,000 on $100,000). Your brother’s ROIC would still be 6% ($3,000 on $50,000) but your ROIC would be 0% ($0 on $50,000). (Which would not be good for you, of course.)

Taking that example further, suppose in the second year, you decrease your operating expenses by $2,000, and increased your revenue by $10,000. In that case, your firm would be making $32,000, so the ROIC for your firm would be 32% ($32,000 on $100,000), your own ROIC would be 58% ($29,000 on $50,000) and your brother’s ROIC would remain at its fixed rate of 6% ($3,000 on his $50,000).

Now, let’s suppose your brother is not all that bright and you convince him to accept only $1,000 a year in interest. In effect, you’ve restructured the loan so that his ROIC is 2% ($1,000 on his $50,000). If you still made $20,000 after expenses, your firm’s ROIC remains at 20% but your ROIC goes up from 34% to 38% ($19,000 on your $50,000).

Please forgive me for what might seem like a lot of numbers, but the example is important because if and when you sell your business, the purchasers will look at the ROIC to determine whether it’s worth their investment dollars.

Therefore — and this is important — it is very much in your interest to increase your ROIC. In general, there are three ways to do this: 1) increase your revenue growth 2) decrease your operating expenses revenues, and 3) increase your operating margins. Ideally, you want to structure your business and business model so that it does all three.

Here are some classic ways to accomplish this:

Grow Revenue

  • Introduce new products/services to your existing market
  • Expand your customer base in your existing market
  • Differentiate product/service offerings to earn price premiums, such as higher quality outcomes, more innovation, branding, and customer lock-ins
  • Expand into other markets not currently being served
  • Increase client satisfaction per dollar spent thereby creating customer loyalty
  • Acquire another company

Decrease Expenses/Increase Operating Margins

  • Invest in high return ancillary products/services (examples in healthcare include an urgent care center, med spa, physical therapy, in-house pharmacy, radiology, and laboratory testing)
  • Using financial leverage as investment capital for higher return investments
  • Reduce unnecessary or excess expenses, by outsourcing non-core functions, creating a paperless office, and right-sizing staff to optimize customer experience/results
  • Take advantage of innovative methods, unique resources, scalability, and economies of scale to drive down cost per customer/client while maximizing operational efficiencies
  • Reduce administrative errors, automate repetitive activities, eliminate redundant tasks, and Improve organizational knowledge through education and training
  • Create integrated customer/client care teams that specialize on specific treatment protocols

The list above is not exhaustive but it does give you a good place to start. As the marketplace continues to experience dramatic changes, it will be the owners who focus on these fundamentals of value creation who consistently outperform those that do not — and whose practices will secure the highest price if and when they sell.

 

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3 Ways To Make Your Company More Valuable Than Your Industry Peers

Have you ever wondered what determines the value of your business?

Perhaps you’ve heard an industry rule of thumb and assumed that your company will be worth about the same as a similar size company in your industry. However, when we take a look at the data provided by The Value Builder System™, we’ve found there are eight factors that drive the value of your business, and they are all potentially more important than the industry you’re in.

Not convinced? Let’s look at Jill Nelson, who recently sold a majority interest in her $11 million telephone answering service, Ruby Receptionists, for $38.8 million.

That’s a lot of money for answering the phone on behalf of independent lawyers, contractors and plumbers across America.

To give you a sense of how high that valuation is, let’s look at some comparison data. At Value Builder, we’ve worked with more than 30,000 businesses in the last five years. Our clients start by completing their Value Builder questionnaire, which covers 35 questions that allow us to place an estimate of value on a company. The average value for companies starting with us is 3.6 times pre-tax profit and those who graduate our program with a Value Builder Score of 80+ (out of a possible 100) are getting an average of 6.3 times pre-tax profit.

When we isolate the administrative support industry that Ruby Receptionists operates in, the average multiple offered for these companies over the last five years is just 1.8 times pre-tax profit.

Nelson, by contrast, sold the majority interest in Ruby Receptionists for more than 3 times revenue.

