In my last post, I discussed the issue of the difference between what the owner thinks his business is worth, and what a buyer is willing to pay for it. In order to close that gap, it’s very important that the owner start taking steps immediately to improve the business, thereby increasing the value of the business. Much of this content is included in Chapter 5 of B2B CFO’s book, The Exit Strategy Handbook.
According Larry Reinharz, Managing Director, Woodbridge International, “The number one reason our deals get delayed or don’t happen is declining financial performance. While due diligence is important … 80% of deals that are delayed or don’t happen are due to declining financial performance.”
The Game PlanTM, our proven 6 step strategy, is to get a business to Excel – meaning be superior to, outdo, surpass, outclass and outrival its competitors. Our process during the exit strategy process is to minimize distractions, focus on increasing sales and sales diversification, improving processes and efficiencies, and branding the business. According to John Warrilow, “Your job as an entrepreneur is to hire salespeople to sell your products and services… An acquirer will want to see that you have a product or service that can be sold by salespeople in general and not just one superstar salesperson.”
The sale of a business is a very time consuming event. The company’s advisors on the Success TeamTM may include ten different individuals and companies. So, while all this is happening, the business and the owner must concentrate on what brings value to the business. Buyers are typically looking for and willing to pay a premium for businesses that exhibit the following traits:
- Increasing sales above the market average
- Increasing profits year over year
- Diverse customer base – no single customer greater than 10% of business
- Well documented human resources
- Non-competes and non-solicitation agreements with key people
- Strong management team
- Well documented systems and processes
By improving in these areas, a business can increase its EBITDA by 20% to 50%, causing both EBITDA to increase, but the multiple paid to increase. So, a business that had EBITDA of $1mm and an estimated value of $4mm to $5mm before any improvements (estimated multiple of 4-5X) can end up with a purchase price of $6mm to $7mm with only a 20% increase in EBITDA but an increased multiple to 5-6X. That’s a potential increase of $2,000,000 for only a $200,000 improvement in EBITDA, but also improved structure, processes and teams.