Whenever owners ask us “What is the first step in the Generational Equity M&A process?” our answer is always the same – a company evaluation.
Think about it – would you put your house up for sale without a professional valuation? Of course not. Then why would you treat your most important asset any differently? A comprehensive valuation is the essential first step, as it gives you an initial estimate of much you should expect for the hours of dedication you put into your company.
That’s why at Generational Equity, we make business valuation the first step in a successful exit strategy. Determining a company’s value is not formulaic – it is both an art and a science. Your financial records and projected growth statistics are key components, but it is also about interpreting these in the context of your business, market and industry.
Don’t believe those that say you can only “ballpark” the true value of a business. With the right professional advice, you can determine a potential measure of value in your company.
Find out more in our free-to-download white paper Selling a Business: Part 1 – The Evaluation.
Once you’ve established your company’s current business enterprise value, you have to ask yourself another question: Is that enough? Most company owners will find that there is plenty of hidden value to be uncovered in their businesses. It is simply a matter of knowing how to build your valuation before the time comes to exit.
Here we discuss six strategies on how to increase value in a company:
Let’s start at the beginning, as recasting financials is a critical part of the valuation process. What does this mean? Put simply, it’s removing or adjusting items on your financial statements that do not relate to ongoing business. These could be as simple as one-time expenses or discretionary costs that new ownership would most likely not expense.
We strongly recommend hiring an M&A professional to dig into your financials and recast these to reflect the true value of your company. Buyers are interested in your business’s future, so don’t get off on the wrong foot by understating your company’s profitability.
It’s not always enough to demonstrate your business has a lot of revenue coming in – it is also how that revenue is coming in. A company that has several active annual contracts for a steady stream of income is more valuable than one that relies on one-off payments or fluctuates depending on the month. Your aim is to demonstrate to buyers that you have a steady stream of revenue coming in that your business can consistently rely on.
Of course, a river is better than a stream, but only if it doesn’t dry up every couple of months!
We’ve now established how buyers prefer revenue to enter your business – now it’s time to focus on the who. Don’t become reliant on a couple of high-value customers as the foundation of your business. This is an immediate red flag for buyers, who will be worried at the effect of losing a key customer down the road would have on your company’s growth.
Plus, having numerous customers strengthens your position, offering you several avenues to increase revenue going forward.
You know how your business works inside out, right? The processes you’ve applied since the day you opened your doors have helped your company grow to where it is today. But, it’s vital that when you exit your business, those processes don’t exit with you.
Document every essential process that has built the foundations of your company. With them, buyers will understand how to maintain your upward trajectory, even if they are strangers to your industry.
Your processes would be nothing without staff to carry them out. So, it is important to identify and train key employees that allow your business to function seamlessly, whether you’re on site or not. The more effectively trained they are, the more valuable they’ll appear and be to prospective buyers.
And when we say loyal, we mean loyal to your company, not to you. A healthy mix of both is the ideal, but a buyer will want to be sure these folks will stick around after the acquisition.
Your intangible assets set your business apart from all others, so you must leverage them to improve its valuation. By their very definition, intangible assets (also known as off-balance sheet assets) are impossible to apply individual values to.
This is because an intangible asset will be worth more to one buyer than another. So, let them do the hard work of determining how much these are worth, and use their conclusions to find the optimal valuation.
And this is really key to understand: Ultimately the actual value of your business is what a willing and informed buyer will pay for it. The business enterprise value that we determine via our evaluation process is simply a snapshot in time and a starting point. Our deal teams are very skilled at finding and negotiating with “optimal” buyers for our clients; buyers that are willing to pay a premium over and above any value we place on a business.
We hope these techniques help you increase the value of your business before you place it on the market. But this is only a starting point. You can discover much more at our complimentary executive conferences, which are held across North America. These powerful insights into the M&A process will explain how you should value a business, what buyers are looking for, and more methods to improve your company’s valuation.
In just a few short hours, you’ll understand how to achieve the optimal return for your business, from the initial evaluation to closing the deal.
For more information, visit our website, or speak directly to our team at Generational Equity at 972-232-1121.
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