Professional Documents
Culture Documents
to Increase
the Value of
Your Business
Page 1
Introduction
Welcome to our world, where we focus on maximizing value.
Here are fifteen of the most universal key factors that you, the entre-
preneur, can manage and implement to impact the value of your busi-
ness. Are there others? Sure, but those tend to be specific to an in-
dustry, region or temporary market circumstances. If you work these
fifteen factors properly, your business will be worth more, when you
decide to borrow money, sell, or transfer control in other ways.
These 15 Key Factors (also called value drivers) represent the inside
story on what generally affects the purchase price of businesses.
Based on real-world transactions, these factors come directly from
skillful business buyers. Make no mistake about it, in a professionally
run selling process, it is those informed and carefully positioned buy-
ers (motivated by greed, fear of loss, ego and whatever else) who are
the true arbiters of value.
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With a wealth of experience acquired by funding and/or investing $1.25
billion in 68 businesses; buying and selling 130 businesses for about
$400 million; starting two businesses; and turning around another for
sale to a Fortune 25 company, GroGroup professionals are in a unique
position to provide these insights. In the process of representing busi-
ness owners, we have interacted with thousands of business buyers,
ranging from multi-billion dollar strategic companies to million-dollar in-
vestors.
This guide was prepared to assist you, the business owner, in planning
and directing your efforts so that, when the time comes to benefit from
your enormous investment of money, time, emotion and effort, every-
thing will be properly positioned to command the best possible value.
So, go ahead. Try it out. Make it grow. Call us when you are ready to
set things into motion. Until then, take good care of your baby, the
marvelous family money tree that you have created and nurtured.
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Key Factor #1
Develop Proprietary Products
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KeyFactor
Key Factor #2#2
Serve
Serve Niche Markets
Niche Markets
Tryingtotobe
Trying beeverything
everythingto
to everyone
everyone in
in aa major
major market
market can
can blur
bluryour
your
company’s image, exposing you to harsh competition. In good
company’s image, exposing you to harsh competition. In good markets, markets,
you are better off owning 30% of a niche than 1% of a broader market.
you are better off owning 30% of a niche than 1% of a broader market.
Niche players have a sharper focus on specific types of customers,
Niche players have a sharper focus on specific types of customers, know
know them in minute detail, and can, therefore, offer them superior ex-
them in minute detail, and can, therefore, offer them superior exper-
pertise, service and products.
tise, service and products.
One client who did this well sold pipe—but not just any old pipe. They
One client who did this well sold pipe—but not just any old pipe. They
focused on specialty products, such as stainless steel, Teflon and glass
focused on specialty products, such as stainless steel, Teflon© and glass
pipe for pharmaceutical and other process industries. As a result, they
pipe for pharmaceutical and other process industries. As a result, they
became the leading distributor in that niche, with sales of $20 million is
became the leading distributor in that niche, with sales of $20 million is
several regions where their customers knew and respected them.
several regions where their customers knew and respected them.
This company sold for a premium because buyers valued their domi-
We were able to sell this company for a premium because buyers valued
nance in this desirable niche market.
their dominance in this desirable niche market.
Key Factor #3
Sell Consumable Products
Key Factor #3
With consumable products, your first sale is only the beginning of a
stream of sales. Sell Consumable
Reorders Products
can be automatic; customer turnover is re-
duced. Buyers of businesses love repeaters, because of the predict-
With consumable
ability of sales. products, your first sale is only the beginning of a
stream of sales. Reorders can be automatic; customer turnover is re-
One of Buyers
duced. the best ofexamples
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our experience
repeaters, was a client
because whopredictabil-
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ness forms and tags used by local dry cleaners. Each sale averaged
ity of sales.
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pendable. As aexamples
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that was a client who sold busi-
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about $300,
multiple for and business
it than they hadwasfor quite
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equipment this business
reseller they werepaid a higher multiple for it than they had
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inganconcurrently.
equipment reseller they were purchasing concurrently.
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Key Factor #4
Build an Organization
Buyers really don’t like a ‘one-man band.’ A business that depends on
only one or two people carries an incredibly high risk in the eyes of a
buyer, and therefore is perceived to be of low value.
