Value Drivers When Selling a Company

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Whether you are considering a recapitalization, a management buy-in or buy-out, or a family transfer, there are key considerations that should be discussed and understood before any company is brought to market.

To identify the best buyer and maximize purchase price, the business owner should be able to articulate the value drivers for the company. Clearly articulating these points can help a Buyer see the value of your business.

Below are 5 key value drivers that must be discussed as early as possible in the process so that all parties are on the same page:

1. Customers

One of the most important value drivers to discuss is your customer. A clear understanding of how a business makes money and who its customers are is essential for any Buyer and deal negotiation.  

You also have to be able to speak to how you acquire customers. What is the profile and size of your customer base? How do you engage with them?  Having a legitimate sales organization, while not necessary for a successful deal, can help you demonstrate to an interested Buyer that you are working with regular, sustainable customers.

Lastly, you also have to be able to speak to how you lose customers. If your customers are able to abandon your business overnight with little to no switching costs, it will be a red flag. If you have customers that can leave next week without pain and heartburn, that’s not a good thing. While it is not an insurmountable challenge, the deeper entrenched your business is in the customer’s life and business, the better.

2. Industry & End Markets

In addition to your customers, it is imperative to be able to define the size of addressable market. There is no need for detailed reports, but you must have a sense of the number of potential customers and trends in that space. Is your industry growing or shrinking? Is there heavy regulation? These types of extra-company factors can help a Buyer make a decision.

Buyers are also concerned about businesses that are highly discretionary. For example, if your business offers a completely discretionary item, that means the purchase can be put off during downturns and economic uncertainty. That is a big risk in future cash flows and, unsurprisingly, a red flag for many Buyers. Similarly, if a business is very cyclical, it can be challenging for an investor. Most sophisticated Buyers will utilize leverage during an acquisition---leverage and cyclicality is a very risky combination.

To help assuage a Buyer’s concerns, you should demonstrate that your business tracks along with the general economy. If you can show solid financials that is a great sign that your business is not particularly subject to cyclicality or customer discretion.

3. Suppliers

The two questions you need to address are:

Are there any supplier concentrations? If your business is being influenced by your supplier because of their consolidation or control of the market, that is not a deal killer, but it is something that must be disclosed to the Buyer.  It is important to understand the costs and risks of switching suppliers.

Can a supplier go straight to your customer? If that is the case, it makes Buyers very nervous. Most Buyers want to see a fundamental, tangible reason why your business exists. If you are relying on opportunistic inefficiencies, there is a great deal of risk that your business will be squeezed out by larger competitors or those with vertical integration capabilities. You need to demonstrate that your firm will be around for a long time because it is addressing a clear need — and one that no one else can easily replicate.

4. Competition

As the interested investor gets the lay of the land, he will also need to know about the level and type of competition surrounding your company. If you claim there is no competition, Buyers will consider you to be naïve.   You will need to effectively be able to address the presence of any competitors and how you differ from them. What are the variables? Price? Service? Location?

You will need to explain why the customer is buying from you. Are they buying from your firm because of the salesperson? Or because of the right price? It may sound like a silly question, but it is fundamental to why a company exists.  Do you have pricing power? The more and better you can answer the question, the more value you can demonstrate in your business.

5. Management & Financials

Only after understanding the full environment in which you company exists will the investor begin to look into the company itself. Understanding the key stakeholders and management of the business is absolutely crucial to a successful deal.

When it comes to financials, the numbers will be what they will be. At this stage of the process, the Buyer is probably most interested in seeing how organized your business is. The numbers need to be reliable. Buyers do not want to be trapped in a situation where they have made a deal and in the due diligence process discovers that they were misled-DEAL BREAKER. The more confident a Buyer has in their ability to track the numbers, the more confident they will feel about the deal.

Good Luck

Steve Sink, CBI, M&AMI

ss@phxaffiliates.com

Good networking is a lot like wearing a bow tie

Bow tieDanny Beyer, a sales executive at Kabel Business Services, is a serial networker and often speaks about networking to groups.

Good networking is a lot like wearing a bow tie.  Hear me out here. When it comes down to it, good networking involves three crucial steps. The same can be said for wearing a bow tie. 

Step one:  Patience.  When I first started networking, it took almost a year to see the fruits of my labor. I can still remember the first deal I closed from networking and the rush it gave me to know that I'd built enough trust with someone for them to recommend me to a friend.  It was a small deal but it was my deal.  Similarly, a bow tie takes a lot of patience. The first time I bought one I stood in Younkers with a very close friend for almost an hour replaying a YouTube clip over and over until I got the thing tied around my neck. Looking back on it now, it was really a terrible tie job but I got it done. Now I can tie a bow tie in less than thirty seconds and I can rely on my network for almost any need that arises. 

Step two:  Getting over nerves.  Let’s face it, there are very few people who can honestly say they enjoy walking into a room of strangers and meeting new people.  In fact, public speaking outranks death as most people’s No. 1 fear. Networking is nerve-racking, even for most seasoned pros. Wearing a bow tie in public for the first time triggers those same nerves. The easiest way to get over them? Dive in headfirst and don’t look back.  Take the risk, walk up to a stranger and say hi. Wear that bow tie with pride for the entire world to see. 

Step three:  Realizing both get easier with time. As I mentioned in the first step, tying a bow tie has gotten pretty easy. The same can be said, albeit to a lesser extent, for networking. I’m still more nervous networking than I do tying a bow tie or wearing it in public, but it has gotten easier. The simple fact is everything will get easier with practice.  I’ve learned to suppress the nerves, or ignore them all together, because I now realize that most people attending an event are just as nervous as I am. 

There you have it, how good networking is like wearing a bow tie. Sure it’s a stretch but just remember with a little patience, some practice, and by diving in headfirst anyone can learn to tie a bow tie or be great at networking.

How are you perceived?

Rowena (Ro) Crosbie is the president of Tero International Inc. This is the third in a series on leadership entitled “The Cover Matters”. 

How are you performing as a leader?  Leadership_blog1

In many tangible tasks and activities, how well we are performing can be quickly assessed.  For the golfer, you receive immediate feedback by looking at your performance on your last golf swing.  This helps inform what adjustments you need to make for the next one. 

Most leadership activities are different.  Leadership is rarely a repetitive behavior and is never a solitary activity.  By definition, leadership is about people.  In their classic leadership text, The Leadership Challenge, authors James Kouzes and Barry Posner present research about which behaviors followers consider most important in their leaders.  Survey respondents cited four characteristics over 50% of the time.

  1. Honesty
  2. Forward-looking
  3. Inspiring
  4. Competent

Unlike a golf swing, these qualities are largely intangible and success can only be assessed over time. 

How do we know if we are performing well in areas that don’t allow for immediate feedback? 

Long term, your legacy will ultimately confirm your leadership performance.  In the short term, exemplary leaders realize that influencing the perceptions others hold of them as they are exercising leadership is critical.  Do you look honest?  Do you come across as confident, competent and inspiring?  Can people tell you are forward-thinking?

Some of the only data available to people entrusted to your leadership on a daily basis is how you look and sound.  The pace we walk when we enter a room, the eye contact we make with others, our hand movements, our facial expression and our vocal quality all communicate for us non-verbally – for better or for worse.  These behaviors shape the perceptions others hold of us.

Appearances matter.  Do a self-audit.  How are you perceived?

Is your body language and vocal quality communicating that you are honest, forward-thinking, inspiring and competent?  Or do you, like many busy leaders, unintentionally and non-verbally communicate qualities such as impatience, disinterest, insecurity, incapability or uncertainty.  

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