There were three factors that made Nelson’s business much more valuable than her industry peers, and they are the same things you can focus on to drive up the value of your company:

1. Cultivate Your Point Of Differentiation

Acquirers do not buy what they could easily build themselves. If your main competitive advantage is price, an acquirer will rightly conclude they can simply set up shop as a competitor and win most of your price sensitive customers away by offering a temporary discount.

In the case of Ruby Receptionists, Nelson invested heavily in a technology that ensured that no matter when a client received a phone call, her technology would route that call to an available receptionist. Nelson’s competitors were mostly low-tech mom and pop businesses who often missed calls when there was a sudden surge of callers. Nelson’s technology could handle client surges because of the unique routing technology she had built that transferred calls efficiently across her network of receptionists.

Nelson’s acquirer, a private equity company called Updata Partners, saw the potential of applying Nelson’s call-routing technology to other businesses they owned and were considering investing in.

2. Recurring Revenue

Acquirers want to know how your business will perform after they buy it. Nothing gives them more confidence that your business will continue to thrive post sale than recurring revenue from subscriptions or service contracts.

In Nelson’s case, Ruby Receptionists billed its customers through recurring contracts—perfect for making a buyer confident that her company has staying power.

3. Customer Diversification

In addition to having customers pay on recurring contracts, the most valuable businesses have lots of little customers rather than one or two biggies. Most acquirers will balk if any one of your customers represents more than 15% of your revenue.

At the time of the acquisition, Ruby Receptionists had 6,000 customers paying an average of just a few hundred dollars per month. Nelson could lose a client or two each month without skipping a beat, which is ideal for reassuring a hesitant buyer that your company’s revenue stream is bulletproof.

Nelson built a valuable company in a relatively unexciting, low-tech industry, proving that how you run your business is more important than the industry you’re in.

 

Is now the time to consider selling your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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Why every business owner needs an exit plan

For most business owners, leaving their business is likely to be the biggest transaction of their lifetimes—and the one that will have the biggest impact on their financial and emotional future. Yet more than 80% of owners have no written plan and nearly half have done no planning at all, according to the Exit Planning Institute. Why? Too often, it’s because they don’t know where or how to start.

Addressing this issue is important, particularly on the front end, while there’s still time to plan. It can save time and money in the long run, and help insure you get the maximum value for the company you worked so hard to create. Remember: some 75% of businesses that are for sale never sell. Those aren’t great odds. Exit planning can help.

Many confuse exit planning with succession planning, but they’re not the same. Succession planning is the process of identifying successors, and providing training and experience to successfully transition leadership and/or management within a business. Exit planning—which includes the critical element of succession planning—is a much more comprehensive analysis of all the factors that impact owners, their businesses and, just as importantly, their families.

Though exit planning is complicated, its goals are simple: to maximize the value of the business at the time of exit, minimize the owner’s tax liability, and simultaneously help the owner achieve their personal, family and financial goals. The process starts by identifying the owner’s goals and objectives in the areas of business value, personal and financial resources, life after the sale or other transaction, family considerations, and many others. It also includes contingencies for the four D’s: death, divorce, disability and departure.

Anyone who has ever been involved with helping someone sell a business, value a business or finance a business has had the experience of looking at a company and realizing that it’s not ready to be sold. Perhaps there are issues with the concentration of customers, or a lack of leadership to take over, or sloppy or no financials. There are also other factors that greatly impact a company’s value and its salability.

It’s particularly important for business owners to focus on exit planning now, because the competition for quality businesses is going to get tougher.

It’s estimated that in the next 15 years, $10 trillion will transfer from one generation to another. The vast majority of that wealth is in the 12 million businesses owned by baby boomers, of which more than 70% will change hands.

So, it’s a lot like the guy who stops while a bear is chasing him to put on his tennis shoes and hears his friend say, “You can’t outrun the bear,” to which he responds, “I don’t have to; I only have to outrun you.” Those who focus on their exit strategy will be better prepared when the time is right.

