10 Keys to Success in Selling a Private Business

The purpose of this article is to help you evaluate your company as a strategic acquirer might. From that perspective we will ask you to focus on ten critical areas of value creation.  Simply put, the better your performance in these areas, the greater the selling price of your business. The likely result is that you will sell at the high range of the multiples normally associated with your industry. For example, if during the last 18 months similar companies have sold at an “EBITDA multiple” of between 4 and 5.5 times EBITDA, moving your company from the low end to the high end of that range can result in a significant swing in transaction value. If your EBITDA were $2 million in this scenario, this increased value would equal $3 million!

Building your business around value drivers will help you maximize value when the time comes to sell your business. IT IS NEVER TOO EARLY TO BEGIN OR TOO LATE TO START.  Make management decisions around the points below and you will be on the right path!

1. CUSTOMER DIVERSITY – Customer concentration equals risk to buyers. The obvious concern is that if the owner sells, some major customers may leave.  When a lost customer accounts for more than 20% of revenue, results can be catastrophic for buyers. If on the other hand, none of your customers account for more than 5% of total sales, potential buyers will highly value your revenue. If you have a customer concentration issue and are planning an exit, start focusing on a program to diversify or, if diversification is not possible, focus efforts on entering a long term contract with larger customers.  An alternate “outside” quick fix would be to make an acquisition of a competitor with customer diversity, integrate them and then take your company to market.  A longer term solution is to refine sales and commission incentives to reward new customer sales.


2. MANAGEMENT DEPTH – A common thread in privately held businesses is a concentration of responsibility with the owner operator. An acquirer paying significant value will discount the prospects of long term owner involvement post close and will look at the quality of the non-owner management staff and employees as a major determinant in acquisition price.  A key in preparing for exit is to develop your people so they could run the business after you are gone.  If you have a strong management team in place and you are anticipating an exit, you should try to implement employment contracts, non-competes, and some form of equity participation plan to keep these stars involved through the transition. A strong management team is a valuable asset in the middle market. If you have one, take steps to keep it in place and the market will reward you.


3. CONTRACTUALLY RECURRING REVENUE – All revenue dollars are not created equal. Revenue dollars that are the result of a contract for annual maintenance, annual licensing fees, a recurring retainer fee, technology license, etc. are much more powerful value drivers than new sales revenue, time and materials revenue, or other non-recurring revenue streams. It’s all about risk. The higher the risk (future unknown sales) the lower the potential return. The lower the risk (contracted revenue stream) the higher the return.  Be creative!  If you can turn a T&M situation into an annual contract, you will be greatly rewarded when it comes time to sell your business.


4. PROPRIETARY PRODUCTS/TECHNOLOGY/PROCESSES – This is the area where the valuation rules do not necessarily apply.  If a strategic buyer believes that a new technology can be acquired and integrated with their own superior distribution channel, they may value your company on a post acquisition performance basis. The marketplace rewards effective innovation. On the flip side, however, the market seldom rewards R&D costs.  Business process innovations cost less and can create as much or more value than technologic innovations.  Continue to look for innovations in distribution systems, collaborative product design process, customer service and other functional areas that can provide a competitive advantage.


5. PENETRATION OF BARRIERS TO ENTRY – Always look to create barriers for your competition. Technology innovation can create barriers, but equally effective can be obtaining hard to get certifications, licenses, or regulatory approvals. Your company may be able to secure approvals that a national competitor may have difficulty obtaining.  Even better, work to take ownership of a customer’s business processes, so that switching vendor costs are prohibitive and risky.


6. EFFECTIVE USE OF PROFESSIONALS – Reviewed or audited financials by a reputable CPA firm are quite valuable in the eyes of a buyer. Professional financials lend credibility on your approach to controlling your business while at the same time reducing the buyer’s perception of risk.  Involve a good outside attorney into the mix, and the risk drops even more. A strong outside professional team is a great asset in growing your business and in helping you obtain maximum value when you exit.


7. PRODUCT/SALES PIPELINE – The biggest fear a buyer faces is loss of revenue.  The larger the sales pipeline, the lower the perceived risk.  While buyers may not want to pay value for “futures” today, the multiple attached to trailing earnings will invariably be improved if accompanied with a robust and credible sales pipeline.  Private equity investors are looking for internal growth, internal growth, and internal growth.  An internal sales growth rate of greater than 15% coupled a detailed sales pipeline to support the continuation of the trend, adds a multiple point or more of value.


8. PRODUCT DIVERSITY / FOCUS – A smaller company that has a quality portfolio of products or services but may lack distribution can become a valuable asset in the hands of the strategic buyer. A narrow product set can increases risk and drives down value. If you are planning to exit, review your product portfolio. However, you MUST balance the desire for diversity with focus.  A diverse product portfolio is more difficult to support and buyers will discount your company if you appear to lack focus.  You want your company’s offering to be as diverse as possible, but only as long as it relates to your company’s core business.  In short, offer as much as you can, but offer what you can do exceptionally well.


9. INDUSTRY EXPERTISE AND EXPOSURE – Expertise and industry recognition is an absolute value driver when it is time to sell the business. To the extent possible, encourage your staff to publish articles in industry magazines and newsletters. Gain exposure as a presenter at industry events. Encourage local and industry reporters to use you as the voice of authority with industry issues. Become the subject matter expert!  You may get more business referrals, and a buyer from your industry will remember you favorably and is more likely to consider you as an acquisition candidate.


10. WRITTEN GROWTH PLAN – Buyers, lenders, investors are doing so only for one reason, future growth.  No buyer ever makes a profit from what your company did last year.  There is no other credible source for projecting your company’s future outside of you.  Having a logical one and three year plan for growth is mandatory and it need not be long.  A basic three to five page plan should include not only financial projections, but hiring, staffing, marketing, and development plans necessary to achieve objectives.  A word to the wise, in developing a business plan, be careful to be realistic.  A buyer reviewing one year projections done six month prior will be looking to see if your company is on pace to achieve your own plan.  It is better to be conservative in projections and over achieve.