I recently read an article by business owner-turned-author John Warrilow entitled “4 Steps to Finding Your Sell Date,” in which he tells owners how best to backdate the sale of their business.
Most of us think of selling as a quick process rather than a slow, painful one, according to Mr. Warrilow. Here is a portion of the article:
Most people think of starting and selling a business as something like a 4 x 100 meter relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook or…), which obligingly acquires your business for millions. They hand over the check and you ride off into the sunset. After all, that’s how it worked for the guys who started YouTube and Instagram — right?
Unfortunately, the process of selling your business looks more like a bloody, muscle-aching 100-mile ultra-marathon than a 100-meter sprint. It takes years to make a clean break from your company — which means it pays to start planning sooner rather than later.
The article lays out four steps for owners to “backdate their exit.” I recognize that most owners are not ready to sell out today and haven’t picked the perfect day to start. Regardless of whether you’re months away or not even thinking about it, preparing your business for a sale will benefit you in the long run.
The following are the six major items that will drive business value in any market:
- Financial Performance: Without question, the single most important factor that influences value is the financial performance of your company. Are revenues and adjusted EBITDA growing or declining? Businesses with consistent and profitable growth are valued more aggressively than those with flat or declining revenue and/or profits. If new clients recently came aboard, or perhaps a proven salesperson has just been hired, the company’s financial performance could improve and value will be affected.
- Industry Specifics: Some client sectors are known for generating lower and higher profit margins. Lower margins are often the result of increased cost and competition in those sectors. In the collection industry, for example, credit card companies have cut their vendor networks and notoriously “squeezed” the rates they pay their agencies downward.
- Client diversification: A company that generates the bulk of its revenue from only a handful of clients is a red flag for potential buyers. This is the old 80/20 rule. The issue is risk, but interested buyers may structure deals to offset concentration. For most buyers, a well-diversified client base is preferred because it eliminates significant risk elements.
- Service offerings: Both new and traditional services could have value to the right buyer. If the company offers multiple services, it can entrench itself with its clients and strengthen those relationships. Providing an array of services is useful in attracting new clients and is understandably sought-after by potential buyers if the services generate significant profits.
- Leadership: A big key for most buyers is whether a quality management team exists and if it will remain in place after the deal. Will the shareholders stay? What does the management team look like beyond the current owners? This can affect a buyer’s confidence level regarding the stability of the company, its client relationships, and its internal organization.
- Presentation: What impression does your office give when people arrive at the front door, and after they walk through it? Are your managers and employees working hard? Are they chipper, or do they appear to have a chip on their shoulder? I’m not saying that a business needs to resemble a five-star hotel with fine china and turn-down service, but in order to “show” well, it should convey a clean, organized environment with people who like what they do and are good at it.
Having a general understanding of what drives value may influence the timing of a sale. Let us know if you want to schedule a time to confidentially discuss your particular situation.