Think like a buyer, even if you’re not
selling today.
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to Research & News)
Evaluating your growth strategy from the perspective
of a buyer/investor is an excellent way to maximize
shareholder value. Even if your are not planning on
a imminent sale, this exercise will help bring more
to the bottom line and prepare you for a future sale.
Following is a list of several common areas of focus
for buyers, which should help you in your efforts.
Core competency
A company with a strong focus around a core business
generally tends to be more appealing to a buyer than
a company going many different directions. First, define
your “core competency” – what business
are you really in? Make sure that the focus of all members
of the management team is aligned in this direction.
Are key resources and the various products and services
of your firm adding to the value of your core business?
Non-core businesses can diminish the profitability of
the primary business and decrease the overall value
of the company.
Customer concentration
Many small businesses can’t help but to have a
handful of customers who generate a large percentage
of the company’s revenue. In general, a buyer
will carefully review any client relationship that comprises
over 10% of revenue. Any efforts to reduce the level
of customer concentration prior to a sale will be helpful
in increasing the reliability of the firm’s future
revenue stream and will help to increase the firm’s
value.
Industry concentration
On the same note, some companies cater to a particular
industry. While this specialization can give them a
competitive advantage in winning contracts through industry
expertise, it can also force companies to take on risk
due to lack of industry diversity. If an industry suffers
a cyclical downturn, a company that has the preponderance
of its customer base within that industry may be affected
as well.
There are times, however, when specialization may result
in a premium value. An acquirer operating within the
same industry with complementary products or services
or who is seeking to enter that market, may place a
higher value on the company’s market position.
Analyze your market position and industry outlook to
determine how to position the company.
Formal contracts
Many privately-held companies conduct business on an
informal, or “handshake” basis. In fact,
many business owners pride themselves on the strength
of their word. Informal agreements, however, particularly
when they are key to the company’s success, can
result in a discount to value. Formal agreements can
ensure the continuity of key relationships, giving a
buyer peace of mind that the company’s customer
and supplier relationships (and therefore cash flow)
are secure. It is best to seek legal advice when establishing
these agreements to address issues such as contract
transferability and termination clauses.
Leases
To the extent that a company or the industry is dependent
on geographic exposure and proximity to customers, a
long-term lease is more valuable. Again, a buyer expects
to attain a certain level of performance. If the company’s
location is key to performance, a long-term lease not
only offers predictable rental expenses, but also ensures
that the specific location is locked in for the long
term.
Shorter term leases are more attractive to buyers in
a situation where 1) the acquirer is seeking to relocate
or “tuck in” to their current operations
or, 2) the current facilities are not large enough to
accommodate the company’s planned growth. In these
scenarios, a company’s long-term lease may result
in a value discount.
Real Estate
Do you own the building that houses the business, if
so, is the building owned by the company or another
entity? Generally speaking, buyers are not interested
in buying real estate and prefer to lease property from
the shareholders. To ease the selling transition and
maximize the value of the business, remove all real
estate off of the company’s balance sheet and
keep it in a holding company or similar entity.
Management succession
It is common to find that the owners of privately-held
businesses are involved in almost every aspect of the
daily operations. If the owner plans to exit the company,
this autocratic structure may become a problem. Efforts
should be made to gradually delegate key responsibilities
(primarily those related to customer relationships and
other direct ties to revenue generation) to various
members of the senior management team. A buyer’s
primary concern is that the business can operate successfully
absent of the current shareholder.
