To build value you first need to know where your company performs best and where it is deficient. In short, your strengths and weaknesses from a buyer’s point of view. A detailed diagnostic of your company unveils those strengths and weaknesses, its value enhancers and risk considerations, the traits that are unique and highly valued and the threats to which your business may be vulnerable.

A thorough assessment begins with market research that includes a comprehensive analysis of industry trends and an in-depth review of your competition. From this assessment benchmark your company against other businesses of similar size that have sold in your industry or related markets. In identifying those elements where buyers paid premiums, be sure to consider the full spectrum of attributes. Much of the value of your business may be intangible and difficult to recognize.

It is important to have an objective versus subjective perspective or you may fail to recognize opportunities for enhanced value. While you know your business better than anyone else does, the only way to enhance value is to take an outside perspective. Careful analysis from professionals familiar with the M&A market is recommended in order to structure a value improvement plan based on the way buyers perceive value.

Recognize that buyers buy businesses only in part based on recent financial performance. The major portion, on average three-quarters of the value, is based upon the future potential and other characteristics of the business.

There are several “owner” related reasons why businesses sell for less than their potential. Read more »

The simple truth is that all business owners will exit their business. The timing will either be determined by you or for you. It is unfortunate, but statistics show thousands of businesses each year sell for a fraction of their market value because owners don’t understand the true value of the business. Others are transferred to family members only to fail soon thereafter. Many are sold at liquidation prices to satisfy estate taxes. Improper timing of the sale causes many entrepreneurs to receive less than maximum value. Worse yet, after a lifetime of work, the proceeds are not enough to sustain the owner’s retirement.

Many business owners are under the impression that because they have invested money and time into their venture, it is valuable and marketable. Nothing could be further from the truth. In fact, many owners have created perpetual full-time jobs, not sustainable, valuable and marketable enterprises. This problem exists in privately held companies of all sizes, from the small to the very large company. Contrary to the common belief, revenue size is not a formula for value.

Building business value is not necessarily the same thing as building bottom line. Let’s define value, recognizing that there are different kinds of value:

• Value for estate purposes – Takes into consideration the fact that the company will lose its driving force and have less capital to grow the business
• Value for stock ownership plans - Here we presume no change in running the company and no change in capital structure except, that which is necessary to service the new debt
• Value for mergers-and-acquisitions (M&A) – Here there will be new dedication, resources and an infusion of, or access to, the funds necessary for growing the business

To build value one must look at a business from an M&A perspective because value is the price which a willing and informed buyer will pay to a willing and informed seller with neither party being under duress.

Avoid the Common Myths of Value

Myth 1 – Value building is same as business building
It may come as a surprise but building the market value of the business is quite different than simply growing sales or profits. Certainly the more sales and profits a business has, the higher the value, but there are some hidden traps that will fool the naive owner. Higher sales or even greater profits may not always mean larger value!

Myth 2 – Value is constant
Market values of companies are dynamic, constantly changing, forever adjusting to the internal activities of the business and the external factors of the market.

Myth 3 – Value is obvious
There are no formulas, no rules of thumb, and no simple multiples that can determine with certainty what price an individual business will obtain in the marketplace. There can be general averages that apply across a broad number of companies in an industry, but such averages are usually inaccurate and often inappropriate for individual companies.

Therefore, value building must concentrate on what motivates sophisticated and serious buyers to pay premiums when they acquire businesses. In short, a practical strategy is one that is focused, specifically customized and stresses what works in the M&A marketplace. How the process works is not always obvious to owners who have difficulty seeing their companies from the perspective of a buyer.

posted by Susan Jones

As a business owner, at some point you will want to extract some, if not all of your wealth from your business. You need to determine not only how to achieve, but maximize liquidity in terms of your personal wealth.

The first step in this process is to become educated; a thorough understanding of your options is essential. The most typical liquidity options for an owner of a middle-market privately held business include:

A SALE
A sale to a public, international or large private company provides immediate liquidity and advantageous tax structures however it can sacrifice important personal considerations if you are not ready to exit or relinquish control.

A PARTIAL SALE
A strategically identified investment group can provide premium value and liquidity as well as financial resources to further the company’s growth. However you must be ready to share or relinquish control of the business.

GOING PUBLIC
Initial Public Offerings (IPO) are designed to provide capital to promote growth and can generate significant market value. However, it may be some time (years) until you can generate liquidity.

PRIVATE MARKET RECAPITALIZATIONS
Recapitalizations are often thought of as one of the best liquidity options, but are the least understood by business owners. Properly structured with a private equity group, a recapitalization can provide you with flexibility and a range of personal and financial advantages.

• Immediate Liquidity – Read more »