Growth Strategies to Maximize Your Company’s Valuation at Selling Time
During my first year a broker, we were called by a gentleman who was interested in selling his company. Since owners typically don’t want their employees to know that they are thinking about selling the company, we agreed to meet at a nearby coffee shop. I went to the meeting with a senior broker from my firm who had worked as a banker in a previous career and could quickly calculate the probable worth of a business in his head. The seller turned out to an elderly gentleman of about 65 – 70 who had started and built the industrial supplies wholesaling business over thirty years. After the three of us hadexchanged a few pleasantries, the senior broker jumped straight into the key questions. How much owner’s income is generated by your business? The owner replied “about $100,000.” The broker then asked him how much he had in inventory. About $500,000 was the reply. At this point the broker fell silent for a minute as he crunched the numbers in his head. Finally he spoke, “The best advice I can give you then is to sell the inventory off for $300,000 to $400,000 and then shut it down. You’ll get more that way then if you try to sell it as a going concern. At best you might expect a multiple of 1.5X or 2X on owner’s income.”
I’ll never forget how the old gentleman reacted to this news. He was crushed. You could see him slump down into his chair. It was devastating news. Most likely for years he had pictured himself cashing in on all the decades of hard work and walking away with possibly a million in cash. Then to be told so bluntly that the inventory, at a discounted price, was still worth more than the business itself must have been devastating. I felt bad leaving that meeting and a bit annoyed with the broker who wasn’t known for his sensitivity and tact. But let me emphasize that I have many more stories like this one since most business owners have no idea what their business is worth in the market place. They, therefore, invariably overestimate its value and are then horrified at selling time to discover just how little buyers are willing to offer for it.
Growth Strategies to Overcome Business Weaknesses
Don’t let this happen to you after many years or multiple decades of hard work. If you’re thinking of selling your business in five to ten years time you need to assess its weaknesses objectively, the ones that will pull down the valuation, and adopt growth strategies that will eliminate or minimize their impact. You need to start doing this now even if it means pushing the selling date back a year or two to correct the problems. Let’s take a look at the most common problems that drag a businesses value down:
If yours is a B2B type business and a substantial portion of your revenues come from just one or two companies, it will make potential buyers highly nervous because if those customers switch to another supplier, the company is dead. It doesn’t take a lot to kill a company in this manner. What constitutes a “substantial portion?” Well, the answer will vary with the situation and the buyer’s level of risk averseness. I have seen buyers walk away when one customer constituted as little as 5% of total annual sales. If one customer is responsible for 10 to 20% of your total revenue, you are definitely in the danger zone.
One way to rectify this problem is to diversify your customer base, if possible, through sales and marketing. If this is not realistic due to a mature market, you may have to buy a competitor in order to diversify your customer base.
This is similar to the above except that the problem is too much of your sales come from one offering that can become obsolete or be replaced for a variety of reasons at any time. Savvy buyers don’t just look at your company’s gross revenues at selling time, instead they analyze sales by product line to see if your business is too reliant upon a narrow range of products or services. If it is, it may scare them off. Your options then are to add new products or, in some cases, to diversify them through an acquisition.
One of the most popular business growth strategies entails broadening one’s offering to the point where the business becomes a one-stop shopping destination for bigger corporate customers. Big corporate customers are not different from soccer moms in the sense that if they need to buy ten different things they would rather do it all at one location than drive to ten different ones. Moreover, if there’s a problem they prefer to have to call one supplier instead of ten.
There’s huge potential for many small businesses in evolving into one stop shopping destinations for larger customers. Obviously, the term means one stop shopping for a particular category of goods and services such as IT or maintenance or repairs, etc. No one can carry everything.
Like sports teams, companies have different strengths and weaknesses. Some will be strong on the sales and marketing side while others will excel at designing and creating things to sell. A popular growth strategy is to use acquisitions to put two imbalanced companies together to form a balanced one that can then out-compete the industry.
Start Preparing Today for a Sale Down the Road
The above is just a quick sampling of common problems that contribute to a low valuation at selling time that will shock the owner. It’s really important to keep in mind that these types of business problems typically take a few years to rectify. Few can be fixed quickly. To make the changes necessary to get your valuation up to an acceptable level will often take three years. Why three years? Well, the answer is that buyers will typically base their offer on the performance of your company over the previous three years. If your company has suffered from a problem for a decade that you finally decided to fix a month before the “for sale” sign went up, don’t expect it to have any significant impact on the valuation buyers use.
Find out more about how you can adopt acquisitions as a growth strategy to build something of true value.