It takes more than luck to sell your company for a premium price. You have to work on these four areas to generate buyer interest.
Seneca, a first-century Roman philosopher once observed, “Luck is where the crossroads of opportunity and preparation meet.” Some business owners believe they’ll be able to “get lucky” and sell their companies for higher than the market average. While luck never hurts, preparation is critical if you want to secure a higher price for your company.
Successful middle-market business owners have dedicated their lives to building their companies. They understand their industry, are keenly aware of the competition, know how to serve customers and have developed well trained, capable management teams. Most of what they have accomplished is a result of hard work, not luck.
Surprisingly, three in five small businesses do not have a business succession plan1, according to a survey conducted by Nationwide. In essence, they are relying on fate with a healthy dose of luck to ultimately secure a premium price for their company should they exit by choice.
Experience has taught us that managing these four variables helps to replace luck with strategic preparedness in securing a premium price for your business:
1. Your company should not be dependent on any one person.
If the future success of your business is dependent upon a few star employees or one person on the leadership team, it can impact the financial potential of the company and could degrade valuation. Ensure your company has great processes in place that could be executed by others if necessary. This makes it easier for a potential buyer or investor to envision how the company could continue to grow even without the current owners or key employees.
2. Your company should be recognized as a great place to work.
Since Gary Becker, a Nobel Memorial Prize recipient, and his 1962 theory on human capital2, there is a growing awareness within the investor community about the link between human capital, values and corporate performance. Fundamentally, investors can see a return on people; hence, investors are attracted to companies that are great places to work. The employees are excited and happy, and turnover is low. Their compensation packages are fair and tied to performance. Companies should strive for a reputation of honesty, fairness, and ability to deliver. In great companies, the employees feel lucky to work there and the owners will benefit when it is time to find investors or sell the business.
3. Your company should have at least three growth markets identified at all times.
Companies that sell for higher prices or successfully raise capital for expansion can demonstrate the potential for growth. Investors are naturally looking for an opportunity to make money. One proven way to make money is to invest in companies that are growing and will continue to expand in the future. Attractive companies know where they are going and have a definite plan to get there.
To ensure future growth, owners need to adapt and exploit new and changing technologies. For example, some foundational, comprehensive and productivity-driving technologies include solutions that analyze, streamline and automate business processes that may also be integrated with mobile functionality. Real-time, fact-based decision-making gives a business a competitive edge, and with cloud-based solutions penetrating the market, technology is becoming increasingly affordable. Additionally, tech-enabled businesses trade at higher valuations. It is important for business owners to at least have a plan on how to utilize technology to improve operations and earnings.
Moreover, business owners need to identify new markets, ensure those markets are large enough to allow for growth, and demonstrate there are opportunities to expand and defend market share. Investors typically avoid declining markets because those markets lead to undesirable price wars which drive down sales and profitability. Print media is an example of a market in decline. Local papers are closing their doors and larger companies are streamlining their businesses as more people turn to the Internet for their news3. Some of the most successful businesses have had to “pivot” in order to capture new markets. It is essential for business owners to have a clear understanding of their market dynamics and have a plan in place to capture those identified new markets.
Lastly, owners need to continually train their workforce. In connection with the previous variable, training helps your business run better, is a recruiting and retention tool, promotes job satisfaction, adds efficiency, and is essential for knowledge transfer4. The market for talent acquisition is becoming increasingly difficult. Top talent is very expensive, and as reported by the Society for Human Resource Management, 84% of job applicants reported applied skills shortages5. With some training for employees and candidates that have the potential do the job, business owners can proactively fill talent gaps. Again, outlining talent gaps and having a plan on how to close those gaps helps investors see the future value of a company.
4. Your company should have at least one proprietary product or procedure.
Smart business owners develop new methods to accomplish everyday jobs in a more efficient manner. In certain instances, owners are able to patent those methods or technology so they own it and it cannot be duplicated by a competitor. This value of proprietary methods or technology is demonstrated almost daily when technology companies with negative cash flow, sell for millions and sometimes billions. Owning proprietary technology or patents is a great way to boost the value of your company and attract investors.
Companies that are attractive to potential investors or buyers seek out good advisers across all fronts. The owners seek the advice of experienced financial advisors, lawyers, HR consultants, and investment bankers. Most are also among the small percentage of business owners who have an exit plan in place and probably have had the plan in place for a long time. Their financial records are in order. They do not have any pending legal issues. They have a solid understanding of what their company is worth and they have clear personal and financial goals.
If an owner has built a strong, successful company with a great future, the likelihood that they will “get lucky” and sell for a much higher price increases exponentially. They’ve simply followed the advice of the Roman philosopher, Seneca. They were prepared when the right opportunity became available.
About the Author
David J. Mahmood
Founder and Chairman
- Nationwide Survey: https://www.nationwide.com/about-us/020717-nw-business-succession.jsp
- Becker, Gary. “Investment in Human Capital: A Theoretical Analysis.” National Bureau of Economic Research. Publication. Oct. 1962.
- Daily Mail Reporter. “America’s dying industries: List of top 10 declining business revealed.” DailyMail.com. Web. 4 Apr. 2011.
- Staff Writer. “Employee Training is Worth the Investment.” go2 Tourism HR Society. Web. 2017.
- Maurer, Roy. “This is Why Finding Talent is Getting Tougher in 2016.” Society for Human Resource Management. Web. 20 Jun. 2016