Cashing In!
Douglas Group
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Five Steps to Building Value for the
Sale of Your Company
Business
owners take risks every day. They guarantee debt. They dig
into their pockets to finance growth. They put heart and soul and
twelve-hour days into growing and nourishing their companies. The
object of this all-absorbing quest is the creation of value. The
ultimate reward is cashing in on that hard-earned value. So what
steps can you, as a business owner, do right now to create value
for the future sale of your company?
Step 1. Building A Niche
All
buyers of companies look for the seller who has carved out a powerful
niche in which to do business. The focused niche player has
strong margins, is more profitable, and has greater barriers to
competitive entry. They are often dominant players selling
products or services in a particular focused market - and they usually
offer some products/services no one else does. They typically
have a defined business category which they understand well - and this
gives them the ability to be first with the changing technologies and
trends deemed desirable in their business segment.
Therefore,
the better you understand your customers and the products which attract
them, the easier it becomes to build and grow that solid niche presence
in your marketplace.
Step 2. Building A Financial Track Record
Buyers
look closely at financial history in assessing value. They look
for strong profitability, steadiness of progress over recent time
periods, and solidity of fundamental balance sheet.
The
more you can keep costs well controlled and profits growing, the
better. It is easy in the mature company to become increasingly
complacent about cost control. To stay in that A+ category
requires ever-vigilant focus upon improving profitability.
Also,
as you build, your plans should include steady and fairly aggressive
pay down of debt. Most buyers, when they pay a multiple of cash
flow, generally begin with a cash flow definition known as "EBITDA"
(earnings before interest, taxes, and depreciation allowance), less
normal recurring "Cap X" (Capital Expenditure Requirements). The
amount they offer is what they expect to pay for a normal mix of assets
and liabilities, excluding interest-bearing debt. Excess cash on
the balance sheet can typically be added to the price. Thus, the
truly healthy company with minimal debt and/or strong cash, is highly
reassuring to buyers, and quickly generates strong confidence.
Step 3. Understanding Growth Potential
A
business preparing to sell should begin with a SWOT analysis
(strengths, weaknesses, opportunities, threats). To optimize
strengths, in obtaining an attractive analysis, measure the size of
your primary customer segment both in terms of current size and the
potential for future growth. Keep in mind that even the best
niche market in the world, if tiny in size with little potential for
growth, is not very attractive.
As
you begin to see weaknesses in the market road ahead, look for
replacement segments in emerging new markets for growth
possibilities. Analyze the forward prognosis in demographics and
retail trends, and in every other bit of information you can glean, to
give you glimpses of the possible future.
Step 4. Securing The Intangibles
Intangible
assets enhance value. The most obvious intangibles relate to
patented products, or products subject to exclusive supply
agreements. As your market presence and distribution networks
become increasingly powerful, it gets easier to command exclusivity in
sourcing the product.
Trade names and trademarks create value. Be diligent about the legal maintenance of such intangibles.
An
equally important, but often neglected, intangible asset is key
people. Depending upon the state laws, non-compete agreements may
not prevent you from losing good talent, but they can prevent key
people from walking out and taking business from you.
A
firm non-compete is something that needs to be in place for top
management, as a matter of course, well in advance of consideration of
sale. If non-compete agreements are put in place immediately
prior to sale, employees are likely to resent the change, and feel
unfairly treated by both the exiting seller and the new corporate buyer.
Step 5. Doing Regular "Housekeeping"
The
basic "housekeeping" which precedes sale is enormously simplified if it
has become a real habit of the organization. "Housekeeping" means
maintaining clean financial records with audits or reviews on an annual
basis by an outside CPA firm. It means to have defensible tax
positions - nothing outrageously risky or "on the edge," and having
clean environmental and safety records. It means complying with
OSHA, ERISA, and any other governmental rules and regulations. It
means fully and properly adhering to rules for sales taxes, use taxes,
franchise taxes, etc.
All
of these areas and more will be reviewed in depth by an incoming buyer,
and major uncertainties or exposures will show. Additionally, any
buyer paying an aggressive price will expect the seller to make certain
representations and warranties about the condition of the company being
sold. The seller is not required to make reps and warranties
about the future in any way, except he will need to say that he has
fairly disclosed known threats and claims. He will also have to
attest that he has been truthful and has not intentionally misled the
buyer.
Positioning For The Future
You
should build into your business plans the mechanisms to enhance value
of your company. By doing so, you ensure that your company will
be worth more in the future, as well as increase its stability and
security right now. It will secure your employees' future,
in that they will be more desirable to a future buyer of the premium
company. By taking the necessary steps now, when the time comes
to sell, you will ensure the best possible outcome for everyone from
the owner/CEO to the mailroom clerk.
Written
by Deborah Douglas, Managing Director of the Douglas Group, a St.
Louis-based private investment banking firm which represents sellers of
middle-market companies. Ms. Douglas is also author of "Cashing In,"
(2004). For more information, contact her at ddouglas@douglasgroup.net or call 314-991-5150.
Click here to read more articles on buying/selling a business
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demonstrates how to
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Topics include:
Owning a Salable Company
vs. Owning "A Job"
Why & When To Sell
How Competition Increases
Selling Price--Significantly!
The Secret Benefit of the
Intermediary Shield
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created this newsletter to share timely and relevant industry expertise
on buying and selling businesses. Here we share stories,
anecdotes, and expertise in the world of business sales; also known as
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