InSight

Exit and Growth Strategies for Middle Market Businesses

Building Business Value—A Systematic Process

By Kim Levin | Aug 23, 2010

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. It is possible the owner is unable to grasp the concept of value versus growth. Owners who are unable or unwilling to adjust to a changing marketplace create a roadblock to business growth. Another reason businesses sell for less may be an owner’s unwillingness to let others help manage and build business value. And finally, owners who are unable or refuse to view the business from an investor’s perspective may be forced to settle for a sale price that is substantially reduced.

As a general rule, buyers buy businesses for the cash they will generate. Free cash flow is the cash available for distribution after taxes and working capital. The greater and more certain the net free cash flow, the higher the price that will be paid. The bottom line is that the reward of the cash flow must be weighed against the risk of the uncertainty of obtaining that cash flow. An important value-building task is to identify current cash flow and grow cash flow while increasing confidence in its occurrence under all circumstances.

So, what steps should you take to build business value and improve your business’s ultimate sale price?

  1. Determine current fair market value as a baseline to measure future performance
  2. Research the market to determine trends in your industry that can impact your business plans
  3. Benchmark against other, similar businesses including a review of the company from an objective outside perspective
  4. Create financial models that demonstrate the milestones you must meet to achieve your goals
  5. Determine the financial impact of the strategic options available to you
  6. Complete an in-depth business analysis and strategies action plan.

While value building is a complex process, any company can do it. The greatest drawback is time. Give yourself enough time to have a substantive effect on value by beginning the process well in advance of your time frame to exit the business.

posted by Susan Jones


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