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Bizbuysell.com, the largest business-for-sale marketplace, recently released its Annual Insight Report which showed that 7,240 businesses sold in 2015. With an average sale price of $200,000, which was 89% of the original asking price, you’ll be surprised to find that many businesses not only don’t receive their asking price, but don’t even sell altogether.
So, what are the factors that prevented those businesses from getting full asking price? For that matter, why wasn’t the asking price higher to begin with? I can tell you from personal experience, as I’ve purchased and sold a contracting business previously while also brokering several other business transactions, there are several key factors which determine whether a business not only sells but also what maximizes sale price.
Timing is Everything
When my business partner and I decided to sell our company to a subsidiary of Shell Oil, we weren’t initially even considering making such a move. But paraphrasing Don Corleone’s famously quoted line from the movie “The Godfather”, they made us an offer we couldn’t refuse. In our case, timing was a big factor in our decision, as we had taken the business from marginal to above industry average profitability. That increased profitability led to an increase in our business valuation.
Most business owners however don’t plan their exit strategy from Day One, or they wait until a catastrophic event has occurred that forces them to sell their business. By that time however, the business is typically trending downward, not generating cash flow and thus not worth as much as it once was. The old adage about the timing of “Buy low and sell high” definitely applies to business valuations as well.
Know Your Numbers
Ask yourself the following:
If you answered “no” to any of these questions, it will not only affect your Business Valuation, it could mean the difference between a sale or no sale.
Knowing our company numbers was a key factor in Shell’s decision to acquire us. Upon completion of their due diligence, Shell Oil’s Lead Business Analyst admitted what was ultimately one of the biggest factors in their decision. Of all the companies they were considering from the acquisition “pool”, we were the only one (out of 30) that was able to provide all of the information they requested.
Whether it’s an individual or another company, the buyer wants to have a comfort level that they’re making the right decision in acquiring your company. The ability to provide all, or even more, financial information than what they’ve asked for provides them with a higher level of comfort by mitigating the perceived risk of making a bad decision. If you’re not in a position to know or understand your numbers, find someone that can by going through your financials inside and out by performing a comprehensive Financial Review.
Brand Differentiators to “Raving Fans”
In one of our previous articles, “10 questions: How Do I Differentiate My Business?”, we discuss the common traits of successful businesses and the differentiating factors that position them as the market leaders in their industry. It’s important to know what differentiates your business from all others, not only in your industry, but in general. Buyers want to know what sets you apart (your “secret sauce” if you will) from your competitors, your overall success traits and ultimately why your customers choose to do business with you.
What potential opportunities exist to improve the “preferential differentiators” of your brand which will lead to more business? How do you move those prospects within your target market that are not familiar with your company to become clients that are “Raving Fans”. Clients that advocate your brand to others while refusing to use your competition? Creating the best possible customer experience is a key factor (think Apple) on how to brand differentiate and acquire those “Raving Fans”.
Risk is one of the biggest red flags for anyone considering acquiring a company, and there are a number of forms in which it comes. One common form is when the success of the business is too dependent upon the owner or executive team. When evaluating such a company, a smart potential buyer will consider what might happen if the owner or executive team were no longer there. Business owners can mitigate these risks by creating a comprehensive succession plan, including the development of a replacement management structure.
Another common risk factor includes the over-reliance on a limited number of clients or suppliers. One of the biggest negative factors for a potential buyer is a business with only a few customers or suppliers. If you have one supplier that accounts for more than 75% of the supply chain, or a client that accounts for more than 25% of revenue, your business becomes increasingly vulnerable to financial loss or failure. For this reason, it is important for business owners to diversify revenue sources and suppliers to mitigate risk for themselves and potential buyers.
Diversity in your sources of revenue is another factor that most buyers will consider as well. If there was a downturn in a particular sector of the market, can your company whether the storm? For that matter, if there was an overall downturn, which part of your business will be negatively impacted the most, if at all? Creating a strategy to diversify revenue sources and implement recession-proof revenue streams is a contributing factor to mitigating risk in the buyer’s mind.
Mum’s the Word
If you are even considering selling, one of the best ways to ruin your business valuation is to tell people you're selling it. If that happens, employees, customers and vendors alike will likely be concerned they won't like something about a new owner, and the probability increases that they will leave you. In fact, the only people who will be happy to hear that you’re selling your business are your competitors who may spread the rumor that you're "going out of business," instead of "selling" your business.
Keep conversations regarding a possible sale to a minimum, and only with people you absolutely trust to respect the confidentiality on the topic. In our case, we were able to keep our sale discussions confidential until the last possible moment. We only disclosed the information to our employees (who had to sign a confidentiality agreement) when it became imminent that we were going to be acquired. While the deal could have fallen through and we ran the risk of losing employees, customers and/or suppliers, the payoff outweighed those risks at that point in time.
No matter what Business Valuation and Sale stage you’re at, I encourage you to implement an Assessment Strategy using the above criteria so you can maximize your business valuation and position the company to sell for the highest amount possible.
If you need help getting started, or would like to know how we can help you maximize your business valuation, contact us today.
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