There are many and varied reasons that people have for being in business, some enjoy the lifestyle but for others it is a means of maximising their personal wealth.
In our experience the majority of business owners will want to realise their investment in their business at some stage, generally as they approach retirement. This article is a discussion of the factors influencing potential buyers and what can be done by owners to maximise the value of their businesses, and enhance attractiveness to buyers.
- Potential buyers will look at acquisitions for a whole range of reasons, including;
- Increasing volume
- Geographical expansion
- Diversification
- Additional skills
- Acquiring profile
- Management expertise
Probably the major influence on the price a buyer is prepared to pay for a business will be a function of their confidence in the underlying profits they are acquiring.
What gives them that confidence? It will result from demonstrable evidence of certain inherent qualities within the business that attract high-calibre staff and create more business from new and existing clients and customers. This in turn indicates continued future growth.
Relevant factors are;
" Depth of management;
" Diverse and high quality customer base
" Customer loyalty
" Quality profile for the business or its product
" Long term growth trends
" Innovation in products and services
Other factors buyers consider may include;
" Strategic fit
" Size and profitability
" Market sector
" Territory
You may not be able to influence all of these but are likely to be able to influence some. If you are serious about selling your business then there are many factors you can analyse and enhance.
People:
One of the main routes to acquiring a reputation as a "quality" organisation is in the people you hire. Staff excellence will lead to more imaginative and effective customer service and product offerings. This in turn will lead to an enhanced reputation in your target market.
The skills being employed by the business should be in keeping with the size and nature of the organisation as a whole. Finding a way to attract and keep the right people is of prime importance. Buyers look cautiously at companies where the up and coming management team have little incentive to stay.
Customers:
In addition to high calibre staff, a buyer will also need to see a diversified, quality customer base. Ideally, any one customer should not account for more than 20% of sales. Not only does this make sound commercial sense in terms of sheltering the business from client departure, it also demonstrates an effective business development or sales team.
Once a client or customer has been won, the aim is obviously to work with them for a meaningful period of time. Customer loyalty is an important yard stick and will certainly be measured in years rather than months. The depth of relationship is also important in a service business. A relationship with the general manager of a customer is usually better than one with the foreman.
Business Systems:
Well run and appropriate business systems which ensure customer satisfaction and which produce quality are also important. If a buyer is going to have to spend money to sort out the infrastructure it will probably come off the purchase price.
Cost Control:
Boosting income levels is obviously one side of the coin, but must be translated into increased bottom line profit. This means ensuring that costs do not grow faster than the actual business generated. This can be a difficult task when new projects are undertaken or new products developed. The most difficult and expensive area is usually staff costs. It is easy to become lax on salaries and staffing levels in the context of a rapidly expanding business and it is these costs that will eat a large chunk of operating profit in a service business.
In the current political environment it can be difficult to get rid of underperforming or surplus staff. Care should be taken that your business is not overstaffed. By the same token you should be wary of being understaffed in critical areas.
Equally important is to retain quality control over the client base. New business should be accurately assessed for profitability and credit worthiness.
Effective margin monitoring and sensible client acceptance criteria should be in place. It is good discipline to set minimum fee levels, however exceptions can be made where there are marketing or strategic reasons to take the business on.
One should not lose sight of cash flows, cash flow is perhaps more important than profitability, it is often better to take on a job with lower profitability but more certain cash flow than a highly profitable job with riskier or deferred cash flows.
Effective credit control and cash management should be in place. High interest, high loans and overdrafts will often eat into profits. Additionally, a buyer may deduct excess borrowing from the value of the business. That said, what is an appropriate level of gearing will differ from business to business.
Business Finance:
A buyer wants to see past profit growth as an indication of future growth. Embarking on new ventures is risky and should therefore be planned carefully.
Attractive as business expansion sometime seems, it is never worth standing to lose more on a new venture than any projected profit growth from the company's existing business units. New ventures should aim to be profitable within a reasonably short timeframe.
Financing New Developments:
Generally if a sale is imminent it is advisable for new ventures to be funded out of cash flow from trading operations and/or asset sales. If the company does not have sufficient cash, then it should be asking some serious questions as to whether this new development would help or hinder the business in the long run.
Ideally borrowings should be a lot less than shareholders funds (share capital and retained earnings) and kept as short term as possible. Care should also be taken when entering into leases as unduly long and onerous leases may detract from your business' value.
Cleaning Up the Balance Sheet:
Vendors are well advised to discuss their business' balance sheet with their chartered accountant. It is not uncommon for businesses to have distorted profitability through being encumbered with underperforming assets. It is prudent to strip out underperforming operations and sell off surplus assets in order to obtain the highest possible value for the core components of the business.
Good Housekeeping:
Keep your administration tidy. Ensure;
" Employee contracts are sound and in place.
" Client terms of trade are signed for all clients.
" Legal agreements are in the right names and are up to date.
" Any intellectual property is adequately protected.
" Insurance cover is adequate and current.
" Accounting procedures and internal controls are adequate.
Any buyer worth their salt will conduct a rigorous due-diligence and the vendor will enhance value if they can pre-empt or allay any issues arising through the due diligence process. Other common areas for concern include lack of appropriate or regular management information, inappropriate accounting policies and inadequate software systems.
Remember that the messier it is, the less confidence the buyer will have in the numbers and consequently the easier it is for the buyer to justify a lower price.
Profile:
Profile helps enormously in attracting good talent and the right customers. People aspire to work for a leading organisation. It is a strong selling point to potential buyers and should not be underrated.
Conclusion:
What ever the plans for the future, consideration of these basic points will help enhance the value of your business. You will be empowered with greater choice, whether for borrowing, to make your own acquisitions or for maximising your sale proceeds.
David Holmes
DDI +64 9 373 1104
MOB +64 27 459 8926
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