The value of any business is most critical at one specific point in the company’s life: at the time the business is sold. Never is a valuation more important than when corporate assets change hands. Entrepreneurs may toil in their business for years--fighting the ups and downs of a drastically altered economy—but the final “payday” when the company is sold is often seen as a retirement paycheck for many. Selling for the highest possible price requires a hard look into a few key components of the company and its operations.
Employee contracts, relationships (both internal-facing and external-focused) and overall corporate human resource issues are perhaps the most important consideration in any merger or business divestment scenario. There are a number of key reasons for this including,
- Employees Interface with Customers. Keeping employees happy and on-board is often essential to maintaining the business. Disgruntled employees can take customers out the door with them.
- Employees Drive the Business. Development, sales and support are all components of internal processes driven by key employees within any company.
- Loyal Employees Inspire Growth. Some of the greatest drivers to growth are great employees. Such employees can be included in nearly all aspects of—including equity compensation—of business growth.
Because most are interested in providing a valuation boost prior to a business sale, it can be a tricky to include employees in the sales process as sounding the alarm could have the reverse effect than desired. Hence, planning from an employee perspective is something that needs accomplished months and years prior to seeking a boost in value. This can be done by getting all the right people on the bus while slowly filtering-out the non-performers.
Customer Contracts & Diversification
Two key components of any customer relationship are longevity and diversification. Business buyers love both. Diversification in customers in terms of size and revenue share are key to mitigating acquisition risk on the part of any buyer. The more customers, the better. Furthermore, most strategic and financial buyers will be looking to buy companies with long term committed contracts with their customers and clients. Such deep-set relationships ensure business revenues are less risky and sustainable into the future.
Keeping regularly apprised on cost and volumes for both services and products you provide will be essential in understanding the cost and value drivers of the business. Once you have a handle on them, it’s then much easier to see where changes can be made to improve, it can also be used as a beneficial hedge against rising costs or unforeseen macro factors that could play into the company’s success.
An example may be helpful. A recent client in the medical field had an office/finance manager who’d dropped the ball on tracking incoming volumes along with insurance and Medicare reimbursements. Doing so caused a slow, almost unnoticeable decline in top-line revenues. The precipitous fall continued until the revenues failed to cover the high fixed cost of his once booming practice. While this is an extreme case, it does help to illustrate the need for tracking inflows, outflows, margins and what makes the business tick. Best case scenario, an owner can significantly add to the value of the business. Worst case: assets are liquidated to curb the hemorrhaging and the business ultimately fails. In the later scenario, value is lost, not gained.
Reviewing financials regularly should be including your existing processes. Doing so can not only help find crippling irregularities but will also assist in drawing-out needed changes in products, processes and capital structure.
A recent entrepreneur with whom we worked wanted to either take his business to the next level by raising capital or selling out altogether. Unfortunately this tech start-up had done nothing in terms of financials. In fact, a brief description of them would have certainly included the words, “awful” or “nonexistent.” The tax returns didn’t match many of what the financials were telling us. Needless to say, recasting, rehashing and preparing the financials became a monstrous project in and of itself. Just cleaning the financials is helpful in showcasing the value of the company. Otherwise, it’s like trying to see Saturn’s rings with a kaleidoscope.
Truthfully, not all companies are on such a woeful side of the financial-statement continuum. But every firm should be willing to expunge some extra effort
What may sound like financial engineering or corporate manipulation is actually a key component of preparing a company for sale. Most companies run by founders, owners and entrepreneurs tend to pay such individuals (usually themselves and/or friends and family) as if they were the Sultan of Brunei. Normalizing salaries means adding back salaries and bonuses to the Profit & Loss statement to reflect what the business would look like if run by an outside entity with a business manager at the helm. This helps to not only paint a better picture of the business as a going concern, but also can significantly boost the valuation and payout to shareholders.
Similar to normalizing financials for owner salaries, the financial statements also require normalization for one-time purchases or expenses not in-line with the normal course of business. These non-recurring items help to normalize cash flows and paint a picture of the company representing the business as a “going concern.” Savvy buyers will want to uncover such expenses in due diligence, but the value of the business itself will not be dependent on the whims of a recent non-recurring expense. Hence, altering the financials to match can help to showcase a more accurate representation of value from a discounted cash-flow basis.
Waste and cost cutting is certainly an important component of boosting corporate value and should be included in the overall strategy. However, operational expenses often include fixed costs that don’t budge much, even with the smartest of frugal business owners. That’s why any value-boosting should include a push for top-line growth immediately before the finish line.
Boosting revenues can have one of the biggest impacts on bottom-line profits at precisely the right moment. For many owners in product/service businesses, boosting sales can mean getting back into the fray for six months or a year prior to putting the business on the market. Many owners who started out as the chief product or service evangelist may have moved on to other roles at the company. Jumping back into the ring for a few final swings right before the bell can mean the difference six and seven figures when it comes to the final payout.
Goodwill and Intangibles
Acquiring, developing, exploiting and selling the benefits of corporate intangibles held by the company is the best way to get outer-space valuations above fundamentals, especially for strategic acquirers. If you have excellent customer goodwill and other intangible assets whose value has grown over time, the sale of the business is the time to exploit that brand awareness and brand loyalty. Pegging a value on such intangibles can be difficult, but can be key to boosting your company’s eventual sale price.