Would You Buy Your Business?

by Gregory R. Rush | Senior Managing Director

All business owners, regardless of their personal objectives, timetables or even economic or M&A market conditions, should be interested in what the current value of their business might be, and how that impacts their succession plans, retirement goals, estate planning, philanthropy, or any other wealth-related priorities they may have.

The challenge is that most business owners don’t have a solid understanding of how businesses are valued and what factors a potential outside buyer might be looking for. Many might not care about the prospect of M&A at all, looking to hold the company within a family and management team for generations. But building the value of a business is fundamentally about strengthening the company over time for greater stability, flexibility, and growth—and all owners should want that for their family, shareholders, employees, and customers. Identifying the critical areas that drive value from an outsider’s perspective is an important start—there are tangible/practical steps that every business can and should take in order to increase value and shore-up the stability of the company for whatever comes next.

A constructive question for any business owner to ask themselves is, “Would you buy your business?” When done in an unbiased and honest way, this thought process can be a particularly useful tool for any owner, regardless of whether they are considering a sale process. Another way to look at it is that everybody leaves their business someday, and it only happens in one of two ways—on your own terms or somebody else’s. The best way to ensure that it happens on your own terms is to prepare as early and extensively as possible. Nobody has ever completed a successful transaction or business exit and says, “I wish I’d done less preparation.” The starting point is in understanding what drives and creates value from a third-party perspective, and how a third-party evaluates those value drivers. Once you have a sense of this, identifying the areas of focus to strengthen your business becomes more obvious.

Too often, business owners are so immersed in the history and sweat equity they have poured into running and building a company that they don’t understand how the value for a potential buyer may be built on entirely different metrics. The critical eye of an outsider’s perspective is required to fully grasp how and why your business might be an attractive acquisition for various buyers—and taking proactive steps to prepare your business for alignment with a buyer’s needs can have a direct and positive impact on the outcome of a sale.

Different buyers may be looking to acquire your business for a range of reasons, be it to serve a need for a growing organization, fill a logistical gap in a production pipeline, provide expansion into a new region, etc. But all buyers are ultimately interested in generating cash flow and being careful about any potential risks or downsides that can jeopardize future cash flows. Regardless of the benefits or opportunities that pique their interest, every one of them will approach the process with a skeptical eye, looking for risks and reasons that reduce value or not to buy rather than focusing on the goals the acquisition might fulfill. The potential risk factors around such an acquisition are what matters most to them, and it’s the job of the seller’s team to mitigate those factors. Until proven otherwise, buyers will be very conservative and cautious in their financial assumptions. Each will examine your business across a list of quantitative and qualitative risk factors that will have a direct correlation to their continued interest and how much they are willing to pay. The goal for business owners should be to create a company that outperforms its peers in as many of the Quantitative and Qualitative categories as possible.

We’ve found that using an analysis similar to what is commonly referred to as the Gartner Magic Quadrant™ can be particularly useful for visualizing how a company performs against these factors.

Quantitative Factors     

First and foremost, buyers want to see the right numbers in the right places. One of the most important steps a business can take to prepare for a successful sale or to increase its value is tracking important business metrics and key performance indicators (KPIs) over time to demonstrate a historical track record of performance trends. This can be the most useful tool in convincing an outside buyer of promising future performance. Important financial metrics to track include:

  • Sales: level, trends, growth, sustainability
  • Profits/Margins: level, trends, growth, sustainability
  • Market: size, growth profile, opportunities, threats
  • Customers: concentration, contract terms, turnover rates
  • CAPEX: required investments in capital to maintain/grow the business

Qualitative Factors

In support of solid financial performance, outsiders will be interested in all of the other elements that will continue to make the business successful and profitable. It may be harder to gather data to support this analysis, but in our rapidly changing and constantly connected world, risk factors around management team cohesion, PR perception, sustainability, and regulatory compliance have never been so important:

  • Culture, Brand, and Reputation
  • Intellectual Property, “Special Sauce”
  • Competitive Landscape
  • Strength, Alignment, and Incentives of Management
  • Systems and Financial Controls: scalability and ability to generate reports in a timely manner
  • Facilities and Equipment: condition, quality, scalability
  • Legal, Regulatory, and Environmental Risks

How do you know where you stack up against the competition? If available to your business sector, it can be incredibly useful to acquire any benchmarking evaluations for your industry. If there isn’t an industry benchmarking study from a trade group available, it can be worthwhile to try to create one in order to set applicable baselines to measure performance against.

For many, the time demands of preparing a business for a successful sale or ownership transition are too much amid the day-to-day operations of the business itself. The old adage, “you have to spend money to make money” applies here as well, with the added up-front expense of bringing in outside expertise to help manage the transition preparation process has been shown to bring significant potential increases in valuations.

Whether you may need help to strengthen financial management, evaluate your business model, set KPIs and performance metrics, or improve your bottom line—a proven M&A advisor can work to identify and strengthen the factors specific to your business that will increase overall performance and build value for potential buyers over time. If you aren’t looking to sell, you may still think there is no need to talk to an investment banker, but these conversations can be most impactful well before you are considering a sale and able to adopt a long-view approach to putting the necessary components in place to maximize your options down the road. We have developed tools like our Dunn Rush Gold Standard of Preparation which provides guidance on things that help prepare a company for any type of potential transaction that an owner might consider.

I can say this from experience, not just on the advisory side of M&A, but as someone who has both operated and gone through the process of selling a business. It is this sell-side insider experience that differentiates us from many other M&A advisors. At Dunn Rush & Co., our founders and senior team members have all owned, run, and eventually sold their own businesses. We can anticipate the questions and concerns, avoid the pitfalls, and advise on the best course of action that an owner needs to achieve their desired objective—the inevitable transition of your business on your own terms, for the best price, on the optimal timetable, and in the manner you desire.

As you start to think about these issues, we have set up a library of resources and FAQs on our website to help you to better assess your needs, or we would be happy to arrange a call to discuss these topics in a way more specific to your own business or concerns.

Please click this link to listen to my accompanying podcast, “Would You Buy Your Business”.

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