If you are like most mid-market business owners, your business is your single largest asset. To get the most value for this asset it behooves you to understand what reduces the value of your business and minimize or eliminate these value killers. The purpose of this article is to help you identify the value killers in a typical business sale and help you take steps to get a higher value for your business.
Here are the key value destroyers in a typical business sale:
1. Unplanned Sale: The most expensive mistake that sellers make is not taking the time to plan a sale. Planning for the sale should begin a minimum of one year and preferably three years before you need to sell.
2. Lone Acquirer: The second most expensive mistake that sellers make is that they get themselves into a single buyer auction. This typically happens when the seller got an unsolicited bid from an industry player. Regardless of the reason, if there is just a single player determining the value of your business, you are very likely to get an offer that is well below the market price.
3. Surprises: Any negative surprises can dramatically alter the deal as the acquirer starts questioning the surprise and begins wondering if there are any other issues with the deal and redoubles his/her due diligence. Negative surprises can lead to changes in price and terms of the deal and in many cases end up becoming deal killers.
4. Losing Focus: One of the most expensive mistakes that sellers make is taking their eye off the ball during the business sale process.Loss of focus tends to be not only expensive but traumatic as the buyer renegotiates price and terms of a deal that you think is done.
5. Customer Concentration & Lack Of Recurring Revenue Streams: Ideally, no single customer should contribute to more than 10% of your revenues or profits. The best solution for this problem is to diversify the customer base. If that is not feasible, see if you can get the customers to commit to you with long term contracts. Lack of long term contracts, annual service/licensing fees, and other recurring revenue streams make business less desirable and results in a lower EBITDA multiple.
6. Lack Of Management Depth: Acquirers buy a business that they hope will be fully functional and growing after the sale. It is tough for the acquirer to place a high value on your business if you are the sole decision maker in the company and the business depends largely on your skill set.
7. Poor Financial Records: To many acquirers, poor bookkeeping indicates increased risk and also says a lot about how the business was run. Having a set of clean, easily auditable books inspires confidence and helps during the due diligence and negotiation process.
8. Poor Legal Records & Weak Contracts: Having poor legal records and having contracts without teeth is a sign of weakness. How well is your intellectual property protected? Are all your independent contractor agreements signed and readily available? Can your suppliers stop servicing you at the drop of the hat? Can your customers drop your line at their whim and fancy?
9. Lack Of Confidentiality: Lack of confidentiality about the sale may mean that your competitors may use the uncertainty to their advantage. Loss of a key employee or a key customer can be devastating to the company’s value.
10. Inexperienced Deal Making Team: Lack of a good team that can balance the experience of the acquirer can be very expensive. Can your transaction management team get a good deal on your price and terms for you? Can your team overcome the aggressive steps taken by the acquirers during due diligence to drive down the value?
The most important take away from this article should be that while EBITDA matters, the process and approach to deal making also has considerable impact on the perceived value. Avoiding the value killers mentioned above will give you an upper hand during the negotiation process.
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