If you’re building a company, the decisions you make as you grow can directly impact value in a future sale. Planning for an exit or sale can help drive a premium valuation, and also help you build a stronger, more resilient business.
As a first step in figuring out how to build a business that will sell, take a few minutes to think about your business from the perspective of a buyer. What would you look for if you were buying a business in your industry?
Perhaps you’d want long-term customers, growing revenues or steady cash flow, a recognizable brand, a positive culture, customer service, trained employees,intellectual property, barriers to entry to prevent competitors taking market share …. and probably many more attributes. Once you’ve developed a list, review it. Most items on your list likely fall into one of two categories: they imply sustainable future growth or they limit future business risk. No surprise – buyers look to acquire companies that will enjoy sustainable growth, with limited risk factors to jeopardize income.
Entrepreneurs who build their companies with these two criteria in mind are generally more successful in a future sale. We’ve listed some ways you can incorporate these concepts into your business. Not every suggestion will work for your business, but applying or adapting some of these ideas as you grow can help increase the attractiveness of your company:
Drive Sustainable Growth:
- Maintain ongoing customer relationships. Buyers like consistency. Fluctuating sales or periodic declines in revenue will pull down valuation and reduce the attractiveness of your business to acquirers. Whether you have a B2B services company, a consumer products company, or a manufacturing company, keeping up sales from your existing customer base while growing with new customers requires a constant focus on customer relationship management, supported by sales, systems, and infrastructure. The actual tactics you need to implement will vary, but before you take on a client or customer, make sure you have a plan in place to keep them for the long-term.
- Build recurring revenues. As a related point, buyers love ongoing contracts that require customers to pay every month (which is why SaaS software companies get high valuations.) A true recurring revenue model might not be an option for your company -- but what other strategies will ensure your customers want or need to keep you around for the long term?
- Build strong gross margins. Buyers like high margin companies, because each dollar in sales drives an incrementally higher amount to the bottom line. As you grow, consider whether low-margin products or distribution channels are worth the incremental sales volume they might generate. Could alternate products or distribution channels allow you to generate the same incremental increase in sales, but with more bottom-line profits? How quickly can you reduce cost of goods as you grow?
- Build a sales culture and sales infrastructure. Many business owners rely on their own abilities to find and bring on new clients. But as the company grows, this can lead to a sales plateau. At some point, every company needs other people in the organization with sales skills. Building and maintaining an effective sales team is one of the biggest challenges for small and mid-sized business owners. How will you find, manage, compensate and keep good sales people? What resources will they need to fulfill their goals? If your organization doesn’t need a direct sales team, how can you build a sales-centric organization where all your employees understand the importance of generating revenue?
Reduce risk in all aspects of your business:
- Eliminate customer and vendor concentration risk. Nothing pulls down valuation like risk. If a buyer believes there is a potential to easily lose a large percentage of customers, or a major supplier, or that there is some other impact that could reduce your sales or income, they will value your company accordingly. If customer, industry or vendor concentration are challenges in your company, a first priority to should be to diversify your customer or supplier base. And as a related point, if your business has an omni-channel distribution strategy, consider whether to reduce distribution channel risk by adding new ways to reach your customers.
- Take care of the financial, legal, and regulatory basics. Gaps in any of these areas can kill your deal or drive down valuation. Make certain you have good financial recording in place, and follow industry standards regarding revenue recognition and other accounting issues. Stay 100% compliant with all employee-related issues, including wage and hour issues. (As an example, do not use 1099s when you should have W-2 employees!). Be meticulous in your HR record-keeping, and ensure your employees sign confidentiality agreements. Ensure tax filings and payments are up-to date. Get U.S. trademarks for all your company and product names. Apply for patents on any of your critical technology. Find a great book-keeper, CPA, business lawyer, and trademark lawyer, and use them!
- Prepare for change. We know how much business has changed over the past ten years. Perhaps you capitalized on change to build a category or take business from less nimble players. But while you’re handling the day-to-day grind, change continues and it’s easy to miss or ignore while you’re dealing with many other priorities. To maximize valuation in a sale, be prepared to show a buyer how your business can overcome risk today, as well as potential risks on the horizon.
The importance of each of the points above will vary by company and by industry. Contact Us to schedule a complimentary consultation to discuss how to build your business with a future sale in mind. We are happy to provide you with guidance or specific suggestions, an overview of valuation, and information on recent transactions in your industry.
