Considering selling your company in the future may make you wonder what it could be worth and what makes a business attractive to buyers. To help you understand those dynamics, I and my colleagues at Merit Investment Bank & Company have compiled a checklist to help you self-assess your situation and plan for the future.
Your company's value can be increased by conducting a comprehensive self-assessment to identify gaps and opportunities. Buyers are looking for well-prepared businesses with good growth prospects. Knowing your company's strengths and weaknesses makes you a better candidate for any deal. As well as constantly preparing for an exit, you never know when you may be able to sell your business.
Investors, or institutional buyers, are always on the lookout for solid companies to acquire or invest in. The investor is not looking for "a job," he or she is looking for a company that they can grow and sell for a higher price in the future. Investors are not looking for "a fixer upper."
1. FINANCIAL PERFORMANCE
It is important to demonstrate three solid years of strong financial performance, with top-line revenue growth exceeding 10% per year and adjusted EBITDA (Cash Flow) margins exceeding 15%, to be considered a desirable acquisition.
These metrics make companies attractive because they represent significant upside growth opportunities, and they also have a greater ability to weather economic downturns.
When faced with a downturn, a buyer may need to invest additional capital to support the original investment if a business with less than $25 million in revenue lacks these internal resources for growth. As you might imagine, further investment is something a buyer wants to avoid.
2. PROVEN AND DEVELOPED MANAGEMENT TEAM
You should have a management team. You don't need a large team with lots of overhead, but a tenured group that can run the company without the founder's continuing involvement.
As the company grows, more functional heads and regional leaders can be added, including a Controller/CFO, a Sales Leader, a Human Resources professional, and a Chief Operating Officer. With all of these positions working together, the company can achieve new financial performance levels.
It is ideal to build a management team that has been around for a while and has demonstrated its worth in the past. A new CFO or VP Sales that may or may not work out does not have the same credibility as a tenured team that has handled economic cycles, business surprises, and business challenges for years.
The management team is backed by banks and institutional investors when evaluating a business since they realize it will help them meet future growth goals. Relying on one person is risky.
Speaking of health, a great team can make the business owner's life a lot better. You probably have a great management team if you can take four vacations a year and spend no time on emails or phone calls. If you are still tied to your phone and emails, there is still work to be done.
3. AUDITED FINANCIALS
Invest in an annual audit or review of your financial statements by an independent accounting firm that is regarded as trustworthy. Don't use an accounting firm owned by a relative like Bernie Madoff's. It demonstrates to the world that you care about the integrity and presentation of your company's financials to have independent oversight of your financials.
Also, if you have audited financials, you have a CPA. You must keep your CPAs in mind as they can be a valuable partner when capital providers evaluate your business. It doesn't matter if your CPA or you provide the same answer, buyers will generally give your CPA's response more weight than yours. That's just life.
It is advisable to conduct a pre-sale Quality of Earnings (QoE) study in addition to your audited financials to help buyers better understand the stability of the business's cash flow and working capital requirements. Every Buyer will complete a Quality of Earnings (QoE), so it's good to do one before going to market, which will prepare you for the Buyer's findings. It is better to identify issues during your own time than during a Buyer’s due diligence process. A decrease in company valuation or even the collapse of the deal could result from these items.
4. TIMELY/ACCURATE FINANCIAL AND OPERATIONAL REPORTING
As a result of a solid financial and operational reporting process, the business can be measured, reported, and managed in accordance with audited financials. A Buyer will want to see a variety of key metrics monthly, including financial statements, sales reports by product and customer, production and inventory reports, accounts receivable and payables aging reports, margins by product, margins by customer, purchases by vendor, and so on. Investors want to see a well-run company with all players working together.
We often see Finance, Sales, and Operations report the same metrics in different ways, even when they ought to all agree. It is important to ensure internal reporting is consistent. The measures may differ depending on who requested and crafted the report. Understand why discrepancies exist and explain justifiable differences, while simultaneously correcting any erroneous reporting if discrepancies arise. Also, it's a good exercise for the management team to agree on definitions and how to view the business.
Be sure that all of your documents accurately report (and tie together) the information you present before launching your company.
5. DIVERSIFIED REVENUE STREAMS
Business concentration is one of the riskiest parts of middle-market companies. Many companies start with a single product or customer. Over time, the company must grow beyond those initial revenue sources and deal with inevitable customer and product problems. Products and customers concentrated in one area are risky for a variety of reasons. Buyers are looking for a solid foundation for growth. As a result of demonstrating a diversified revenue base, the company's risk profile becomes more attractive to buyers.
We have encountered cases where buyers won't consider companies with more than 5% sales from any one customer. Additionally, being dependent upon one product can be risky if raw materials are disrupted or markets shift.
SUMMARY
In the meantime, we hope the first five items have been insightful, stimulated some reflection, and have motivated you to review your business. While it is not always an easy process, taking a critical look at your business can be rewarding and exciting. Stay tuned for Part 2, where we continue our list of 10 Ways. Until then, you can check out our quick and easy online business evaluation tool to gain a better understanding of your business and start considering how to improve it.