By Ryan P. Hurst, ASA
Is your company one of the 66 percent expecting to transfer ownership within the next ten years? If this statistic from Pepperdine University applies to you, it is important to invest the time now to optimize your company and accelerate its value. Not only will this help you stand out from the competition, it may also help you gain a higher price from the transaction.
As a business owner, you may feel like you have a good idea of what your company is worth, but it is critical to verify these assumptions with an independent, third-party valuation. Doing so allows owners to gain a deeper understanding of strengths and vulnerabilities and take the necessary action to close value gaps that are often a primary cause of deal breakdown. Below are action items to maximize value and certainty of proceeds in three key areas: future cash flow, business risk and transferability of value.
Optimize company cash flow
Potential buyers look for upward trends and consistency in cash flow reporting. Even if one year is not as strong as others, producing a longer track record of steady performance is more advantageous than one or two years that can be written off as aberrations. Discretionary owner expenses can also depress cash flow in closely held or family owned businesses. Owners thinking ahead to their inevitable exit should consider reducing discretionary expenses and keeping track of unusual expenses to improve the level and quality of earnings down the line.
Minimize risks related to process, people and technology
As potential buyers evaluate an acquisition target, several operational and personnel areas can raise concern. Chief among these issues is the concentration of customers, suppliers or vendors. Find ways to diversify business relationships with customers, broaden your pool of vendors, and enhance the reliability of the supply chain through solid contracts with important partners, which helps reduce the negative impacts of changes or departures. The same principle holds true for internal processes – a buyer may value a company less if he knows he’ll have to replace equipment, update technology or key staff members soon after taking over.
Enhance transferable value
Beyond the physical assets of a business, a buyer also takes on the intangible value. One of the main areas of intangible value involves the owner’s knowledge and connections. After decades running a successful business, it makes sense that the owner would have deep ties and a wealth of proprietary information. Developing a plan to impart knowledge, transfer roles and relationships, and assign responsibilities to other key employees will support a sustainable business with high transferable value.
RKL has a deep bench of transaction advisors focused on helping owners get their companies ready for sale and supporting them throughout the process until the ink is dry on the agreement. Contact us today for assistance implementing these value-boosting strategies.
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Ryan P. Hurst, ASA, is a Partner in RKL’s Business Consulting Services Group. He serves the valuation, investment banking and transaction advisory needs of clients in a wide variety of industries. Ryan can be reached at [email protected].
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