When it comes to selling a business, owners would do well to set aside their own views of value and look at their company through the eyes of a potential buyer. The stronger the acquisition target is for a buyer, the better the chances that a business will fetch a premium at time of sale.
So what is the best way for a seller to strengthen the business and win the buyer’s beauty contest?
Financial benchmarks can be used to compare a company’s performance relative to competitors of like size. One source of industry benchmarks are database providers like Sageworks© who track the financial performance of thousands of industry participants.
Operating below industry averages may be a signal that something is wrong with a company’s cost structure or business processes. These benchmarks can be very useful in identifying shortfalls, strengthening, and then leveraging them to market the business in a sale process.
Financial buyers look at dozens of investment opportunities a week and initially screen them based on profit, deal size, and industry space. If there is a fit with their investment criteria, they will then seek additional information and financially model the business based on historical and projected company growth, margin, risk, and cash management
Intrinsic Value Enhancement
The combination of a company’s growth, margin, risk, cash management, and size constitute the intrinsic value of a business and attractiveness of an acquisition as an investment. Knowing a company’s intrinsic value is a good starting point for sellers as it can lead to action plans to improve attractiveness and enhance value of the business before entering into a sale process.
Adding more sales or support people is often a consideration in growing a business. Expense reduction is the first thing that comes to mind when considering how to improve profit. Shortening the receivables cycle can improve cash flow. But how do you achieve the improvements you seek? Analyzing and, if necessary, re-engineering business processes can provide significant insight into how to improve the operating and financial performance of a company.
To be continued – in next week’s blog.
If you have any questions, feel free to contact Joan Young, President of Sunbelt Business Brokers, Greater Bay Area – [email protected]. Sunbelt also handles Mergers and Acquisitions.