2021 was a blowout year for mergers and acquisition activity. Activity was up over 60 percent from the previous year and the trend is widely predicted to continue in 2022. If you have taken the appropriate steps to prepare and position your business for sale, then 2022 might be the year to capitalize on strong market conditions. However, if you have not taken the proper steps to sell your business, then going to market might not deliver the results you wanted. In a worst case scenario, you could damage your business.
What are the steps for preparing? Everyone says you must have good books, records and financials, and the business should not heavily rely upon its owner. Yes, these are a given. The books, records and financial statements are proof that the business generates profit and cash flow year over year. Transferability of a business that consistently generates cash flow in the absence of the current owner is essential. But, these are the minimum requirements.
When you consider that extracting wealth out of one’s business is likely to be the most important financial event for a business owner, then taking the time to prepare is critical to securing maximum value.
To prepare, start with reviewing your business through the eyes of a buyer. How does your business stack up against other investment alternatives? Here’s list of questions that highlights factors in preparing and positioning your business for maximum value extraction:
1. Evaluating Return on Investment
What is the three- year trend for earnings/cash flow? Is the business performing at or better than industry key performance indicator (KPI) standards? Upward trends strengthen your position.
2. Evaluating Risk
1. If the owner leaves, will the business continue? Are customer relationships dependent on the owner versus the business?
2. Is it possible for employees to leave and take customers with them? Do you have employment agreements with provisions for anti-piracy and non-solicitation of customers and employees?
3. Is there recurring revenue, long-term contracts or service offerings that creates revenue stickiness?
4. Do any customers represent more than 10 percent of total revenue? Customer concentration is a significant risk factor.
5. Evaluating Long-Term Growth Potential
1. What is the industry’s long-term growth projection or where is the industry in its life cycle? If the industry is in a decline, then the market demand for your business will be low and likely to result in a low value.
While there are several other steps to preparing and positioning your business for sale, this gives you a starting point. Whether you plan to own your business for years, transfer to family members/key employees or sell to a third party, why not take the steps to prepare and position your business?
Our experience with clients who get serious about preparing have three major outcomes: enhanced business value, increased cash flow and improved quality of life while they still own the business. The best part about being prepared is having the opportunity to capitalize on market timing. M&A activity in 2021 posted record-high values on privately-held companies for numerous industry sectors.
Here’s an example: A client wanted to exit the business in three to five years. We analyzed the business, the industry and the market. While the business had tremendous upside potential (meaning that it was scalable, delivered high value to customers, had recurring revenue and held a unique market position), the business had not yet demonstrated the model worked. After all expenses were paid, the cash available to the owner was $20,000. Because the cash flow was so low, an outsider would question if the market was willing to pay for the services –although the business had Fortune 500 customers, excellent customer retention and had excellent technology in a growth industry. We went to work and focused on moving the needle on net margin. After year one, cash after expenses grew to $200K. Then, year two = $400K; year three = $695K; and year four was on track for $1 million. At the same time, we monitored the market. At the end of year three, we determined the market was optimal. Before the end of year four, the business sold to a strategic buyer for $5 million in cash.
Taking these steps are the key to success:
1. Identify the baseline value of the business as it sits today.
2. Determine what can be done within the business owner’s timeframe, capital and personal effort to move the needle on value (addressing any existing risk factors)
3. Develop achievable strategies. (focus on long-term contracts and customer stickiness)
4. Create a business plan that incorporates these strategies.
5. Monitor the market all along the way.
Diane Thomas is President of Premier Sales, Inc., a business sales, merger and acquisitions firm located in Scottsdale, Arizona. For more than 30 years, Premier Sales’ client-centric focus and creative win-win mentality has produced extraordinary results with one of the highest industry success rates.