Keys to Position
Your Business to Sell at a Premium
By Kenneth H. Marks
Only a year or two
ago an emerging growth or middle-market company (revenues from a few
million to several hundred million dollars) had a good chance of
being sold if it was reasonably well run. With private equity
flowing, plenty of debt and liquidity, and strategic buyers growing
valuations were up and it was a seller’s market. “A” companies,
those that are the leaders in their market segments and high
performing, will likely find buyers at traditional valuations and
premiums. At the other end of the spectrum, the “C” and “D” players
are trying to survive or being liquidated.
So what about the
“Bs”? The large majority of emerging growth and middle-market
companies fit the “B” profile and they are stuck, at least in terms
of creating shareholder liquidity or selling. At a minimum “B”
companies are being transacted at significantly reduced multiples.
You can think of this as a bar bell effect, where the companies on
the right side are sellable and those on the left are being
liquidated those in the middle i.e. the “Bs” are not moving. The
quandary for “B” owners and managers needing or wanting liquidity is
at best a company that will sell at much less than expected or at
worst there is no buyer or financing.
The value of a
company, whether growing, selling or financing, is eventually based
on future cash flow, adjusted for the likelihood of it occurring. So
the actions you take to position a company for sale are nearly the
same as those to grow it or obtain new capital. In generic terms,
you can increase the value of the business by increasing cash flow
while using the same or less capital. If you cannot increase the
cash flow, focus on reducing the invested capital. If you cannot
significantly impact the cash flow or invested capital, you may be
able to reduce the risk of the capital invested - this will also
increase the value.
In practical terms,
focus on the fundamentals and their alignment, being able to answer
the tough questions in terms that a sophisticated third party buyer
or investor will find attractive. For many management teams, this
begins with a shift in mindset from “how we have done things in the
past” to “how do things need to be in a future state to generate the
expected cash flow and results”.
Selling a company
for a premium requires selling the vision and future, using the past
to evidence management’s credibility and the business’ ability to
perform. It requires articulating in strategic and financial terms
the outlook and expected performance along with strategic
initiatives. A buyer’s or investor’s evaluation of the business
begins with understanding the strategy. In simple terms, management
needs to understand its industry and be able to articulate its
relative position and performance in the market compared to
competition. Then be able to articulate a strategy to improve its
position over time. Common questions include:
Where does the
company add value in the supply chain of its customers and
are profitable for the business and why continue those that are
What is the
company’s “secret sauce” or unique or difficult to duplicate
aspects of the business?
A buyer or investor
is going to look at your management team in terms of what skills and
experiences are required to build the business moving forward. The
team that got you through the earlier stages of the business may not
be the team to get you through the next. We recommend assessing
your team for industry and functional knowledge relevant to the
stage and expected plans of the business moving forward. Where it
makes sense, implement professional development plans and train
members of the team. In other cases, it may be require hiring new
talent to round-out the group. Having a proven team that can
operate without significant dependence on any one person, reduces
the risk of execution and dependence on the owner / founder.
Another issue that
commonly surfaces in evaluating a company’s ability to execute on
its forecast is the capability of its systems and processes to scale
as the business does. Management can reduce execution risk and
enhance the value of the business by having infrastructure
appropriate to the go-forward plans. Typical areas for improvement
include the selling process and strategy, information systems and
metrics, financial controls and reporting, and planning and decision
Why wait to sell or
raise capital to implement the operating changes that a buyer or
investor will likely pursue? Example decisions or issues to address
in advance of a transaction:
selection - do you have customers that value your product or
service, and that are willing to pay for your value-add? Maybe
your company needs to trim its customer base and focus on
customers that will help you get to the next level? On the
other hand, does your company have a high concentration of
revenue with any single customer? If so, how are you mitigating
service pricing - are you pricing your product or service
relative to the quality and value-add in the market. Is there an
opportunity to increase prices and margins?
Is your supply
chain and inventory managed to optimize the cash cycle vs.
customer satisfaction? How can you reduce the invested working
capital AND increase quality and availability of products or
Is your house
in-order - do you have reviewed or audited financial statements
and are your records organized and complete? These will increase
credibility and speed due-diligence.
By addressing key
gaps and pursuing operating opportunities for improvement,
management can significantly impact value and likely get paid for it
in the transition or sale process.
If the company is
considering a capital raise, proactively raising funds before you
need them can put the company in the driver’s seat and control of
its options raise capital when you can, not when you need it. A
clean capital structure with clearly defined expectations (i.e.
valuation) among stakeholders makes structuring a deal and getting
to close easier. In some cases, it makes the difference between
closing and a failed transaction. In some deals, the reason to sell
or recapitalize the company is to resolve shareholder issues but
where there is litigation or unresolved claims against equity, it
may make sense to address issues before you go to market.
implementation of activities in the areas above in preparation for
an ownership transition or capital infusion can greatly increase the
ability to attract the buyers or investors desired and the
likelihood of getting a deal done, while at the same time increase
the value of business.
Read other articles and learn more about
Kenneth H. Marks.
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