Strategy

Positioning the Company for Maximum Exit Value


by FEI Daily Staff

Focus attention on the “right” sales factors or value drivers that make a business attractive to potential buyers.

What color car would a buyer prefer? Based on personal preference, the answer could affect how much he is willing to pay for a car identical in all other aspects. What does that have to do with the market value of a business?

Simply put, traditional valuation techniques generally ignore one important factor in their calculation — the buyer. While these valuations certainly have their uses, they usually assume a willing buyer doesn’t have any personal preferences outside the normal industry standards.

Assuming a dealer has two identical used cars, except that one is blue and the other silver, they will almost certainly be priced exactly the same. If the preference is for blue, the buyer would no doubt buy that car. In fact, the dealer would have to discount the silver model for it to be considered as an option. As a result, preference has effectively determined a higher value for the blue car over the silver one, despite the market suggesting they are both worth the same.

If the owner of a business is considering selling at some point in the future, the buyer — along with his or her preferences — is likely unknown. So how should the company position itself to maximize value from an exit?

There are two main buyer groups, each with very different views of what is important to them: financial and strategic buyers. Financial buyers generally are individuals or groups of individuals looking to invest in a business, whereas a strategic buyer is normally a company looking to add to its existing operations.

As an example, assume that after some initial research it is determined that the most likely buyer type is a strategic buyer. It is then determined that, based on other acquisitions in the industry, the primary focus of most buyers is the quality of the customer base being acquired, rather than, say, the management team, which will most likely be surplus to requirements after the deal.

Thus, if the last five years have been spent investing and training a good management team, these efforts could be ignored by the buyer who might well discount them. But if those efforts had been channeled into increasing and maintaining quality customers, the buyer would most likely pay a higher price for the business.

This highlights the impact of focusing attention on the right sales factors or value drivers that make a business attractive to potential buyers. Value drivers can include, among other things: customer base, management team, products and services, competitive advantages, location, quality of financial reports or financial performance.

Risk tolerance, the required rate of return on investment, ratio of equity and debt used to purchase the business and the cost of debt will also determine the potential value that a buyer can justify paying. These factors, while difficult to anticipate, should be considered when negotiating an actual sale with actual buyers.

To position a business to maximize value when the time is right, go through the following exercises:

▪ Undertake a market analysis of who is buying similar businesses to determine the most likely buyer type for your business.

▪ Review recent transactions to determine what values are being achieved.

▪ If possible, contact “typical” buyers anonymously to understand the value drivers they are primarily looking for in an acquisition target.

▪ Understand the level and source of debt that could reasonably be secured to finance an acquisition of your business to estimate the likely ratio of debt and equity.

▪ Perform a strategic planning session to ensure the long-term goals of the company are focused on growing the right value drivers based on the analysis.

▪ Create key performance Indicators in order to track specific value drivers on a monthly basis; include them as part of the monthly financial package to ensure efforts are maintained over time.

▪ Review the process on an annual basis to ensure any changes in buyer types and value drivers are known and addressed in a timely manner.

Gaining a better understanding of how different buyers might view the value of a business can be a great benefit and help to build a more valuable company.

Chris Blees CPA/ABV, CM&AA, is president and CEO of BiggsKofford Certified Public Accountants and BiggsKofford Capital Investment Bank. He’s coauthor of Middle Market M&A: Handbook for Investment Banking and Business Consulting, publication date February 2012. For information, visit www.amaaonline.com.
This article first appeared in Financial Executive magazine