Making Your Company More Valuable and Attractive to Buyers

Do you remember 2008? How soon the markets forget. Eight years ago or so you couldn’t give away most real estate, and business valuations plummeted with very few buyers and minimal mergers and acquisitions (M&A) activity.

Valuations have fully recovered and are extremely high again, and M&A activity is strong. Today, one of the limiting factors of deals getting done are over zealous CEOs and business owners that demand extremely high prices for companies that were not sellable less than a decade ago. Another limiting factor is that your business is simply too small to attract a buyer (under $10 million in revenue) which means you need to gain help in accelerating your growth.

Whether you decide to sell your company in today’s hot market, or prefer to hold and grow your business further (and risk another drop in the market), there are certain key areas that you need to focus on to build value and make your business more attractive to current and future buyers. A strategy to make your business irresistible to prospective acquirers may generate the greatest return in your life time. After all, I tell our clients on a regular basis, you never know when the perfect buyer will knock on your door.  Below are key factors that you must employ in your business to build value, make your company sellable and attractive to current and future buyers.

Growth Rate

The growth rate of your business is critical to the value of your business and the attractiveness of an acquirer. Small to mid-size businesses that grow at 10% or 20% per year are not attractive to buyers given the many other options they have to acquire faster growing businesses. If your growth rate is slow or stagnant, there are issues that you need to address in your business if you expect to exit at some point in the future. This key factor applies to all types of businesses all the time.

Size Matters

Companies that are dedicating people and resources (their M&A team) to acquiring other companies tend to focus on larger companies. It takes just as much (actually more) time to acquire a small company than it does to acquire a mid-size or large company.

Acquirers are looking for revenue and profits that will move the needle of their

business. They want strong management, large markets served for future growth, and revenue that is substantial and predictable. Kick into growth mode to increase sales, profits, the value of your business, and to generate your golden opportunity to sell.

Recurring Revenue

If you are only as good as your last project, you are in trouble today. Acquirers see value in recurring, contracted revenue. Not just loyal customers that buy semi-regularly, but a strategy and business model with long-term, contracted customers that is forecastable and predictable. Not all customers need to be this sure bet, but you need to have a business that has staying power to attract buyers and have them pay you handsomely for the customers you have secured and for your many years of hard work.

Gross Profit and Gross Margins

Your Gross Profit Margin (GPM), or Sales less Cost of Goods Sold divided by Sales, is the number one factor that points to the profitability of providing your product or service (before overhead/expenses). Acquirers are attracted to businesses with high GPM as this will typically result in high Net Profit, Net Profit Margin and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).

Depending on your type of business (manufacturing vs. service vs. software have very different Gross Profit Margins), you need to have a GPM that is at or higher than other companies in your industry to optimize your value. If your Gross Margins are low, seek advice from a business advisor as you are leaving a lot of profits on the table, as well as, penalizing your business value substantially.

Management

Strong management is always a key factor in running and growing a sustainable business that is attractive to buyers. Interim management (business advisors, CPAs, attorneys, etc.) work well for smaller companies until they reach a certain size where a full permanent management team can be hired. If you are the lone senior executive in your company or your management team is lacking a full realm of expertise, you need to gain additional assistance or help to enable growth and build value in your business.

CEO Advisor, Inc. has decades of expertise in hands-on advising of small and mid-size business, including building value, growth capital and buying/selling companies. Please contact Mark Hartsell, MBA, President at (949) 629-2520, by email at MHartsell@CEOAdvisor.com, or visit www.CEOAdvisor.com for more information.MoneysigninGrass

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