Tuesday, August 9, 2016

How to Increase the Selling Price of Your Business by 40% or More

This sounds like a bold claim, but over our 17 year history in Mergers and Acquisitions we have seen huge swings in value for business sellers that embraced these value enhancing approaches.

Never - Engage with a single buyer who approaches you with an unsolicited offer. This buyer is trying to buy your company at a bargain price. You are either for sale with the full universe of strategic buyers competing for your company, or you are not for sale. This is the number one error business sellers make.

Turn as much of your revenue as possible into contractually recurring revenue. This is exactly why most major software companies are moving away from a one-time licensing fee to a software as a service (SaaS) offering. The time and materials IT service model is disappearing and being replaced with a managed services offering. Contractually recurring revenue tremendously reduces the risk for a business buyer and they will pay up for it both in purchase price and the percentage of cash at closing versus earnouts and deferred contingent payments.

Create and leverage intellectual capital. Just ask a song writer or an author. Disney is a master at creating compelling movie characters and then using them on everything from lunch boxes and underwear to action figures and amusement park rides. For intellectual capital including software, inventions, approved drugs, the labor plus materials metrics of a typical manufacturer do not apply and the gross margins can approach 100%.

Become a voice of authority in your industry. Be the go-to resource for reporters to comment on industry developments. Blog, write articles, and speak at industry events. Many M&A deals that result in huge premiums for the selling company are the result of also acquiring the company's talent.  Take Wal-Mart's acquisition of Jet. How much of that premium price was a result of the visionary CEO Marc Lore and his potential impact on the giant acquiring company. Acquisitions by Google, Facebook, Microsoft and many others feature this premium price for companies with coveted talent.

Understand and document how a large acquiring company could create "strategic value" as the new owner of your company. Capture that in a growth plan document and be ready to articulate that in discussions with potential buyers.

Own your financial statements. When a buyer asks a question on aspects of your financial statements, it is not your accountant's job. It is your job to understand where every dollar comes from and where every dollar goes. The message is that you are in control. If you are wishy washy in this area, the buyer loses confidence in all other facets of your business and will apply their own discount on the entire transaction value.

Diversify your customer base. If you have a major portion of your company's revenues concentrated in a hand full of customers, count on the buyer applying a punishing discount to transaction value and the amount of transaction value you receive at closing. The implied message is that after you leave, your customers will no longer be loyal to the old company. They will hedge their bets with your transaction value.

Do not attempt to sell your company yourself. Here are just a few reasons. You already have more than a full time job. Selling a business is a full time job. Normally a business seller will sell only one business in a lifetime. Experienced buyers have acquired dozens of companies. Their experience will move money from your pockets to their pockets at every stage of the sale process. You will have a very difficult time creating a true soft auction competitive bidding process and will default to processing each buyer in a serial fashion. You lose all competitive leverage. By selling your own business, you alert the world that you are for sale. Your employees, clients, suppliers, and bankers get nervous while your competitors get predatory.

Hire a good M&A advisor, preferably with experience in your industry or market niche to represent you. They will speak the language, so important in establishing credibility with the buyers. They will have a fully developed database with the appropriate M&A contacts at the target buying companies. They will articulate your story to the best buyers. They will balance the experience scales in negotiating price, terms and conditions of your transaction and perhaps more importantly, will defend that value through term sheets, due diligence, contractual negotiations and closing. Finally, they will artfully stimulate the animal spirits of a competitive market to maximize your selling price and terms.

The sad part about business owners who elect to sell their business themselves, is that the only one who knows about the huge haircut they took was the single buyer who is celebrating their bargain purchase.

For more detailed information on all aspects of Business Sales, please visit our website at www.midmarkcap.com/mmc and subscribe to our Exit Strategist Newsletter.

Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To learn more about our services for technology business sellers click to visit our Web Site MidMarket Capital