Marketers will sometimes talk about 4, 5 or 7 P formula of selling. Known as the “marketing mix,” the emphasis a company puts in each area can have a direct impact on sales and profits.
Please note, selling a business is not like selling a product, although similar factors impact a company’s value and saleability. The right mix will make your company more desirable to Buyers and more likely to attract multiple competitive offers.
Product Analyze your product(s) or service(s) and honestly assess past and potential future performance. Will this continue to be successful? Is it superior to your competition? If the answer to these two questions is yes, your company’s value increases.
Lessons from the recent past include Blockbuster (1985-2010) and Borders (1971-2011), two companies that failed to innovate and were too late to pivot to new models – entering online video and e-reader business.
People: Look at your human resources as people play a critical role in your business’s saleability. As an owner, you need to be replaceable. Ideally, your business should continue to operate and grow without you as a part of day-to-day operations.
In the lower middle market, you’ll gain extra value by having a management team or key employee group that can run the business with little to no input from you the owner. Buyers want to know they can maintain your success even after you’re gone.
When talking to would-be Buyers, be sure to talk up your people. Say “they did that” or “we did” whenever possible, as opposed to highlighting your own solo contributions.
It may appear counter-intuitive, however, the less your company needs you, the greater the value. If you truly are the only one with all the magic dust, your business is a risky proposition for a Buyer and will be harder to sell.
Bonus…you get to take enjoyable week or month-long vacations and leave capable people running your business while you own it!
Profits: Identify your company’s true profit. Generally, buyers want a business with a stable record of profits and preferably a growth trend. They will typically look at the last three years of financial performance, paying attention to the last 12 months (aka trailing twelve months, TTM).
A business is generally worth a multiple of its cash flow, specifically EBITDA adjusted for the owner’s salary and benefits. By driving cash to the bottom line instead of taking and/or hiding unnecessary perks inside your financials, particularly in the last few years before a sale, increases the value of your business to Buyers.
Take a hard look at cash-related issues like working capital, capital expenditures, fair market rent, and fair market payroll. If you’re underpaying (or overpaying) yourself in terms of rent, your cash flow might not reflect the new owners cash flow. If you’re working 80- hour weeks (longer than any paid manager could be expected to work), your current salary might not be an accurate reflection of the necessary replacement salary.
cash flow is one of the most important numbers Buyers will use when valuing your business. Make sure yours is accurate and tells a good story.
Potential: What is your company’s growth potential? Buyers want a growth story and a vision for the future.
You should be proud of what you’ve built, however, would-be Buyers do not want to hear that the business is doing “the best it possibly can.” They hear “There’s nowhere to go but down.” If you haven’t, spend some time thinking about growth opportunities and what you might do if you had more energy, more capital, or were willing to take on new risk.
If you don’t have a vision for growth, talk to us or an advisor.
Price: What is the value of your business? Ask two professional valuation experts to determine your business value, and you’ll probably get similar numbers. But ask two or more Buyers to value your business, and their target price may vary significantly.
That is because your business is worth more or less to different buyers, depending on their motivations, resources, and business synergies. How they value your business will depend, in part, on how badly they want to reach their goal…and what you are willing to Sell it for.
For the lower middle market, going to market without an asking price, a no-price strategy, can give the you, the seller an advantage. Please note that not all businesses can or should go to market without a price.
Delta Business Advisors are here to assist you along your path to your future, whatever that may hold for you.