2018 has been a big year for mergers and acquisitions, or M&A. A booming economy, rising stock valuations and excess corporate cash due to tax reform were among the factors that led to a record $2.5 trillion in M&A activity during the first half of the year.
Perhaps you’re thinking about selling your business in the near future. If so, there are some things you should be doing right now to maximize the value of your business in the eyes of potential buyers.
Focus on Value Drivers
Most acquirers are looking for certain characteristics in businesses they’re thinking about buying that will boost their return on investment in the business. These are sometimes referred to as value drivers because they literally help drive increases in the value of a business.
Focusing on these value drivers during the months or years leading up to the sale of your business is the best way to boost your business’ value to acquirers and its eventual selling price. There are three main things business acquirers tend to look for in businesses they’re considering buying:
- Projected future earnings and cash flow.
- The certainty of these earnings and cash flow.
- The timing of these earnings and cash flow.
So if you want to maximize the selling price of your company, you should be managing your business now with an eye toward growing and accelerating future cash flow and earnings while increasing the likelihood that they will occur. Or in other words, you should try to reduce the risk that increases in future cash flow and earnings won’t occur.
To boost future cash flow and earnings, you should pursue business opportunities that offer the highest possible ROI, both now and in the future. And to minimize the risk that future cash flow and earnings won’t materialize, you should strive to diversify your business — both in terms of your sales and revenue streams as well as your product and service mix.
Here are a few specific value drivers that can have a big impact on your company’s future value and ultimate selling price. By focusing on improving performance in each of these areas now, you may be able to command more money for your business when you’re ready to sell.
- Financial performance — It all starts here. Focus on achieving consistent sales and revenue growth, high margins and steady cash flow. Keep a close eye on financial key performance indicators (or KPIs) like return on assets (ROA), return on equity (ROE) and gross profit margin to gauge your performance in these areas.
- Growth opportunities — Most business acquirers aren’t interested in maintaining the status quo — they want to grow the businesses they acquire. Create a strategic growth plan that details business growth opportunities, such as tapping into new niches or capitalizing on new technologies.
- Management team — Acquirers also look for a deep management “bench” that’s incented to stick around after you sell the company. Start investing in your management team now by sharing decision-making authority and delegating critical tasks to your managers so they can help ease the transition to new ownership.
- Customer concentrations — If your business is heavily dependent on one or a handful of large customers, this presents added risk for acquirers since the loss of a major customer could cripple the business financially. Try to diversify your sales and revenue among a wide variety of different customers instead of concentrating sales with just one or a few large customers.
- Strengths and competitive advantages — What’s your company’s USP, or unique selling proposition? In other words, what is it about your business that sets you apart from your competitors? Maybe it’s the highest quality, the best service or the lowest price. Decide how you’re going to distinguish your business from the competition and focus on honing these competitive advantages.
How We Can Help
Give us a call if you have more questions about increasing the value of your business before selling. Judd Financial has helped many other companies identify and focus on value drivers in order to maximize the business’ selling price.