A well-designed and implemented exit plan is a powerful personal planning tool as well as a business planning tool. Done correctly it enables owners to accomplish many, if not all, of the following:

  • Create strategic options from which to choose
  • Preserve family unity and accord
  • Minimize or eliminate capital gains and other taxes
  • Maximize company value in good times and bad
  • Allow for retirement
  • Control how and when they exit

The process of exit planning is a multidisciplinary one that includes the business owner, their accountant, financial planner and attorney/estate planner at a minimum. It should also include an insurance professional, a mergers and acquisition specialist, or other business intermediary who can help sell and value the business. In this process, someone must be the lead advisor or team captain to make sure that there’s an adhered-to timetable.

Successful owner-executed exit plans can be done this way, particularly when one or more of the players has a good deal of exit planning experience. It’s important that the team collectively has expertise in many areas such as business valuation, corporate finance, estate and gift tax planning, life and disability insurance planning, and overall good business skills. And it’s vitally important that the lead advisor takes the responsibility for the “client deliverable.” This prepared report is then the plan for what needs to be done, when it needs to done and who is responsible.

There are many reasons to have an exit plan. Some are financial and some are emotional, which have a great impact on the business owner’s family. But in the end, it’s all about controlling one’s destiny and not being controlled by it. It’s about knowing what your business is truly worth and what a potential buyer sees as potential issues. It’s about having the peace of mind that the process as it affects the family is collaborative and not corrosive. We all know families where false hopes or half-truths destroyed the family unit. Most importantly, it’s about controlling something that will inevitably happen.

Remember, everyone is going to exit his or her business—it’s just a matter of how and when. So, don’t be like most business owners who spend more time on their family vacation than on exit planning. Know your future and plan for it.

This article was written by Camm Morton – franchisee VR Mergers and Acquisitions in Baton Rouge, LA.

 

Is your business creating maximum value?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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One Way To Decide When To Sell

How do you know the right time to sell your company? One answer to this age-old question is that the time to sell is when someone else is willing to invest more in your business than you are.

When you start a business, nobody is willing to invest in its success more than you. You’ve already worked a 40-hour week by Wednesday and, if you’re like most founders, you’ve invested a big chunk of your liquid assets to get your business going.

You’re all in.

In the early days, you are willing to risk your business on a new strategy because the business is pretty much worthless. As the Bob Dylan lyric goes, “When you ain’t got nothing, you got nothing to lose.”

As your business grows and becomes more valuable, you may find yourself becoming more conservative, unwilling to risk the equity you have created inside your business on your next big idea. You have reached a point where someone else may be willing to risk more time and money for your business than you are.

Peach New Media 

David Will is the founder of Peach New Media, which he started back in 2000 as a reseller of web conferencing. In the early days, Will changed his business strategy frequently, trying to find an idea with legs. After a number of pivots, he landed on selling learning management software to associations.

The business grew nicely and by 2015 Peach New Media had 40 employees and then received an attractive acquisition offer from a large private equity company. Will was conflicted. He loved his business and treasured the team he had built. At the same time, the acquirer was offering him a life-changing check.

In the end, Will realized that he had become somewhat more conservative as his business had grown and the potential acquirer was willing to make a big bet on integrating Peach New Media into another one of its acquisitions. Will realized he had reached a point where his appetite for risk in his own business was lower than his potential acquirer’s. Will decided to sell.

When To Sell

The point where a buyer is willing to risk more than you are happens at a different stage for everyone. Let’s say you have a business worth $1 million today. Would you be willing to risk the entire thing on a new strategy for a shot at making it a $10 million company? Many entrepreneurs would take that bet.

Now imagine you have a company worth $10 million and your business represents the bulk of your net worth. Most would argue $10 million is life-changing money. Would you be willing to risk your entire company for a chance to make it a $100 million company? The marginal utility of an extra $90 million is minimal—we all only need so many cars—but the risk is significant. Fewer owners would bet $10 million for a chance at $100 million.

What if your business was worth $100 million? Would you risk it all for a long shot at becoming a billion-dollar company? It is hard to imagine any one person betting $100 million dollars on anything, but if you’re the CEO of a billion-dollar corporation with ambitious growth goals, $100 million is a bet you may be willing to make.

When someone else is willing to invest more in your business than you are, it is probably time your company finds a new owner.

 

Is now the time to consider selling your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

Sellability Score