2.a very responsive financial reporting system that can quickly flag to
you (and them) how they are performing, relative to budget (i.e., what
they committed that they would do).
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Key Factor #5
Beware of Size, a Double-Edged Sword
Larger businesses are often stronger than smaller ones. Among the
benefits they can offer are better market share, broader product lines,
multiple locations, more assets, deeper management and greater ca-
pabilities. Recognizing this, buyers often set minimum sales size as
a criterion for screening acquisition candidates. Because the notion
of ’critical mass’ is both accepted and comfortable, everything else
being equal, big companies pay high multiples for large targets.
Size can hurt, however. When the goal is market share, or simply
size, profits often suffer. The resulting high working capital demands
can lead to strained finances. Also, more debt means increased risk.
Larger businesses can be more complex and harder to manage. Is a
business that earns 10% pretax on $10 million of revenue worth more
or less than a business earning 3.4% on $30 million? It depends on
other factors, such as this: if both have the same book value, but the
$30 million company is carrying $8 million more in debt, it’s very likely
the smaller business will be worth more to a buyer.
A prospective client had more than 100 hundred fast food stores.
The company was losing money and deeply in debt, but the owner’s
response was to grow even faster, and he added another 35 stores.
His compulsion to grow put his business in jeopardy, so we coun-
seled him to re-think his strategy, rather than sell.
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Key Factor #6
Produce Credible Financial Statements
Financial statements provide a record of the financial results of a
company’s operations, as well as statements of assets and liabilities
and the sources and uses of cash. Many buyers are turned off by fi-
nancials they deem to be untrustworthy. Buyers lose faith in the
seller’s credibility if the financial reports look ‘different’, or lack clarity
and specificity. It should be obvious that unsupported tax returns
rarely pass muster.
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Key Factor #7
Develop a Broad Customer Base
Perceived risks play a major factor in every buyer’s internal purchase
price deliberations. A business with many independent customers is
generally believed to be more predictable and represents a lower risk
than a similar business that depends heavily on a handful of major
customers.
Note: The same issue may exist in the way you source raw materials,
components, and other supplies. Specifically, if you are dependent
upon a single vendor for a critical item, it would be wise to develop
alternative sources of supply.
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Key Factor #8
Formulate and Follow a Strategy
A good business with a clearly-articulated strategy usually com-
mands a premium.
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Key Factor #9
Steadily Increase Sales and Profits
Buyers make many judgments when reviewing prospective acquisi-
tions, including how much they can expect to earn from each specific
investment. Forecasts are key to this exercise, but forecasting the
outlook of a company replete with ups and downs in sales and profit is
difficult, so buyers tend to dismiss these deals, or value them far lower
than those with more reliable-looking histories.
Targeting specific niches in growth areas of your industry will help cre-
ate and protect your sales trend lines, and will tend to attract strategic
buyers who pay a premium for quality acquisitions.
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Key Factor #10
Low Debt + High Book Value = Higher Price
Debt outstanding at the time of sale usually is retired by the seller out
of the proceeds of sale, reducing the net price received. We have
seen too many businesses that were impossible to sell for a net price
satisfactory to the sellers because the debt they had accumulated ex-
ceeded the gross value of the business.
How can this happen? Any of a number of things can produce this
imbalance, including: a pattern of excessive distributions to owners;
high growth consumes too much working capital, thereby outstripping
the ordinary cash flow’s ability to sustain the balance sheet; the na-
ture of the business requires an unusually high investment in fixed
assets; cost of a recent expansion hasn’t been recovered; a recent
acquisition was supported by debt that hasn’t yet been prepaid; or, as
we see in too many businesses, it is simply under-capitalized.
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Key Factor #11
Be a ‘Player’ in a Major Industry
To attract the big buyers who pay the big prices, you need to be a ‘big
shot’ too. The company with a proprietary product in a tiny or shrink-
ing industry sector is unlikely to be in high demand to acquirers who
pay higher prices. Why? Because they look for (and expect to real-
ize) the benefits of ‘synergy’ commonly thought to be available when
overlapping companies are merged.
