Business qualities that build value for a buyer
Many qualities make a business more valuable when the time comes to sell. The most successful businesses will increase their marketability based on such qualities as an established and growing customer base, recurring revenue sources and a talented management team. Knowing how to emphasize and market these features can mean the difference between an acceptable purchase price vs an offer that falls below expectations.
Certainty is at the top of list of key value drivers. Investors and lenders both are looking for predictable revenues, profits and cash flows. Buyers will attribute a high value to a business that has produces consistent positive results, especially in the face of a difficult economy. Consistently adding new customers, growing revenue from existing customers and retaining good people are all deemed high in value.
Customer diversity will be the initial focus of a smart buyer. Companies are acquired for a variety of reasons, and a desirable customer base is very high on the list. Management team members come and go and equipment eventually wears out, so the real value lies with customers. The ability to increase market share or gain access to new customers draws many buyers to the negotiation table.
Prospective buyers will pore over customer data focusing on buying habits, margins and trends. Of particular interest are reasons for new customers gained and customers lost.
Extremely critical is the percentage of total sales concentrated in just a few customers. The smaller the number of customers the greater the acquisition risk. So losing one or two major customers can dramatically harm future profitability and the certainty factor declines as does the valuation of the business.
Recurring revenue is another significant value driver and is major factor in consistency. Repeat orders, long term contracts, maintenance revenue and consumable goods sales represent certainty of the next order and will drive up value. The reliability factor has a higher value than one-time revenue. Consistent revenue from a large number of invoices, rather than occasional large invoice for a one-off project spreads risk.
At some point everyone has heard the of the "razor and razor blade" revenue model. The business can practically give away razors as long as it held on to the recurring revenue stream of its razor blades. The more razors sold creates a multiple of blade sales. Analyze your revenue sources and focus on products and services that create recurring revenue sources.
And then there is the staff. An old M&A adage claims the perfect acquisition is one in which you keep the customers and lose the employees. The employment market today puts high quality people at a premium. Transactions often close or collapse based on the buyer's ability to retain key people. This will vary in importance according to the company or industry, but given today's innovation-driven environment and strong customer service requirement, people are no longer regarded as interchangeable parts. The certainty of acquiring much needed talent such as a marketing guru or product developer can generate great value.
However, be cautious of company dependence on one or a few key people. This can be a major negative much the same as dependence on a few customers or suppliers. Diversity in all three areas is very important when judging the ability for consistent performance post closing.
Finally, barriers to entry create higher value. Smart buyers will only make an acquisition where they can see a path to even greater value. Therefore, creating processes, technology or brands can make it difficult for competitors to take away customers build value and certainty of cash flow. Amazon is setting the pace in this area with faster and faster delivery. Build your niche and that will build your value.
Advice for future sellers; know, develop and emphasize the key value drivers in your business and you will exceed your value expectations!
• Eric Lundstrom is founder of Focus Capital Advisors Inc. in Downers Grove.