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Make Your Business Attractive to a Strategic Buyer

The Team - Tuesday, January 25, 2011

When it is time to sell their family home, many people just put it on the market for what they can get.  Many people run a business and then do the same – put it on the market.  At least there are always some sales for houses similar to yours but there is not usually a multitude of buyers for your business. 

Given the lack of ability to compare with like businesses, what is yours worth?  

Most accountants will tell you that it is a multiple of the firm’s profitability (typically 3 – 4 times Earnings Before Interest & Taxes).  Yes - most businesses are sold on the basis of today's financial statements. But some companies sell for thirty times and some for only one times that figure and some companies are valued in the millions when they have never made a profit.

Clearly, other factors can be addressed to increase the value of your business. A less well-known – but much more valuable – approach is to sell the business based on what it will do for another company.  Indeed, many buyers may need to have explained to them why they should take on a business that is strategic to them.  The secret is to get away from a purely financial valuation based on your P&L and Balance Sheet and begin directing your business towards a strategic sale.

In the same way that you can improve aspects of your house over a few months to obtain higher value, you can work on your business over a couple of years or so to add the value that will increase your own net worth. The rigour of strategically preparing your business will result in a sustainable growth in earnings and in good systems and procedures that allow the business to operate without you. Your value will be increased even though you may have no immediate plans to sell your business.

You should start by thinking about the people you know and who know your business – your suppliers, customers and competitors.  Who among them may see revenue potential in a combined business?  Maybe it’s not revenue that will interest them, but a means of managing their risks and threats. Maybe they would want to buy rather than build an expansion of their business in your area of expertise.  

Look at your business through the eye of a potential buyer (or have somebody do it for you), then over a period of time address the key criteria.  Who are the key people in your business?  Is it you – if so then you must start skilling up a replacement.  Look after your key employees for both your benefit and theirs.  Do your accounts need cleaning up and are they in a form that they are necessary part of managing your business?

However, just like selling your house in a hurry, you won’t generally get increased value at the last minute.  Start acting strategically NOW to increase your value – some possible steps over a two year period are:

    - identify possible buyers that may benefit from owning your business;

    - understand what their risks are to their own business;

    - develop a statement of what your opertion would add to their business;

    - brainstorm what they would find risky about integrating your business with their         business;

    - take action to address their integration risks;

    - start a Due Diligence file on your own business and work to remove problems;

    - slowly bring possible buyers into the fold – not as a possible purchaser but as           someone who will more closely with you than they do; now; and

    - in small increments, let them see the inner workings of your business.

We cannot overstate the importance of you undertaking Due Diligence on yourself and cleaning up all aspects to get you through the process that someone will take.  When it does come to having a potential buyer conducting Due Diligence, be open and honest.  Nothing will reduce your value by being caught in a deception.

At NOW Business Mastery, we understand the process of a strategic sale and the steps to take to build value in your business.

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