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Capital Ideas for Middle Market Businesses

10 Tips For Sellers to Add Value

By Craig Allsopp, Director
Portland Office
Corporate Finance Associates


Baby boomer business owners may be overwhelmed with information covering the dos and don’ts of preparing a company for sale. So to help start the process, here are 10 actions for you to add value today so that you can impress potential buyers when you are ready to go to market.

  • Audit your financials. Sloppy numbers sap value like a poorly tuned engine saps horsepower. You may find a buyer who will overlook holes in your financial reporting, but you won’t get top dollar. An audit shows a prospective buyer that you are serious about doing the little things right – which can be a powerful signal to send when you are in a negotiating process.

  • Fill gaps in your team. No one can do everything well – including you. If you can’t be away for a week without checking in on routine problems you need a stronger team. This is especially true if the buyers for your business include Private Equity Groups who almost always are looking for a deep bench when they are recapitalizing a company.

  • Create an exit plan. Sitting down with an investment banker and your other business advisors (lawyer, accountant, financial planner) to plan your exit in advance will eliminate confusion during the business sale process. Fred Wainwright, a certified exit planner at Ledyard Bank in New Hampshire, urges business owners not to wait for a life-changing event to force the planning process. “We like to see owners start meeting with their advisors two to three years before a planned transition. That way the owner can act to fill the gaps so his business can become an A or even an A+ company.”

  • Diversify your customer base. Many business owners are surprised to learn that customer concentration is a major knockout for sophisticated buyers. But when businesses derive 40% or 50% of their revenues from one or two customers a red flag goes up for potential buyers who don’t want the risk of losing a major customer. A good rule of thumb: no one customer should represent more than 10% to 15% of your revenue.

  • Solidify your contracts. Everyone knows it costs more to get a new customer than to keep an existing one. Buyers will pay a premium for a business with customers under contract and/or recurring subscription type revenues. This is one of the reasons why companies with service contracts are so popular with investors today.

  • Build the product pipeline. If you want buyers to pay up for the future, you need to give them a reason. Consider launching new products or entering new markets to show growth potential. The research you do as part of this effort will also help answer two of the BIG investor questions (1) “How big is the market” and (2) “How can you get more share.” Confident answers make it hard for buyers to walk away.

  • Get a realistic valuation. Your company will not trade at the same multiple as IBM, but it may be worth more (or less) than you think. Buyers will be armed with this information; to negotiate properly you should be too. Your investment banker can provide you with a general range of value (5x to 6x times EBITDA for companies in the $20M to $50M sales range) by providing recent transaction information but to truly get a handle based on your actual performance versus your industry peers you should consider a valuation assessment by a skilled professional or, in certain cases, a formal valuation by a certified appraiser.

  • Make an acquisition. Buying another company is a big undertaking, but often is the fastest way to growth and a more attractive exit upon successful integration. “There is certainly no playbook,” says Glenn Fishler, who embarked on an acquisition strategy after 23 years of building his company one customer at a time. “If you’ve never made an acquisition before, and you don’t have people inside the company to guide you, you’ve got to find all the help you can get.”

  • Put your records in order. The better organized you are the easier it will be to sell your company and the less disruptive you will find the due diligence process. Time will start to speed up the day you accept a Letter of Intent from a prospective buyer. You will be asked for information about your company, your corporate structure, your stockholders, your employees, your customers and your legal affairs. Organizing these records beforehand will help keep the deal on track and, perhaps more important, re-affirm for the buyer that he is making the right deal.

  • Protect your IP. In our knowledge based economy, intellectual property is more valuable today than ever. To support your business model, catalog your training processes, document your software, trademark your products, copyright your Web site and keep close tabs on your customer list. These are valuable assets and you want to make sure you get fairly paid for them.

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