Start With the End in Mind – and Build a Company You Can Sell
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. Here are some suggestions to consider now, to sell your business in the future:
- Know what buyers want. To translate your goal of a future sale into executable strategies, think like a buyer. If you were buying a business in your industry, what would you look for? Perhaps you’d want long-term customers, trained employees, a positive culture, growing revenues or steady cash flow, recognizable brand, customer service, intellectual property, barriers to entry … and probably many more attributes. Most items on your list likely fall into one of two categories: they imply future growth or they limit future business risk. No surprise – buyers acquire companies they think will continue to grow, with limited risks to jeopardize that growth. Build your company to achieve these two criteria, and you will be able to sell it.
- Maintain ongoing customer relationships. It’s easy to focus on new customers, but it’s just as important to build systems and infrastructure to maintain relationships once you get them. Otherwise you’re on a constant treadmill with ups and downs in sales, which buyers consider risky. If you’re selling wholesale, it can be exciting to bring on a new big-box retailer, but ensure you have resources lined up to support ongoing sales. If you are selling to individual consumers, build systems that facilitate repeat sales. If you’re selling services to B2B customers, put in a sales infrastructure to maintain communication with decision makers.
- Build recurring revenues. As a related point, buyers love long-term, ongoing contracts that require the customer to pay you every month (which is why SaaS software companies get high valuations.) A true recurring revenue model might not be an option your company -- but what other strategies will ensure that your customers want and need to keep you around for the long term?
- Build strong gross margins. Buyers want 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 sales volume they might generate. How else can you generate the same increase in sales, but with more bottom line profits?
- Eliminate customer and vendor concentration risk. If you have only a few big customers or rely on one major supplier, sales might drop significantly if you lose a major customer or critical vendor. This is a major risk factor that will send buyers running away from your business. If this is a challenge in your company, a first priority to should be to diversify your customer or supplier base.
- Take care of the financial, legal, and regulatory basics. Gaps in any of these areas can kill your deal or drive down valuation. Ensure 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.(Do not use 1099s when you should have W-2 employees!). 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 so many other priorities. But if you’re enjoying a nice ride building sales through Facebook or other social media, what’s next, as cost-of-acquisition rises? Will Amazon private label your products and drive down your sales in their channel? If you sell to Fortune 5000 clients, how will you adjust to any slowdown in corporate spending? To maximize valuation in a sale, show a buyer how your business can overcome risk today and risk on the horizon.
- Track mergers and acquisitions activity in your industry. Understand your company value today, and learn which drivers will enhance valuation as you grow. Sometimes revenue growth is more important than income, but this can vary by company and buyer. Click here for a general overview on company valuation. Keep an eye out for M&A information specific to your industry, track trade publications, speak with industry colleagues, and monitor sales of your competitors. If certain private equity buyers are active in your industry, follow them on social media. Contact us to discuss which private equity firms are buying in your industry.
To build your company today with a future sale in mind, focus on ways to ensure your company will continue to grow, with minimal downside risk. Contact us for more details.