(Editor’s note: This article originally appeared on Bizjournals.com, whose parent company, American City Business Journals, is the largest publisher of metropolitan business newsweeklies in the United States, with 43 business publications across the country.)
We’ve all had that bad dream. You are walking to your next class. As you enter the classroom, you see that your teacher is handing out test booklets.
It’s the big test – the final exam. How could you have forgotten about it? How could you have forgotten to study?
As you sink into your desk, your heart’s sinking at the same time. Your best hope now is to minimize the damage. Any hope of a good grade went out the door when you forgot to prepare.
I’m told this is not an uncommon dream. And while I can tell you that my school years are far behind me, I’ve faced many a test in starting and running eight businesses. I know firsthand that it’s much better to be prepared.
Enhancing the value of your company
If you are a business owner, you’ve also learned the benefits of preparing for the tests that are a part of growing your company. Are your financials in order? Do you have a solid growth plan and a broad customer base? If not, you could fail the test when it’s time to sell your business.
Here’s the reality: Companies that pose business risks to an acquirer sell for less. Companies that have addressed their risk factors sell for more. When it’s time to sell, if your company presents business risks, buyers will find them. They routinely perform detailed due diligence on any company they consider purchasing or investing in. And once they do, they’ll use those risks to reduce your company’s valuation.
What follows is a bit of a pre-test. It’s a list of business risks that you will want to make sure you’ve addressed before you put your company on the market. Few of these items will be a surprise. And most are not easy fixes. But by investing your time in eliminating potential buyer objections, you can get a much better grade for your business in the form of a higher purchase price.
Make due diligence easy
Potential buyers are going to dig deeply into your financials. Make sure your records are up-to-date and easy to understand. If you use an outside accounting firm, be sure they are prepared for the due diligence process.
Limit technology risks
Most successful businesses rely on technology to operate efficiently. To minimize business risk and maximize value, keep your company’s technology up-to-date. You want to be able to demonstrate that your technology has a relatively long life span. This assures potential buyers that they will not have to purchase new, expensive systems right after the sale closes.
Reduce market concentration
Nothing makes a buyer feel more secure than a big backlog of orders from a diverse customer base. Reduce your market risk by building long-term relationships with customers and ensuring that sales are generated from multiple customers, not just one. Geographic customer diversity also helps reassure buyers of future sales stability.
Minimize management risks
Potential buyers need the expertise and experience you and your team bring to the business. If you see holes in your management team, you’ll want to address them before you go to market. Many buyers don’t want to run the business, and they’ll depend on you and your team to continue running and building the business after the sale.
But don’t fool yourself into thinking that just fixing one risk factor is enough. Buyers calculate risk by looking at many factors. You may have strong financials, amazing technology and a great team, but if the majority of your sales come from one customer, the entire value of the company can drop dramatically. Likewise, having a strong, diversified customer base can be devalued by poor financials or old technology. To attract the best price, you have to be strong across the board. So look at every area of your organization. Even the perception of risk can hurt you.
In summary, you’ll want to bring a buttoned-up company to market, and you’ll want to consult with an experienced investment banker to make sure your company is ready. Your reward could be a significantly higher sales price.
About the Author
David J. Mahmood
Founder and Chairman
Phone: (214) 217-7750