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Key Factor #12
Look Sharp
Mom was right—first impressions DO matter.
Appearances, no matter how trivial the individual items may seem, all
become part of the fabric of the buyer’s initial opinion of the quality of
management and, therefore, the value of the business. Mow the
grass and plant flowers. Get rid of the clutter in the factory, ware-
house and out back. Paint the building, inside and out. Pave the
parking lot and re-paint the lines.
...and yes, clean up your office and pitch all of that ‘stuff’ you’ve accu-
mulated.
Period.
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Key Factor #13
Use a Merger & Acquisition Professional
to Sell Your Business
Engaging the services of a good M&A professional will give you a significantly bet-
ter chance of selling your business—to a quality buyer, for a better price, on a
timely basis, and on better terms. Consider this:
Most business owners will never sell even one business; the best buyers
purchase several companies every year. You will be outgunned if you chose
to ‘save the fee’ and go it alone, and that will be a painful and very expensive
education
The best results are achieved by marketing the deal quietly, but broadly
to many qualified buyers. When we market a business, we start with a rigor-
ous search for public companies, both here and abroad, because these entities
consistently pay the highest prices and offer the most solid deal structures. We
also know who, among the thousands of mercurial financial buyers, actually
close deals without a lot of fuss
Don’t put a price tag on your business. In any negotiation, the first person to
name a number loses. Our highly perfected selling technique is crafted to bring
multiple buyers to the table simultaneously. This creates a fear of loss in their
minds, causing them to pay more than they might otherwise offer. Our credibil-
ity with these quality buyers induces them to participate. It all comes down to
another basic rule: One buyer is no buyer. These alternatives give our sellers
the comfort to push buyers hard to achieve the best possible deal
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Key Factor #13, continued...
Hiring a professional who has completed many visible and noteworthy sale
transactions establishes the seller’s credibility, not only with regard to seri-
ous intent to sell, but also in the information given to buyers
Be aware that the complex terms of sale are every bit as important as
the agreed purchase price. You should have the advice of someone famil-
iar with the many financial aspects of selling a business. Reps and warran-
tees, subordination, earn outs, royalties, holdbacks, escrows and employment
agreements are but a few of the items that can be part of your deal.
The bottom line is this—you’ll probably only sell your company once. It is likely
to be the greatest part of your fortune and personal legacy. Huge portions of po-
tential value are made or lost in this carefully choreographed contest of skills. A
true professional will improve your deal by many times the fee you will pay
him to handle this process.
We do.
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Key Factor #14
Think Taxes
There are many tax-minimizing things that you can do now, in prepara-
tion for the eventual sale/transfer. For example, if you are taxed as a C
Corp, consider an S Corp election. That simple step could eliminate
double taxation on earnings as well as on distributions of sale pro-
ceeds.
Real estate should be held away from the company for a few reasons,
including that it allows you to accumulate wealth in a ‘safe haven’ away
from the risks inherent in the business model. It also facilitates gifting
and estate planning. Many buyers prefer not to purchase real estate;
rather, they lease it for a period of time, with options to extend or pur-
chase at a future date at prevailing market values. Were the property
held inside the business, these actions create a burdensome double-
tax for you. Also, real estate is best sold separately to a real estate fo-
cused entity, usually on better terms than corporate buyers pay.
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Key Factor #15
Time the Sale Correctly
The best time to sell is when the market is ready. However, if you
have been running your business to maximize value, then you will be
ready, too.
The business grew as predicted and now he wants to sell, but the mar-
ket is down 60%. Instead of adding 10%+ to the sale value, he actu-
ally LOST ONE HALF of his perceived worth. When will he be able to
reach his goal and retire now? 2012? 2013? Later?
Can you avoid that all-too-familiar trap? Sure. Run your business with
the first 14 Key Factors in mind and then you will be ready to take ad-
vantage of market peaks when they occur every 5 or 10 years. Also, if
you are doing a particularly astute job implementing some/all of Keys
1, 2, 7, 11 or 12, you will attract the attention of strategic buyers, no
matter what the market conditions.
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We and our affiliates are an international merger and acquisition team
that specializes in:
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