Knowing the value of a business — and understanding how to increase that value — is key to maximizing price when it is time to sell. Further, focusing on value drivers and trends in the business over time can also help turn around a distressed company before it is too late. But what value drivers should be considered, and why? To increase value, owners must understand how hypothetical buyers would perceive their business operations.
The M&A advisors at Doeren Mayhew Capital Advisors provide the following key factors investors look for when valuing a business interest:
- Profits and Cash Flow – Investors prefer companies with high profits, positive operating cash flows and consistent upward growth patterns, especially relative to the industry and your competitors.
- Longstanding and Diverse Customer Base – Companies that are not tied to one or two key customers or that have customers across multiple industries are more insulated against economic downturns, and thus more attractive to buyers.
- Experienced and Capable Management Team – Strong, decentralized management teams are valuable assets. If a company relies on key people, buyers may require an earnout or ongoing consulting agreements with the sellers as a condition of the sale. Also important is having agreements and incentives in place to keep management on board to help run the company post-sale.
- Proprietary Products and Services – Companies poised for future growth always appeal to potential investors. So managers should continually reinvest in property, the plant, equipment, and research and development. If management neglects upkeep and distributes excess cash flow, investors may be turned off.
- Technology and Systems – Maintaining the latest technology in the business will not only help with post-close integration, but will also lower the investment new owners will have to make to keep their new company running successfully.
- Asset Management – Potential buyers look for efficient collections and inventory management as well as high equipment use rates.
Although these characteristics may seem obvious, many owners compromise business value with imprudent business practices. For example, smaller businesses commonly downplay revenues or exaggerate expenses to minimize taxes. But low taxable income makes a business less attractive to prospective buyers.
Closing the Gap
Often a significant gap exists between what an owner thinks his or her business interest is worth and what it realistically will sell for. If you are thinking of selling your business soon, contact our M&A advisors to get insightful ideas to close the gap and start driving up the value of your business today.
