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Capital Ideas for Private Business

Get Ready for the Next M&A Wave

Six Value Builders

By Jay Carter, Principal
Charlotte Office, Corporate Finance Associates

Just twelve months ago, most owners of privately held businesses were feeling pretty upbeat. Many had enjoyed a record-breaking year in 2006, and 2007 was shaping up to be another high-water mark. One year ago (unless you were a sub-prime lender or starter-home track builder!) there was still plenty of money available to support merger and acquisition activity at valuation multiples that were at unprecedented levels.

Today, just twelve months later, many of these same successful business owners across the country are reeling from the combined effects of the expanding credit crunch and economic slowdown. Those who had “been thinking” about selling their companies and creating long-term financial security and more free time for themselves now feel trapped and unable to pursue their goals.

As a middle market investment banker and exit strategy advisor, I have observed many owners of privately held companies are now doing nothing to advance their goal of financial security and/or retirement. Instead, they have retreated to the “safety” of waiting until the next wave of M&A activity—the next valuation peak—when, presumably they will start thinking about selling their business again. The problem is, by simply waiting until the next wave comes, many owners will certainly not maximize their opportunity, and worse, they may miss it altogether (again!).

The point is: don’t just wait for the next wave to arrive; be ready for it. If the market is soft for your business right now, it’s the perfect time to make preparations for the market’s rebound. Business owners should focus their efforts on activities today that will enhance both the market value and the marketability of their business in the future. Of course, every business is different, but in one recent engagement, we identified these six Value Builders which are representative of the many potential Value Builders that can be worked on now to enhance future market value and marketability of a given company.

Six Value Builders

Management Succession: begin transfer of knowledge and responsibilities to key employee or employees immediately to facilitate a smooth transition and reduce dependence on a single key person;

Business Plan: create a written business plan focusing on every conceivable growth opportunity for the business, assuming there are no capital constraints;

Company Website: spend a modest amount of time and money to enhance the company’s website so that it makes a very positive impression about the company relative to its direct competitors’ websites;

Corporate Structure: discuss with the company’s CPA if an alternative corporate structure would yield favorable tax and/or marketability consequences;

Financial Statements: upgrade to CPA-reviewed or audited financial statements, going back at least 2 years and for each year going forward;

Corporate Contingency Plan: memorialize in writing a contingency plan for the business in the event of an unplanned event (death or disability) of key owner/manager.

Clearly, some Value Builders cost more money than others, and some take more time to complete than others. My recommendation is that once a comprehensive assessment is made and a number of Value Builders are identified, they should be ranked in terms of both cost and potential value, focusing first on those which are “high value/low cost” and avoiding entirely the “low value/high cost” variety. The key is to work on something now, so when the next wave comes, it will be yours.


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