The long-term goal for most closely held business owners is to one day achieve what’s referred to as a liquidity event. This involves either selling their business outright to an external or internal buyer or selling a portion of the business to an equity partner who can help grow the company to the next level.
In either case, the owner’s goal usually is to sell the business (either wholly or partially) at the highest possible price. But this doesn’t just happen by accident: It requires years of advance planning. During this time, management should be focusing on a number of different value drivers that will increase the perceived value of the company — and thus its selling price — to potential buyers.
HITTING THE WALL
Unfortunately, we speak with many business owners who have not planned in advance for a liquidity event. Instead, they “hit the wall” when it comes to the day-to-day work involved in running their business and decide that they want to sell now. Or, they find an equity partner to whom they want to sell a minority interest in their company in order to realize growth.
Without having planned in advance for the sale of their company, these owners may not be in a strong negotiating position with potential buyers. This is often because they have been running the business with the goal of reducing taxable income and maximizing deductions in order to lower current income taxes.
For example, closely held business owners sometimes deduct personal vacations as business trips and country club memberships as business expenses. Or they make other financial and accounting moves that lower their net income. While these tactics may lower current income taxes and accomplish other short-term financial goals, they don’t put the company in the best position for a future sale.
IN THE EYES OF A BUYER
Planning for a liquidity event involves making financial and management decisions based primarily on how they will position the company in the eyes of potential buyers in the near-term future — typically, one to three years out.
More specifically, owners should focus on a number of value drivers when making these decisions, including the following:
- Financial statement quality and accounting process integrity — This is the number one area where we see deals fall through. We’re talking about owners who haven’t worked with a CPA to prepare quality audited or reviewed financial statements, or who use QuickBooks instead of a more sophisticated accounting program.
- Management team depth and strength — Business buyers usually want to see that a strong management team is in place before purchasing a company. If your business revolves around you — you make all the important decisions and handle all the important responsibilities — make it a priority now to start delegating responsibility to your management team so your business is capable of running without you.
- Competitive advantages and USP — What is it about your company that sets you apart from your
competition? What is your Unique Selling Proposition, or USP? And are your competitive advantages and USP sustainable over the long term? - Customer concentrations — The more heavily your sales and revenue are dependent on just one (or a small handful) of customers, the more financial risk buyers must take when acquiring your business. Ideally, no single customer should account for more than 30 percent of your revenue.
- Business growth opportunities — Buyers aren’t looking to maintain the status quo with companies they acquire. They want to grow revenue and profits in order to realize a return on their business investment.
PERFORMING A VALUE DRIVERS ASSESSMENT
One of the best ways to prepare for a liquidity event is to hire an M&A advisor to perform an assessment of your company’s value drivers. This assessment will give you a good idea of what buyers will see when analyzing your business as a potential acquisition candidate and suggest things you can do now to increase your company’s value in the near-term future.
Please contact us to schedule a meeting where we can discuss ways to prepare your company for a future liquidity event.