15 ways to increase the value multiple in the sale of your business

While many factors can influence a company’s market value, in most business sales the purchase price is largely based on some multiple of the subject company’s adjusted earning capacity or, less often, net revenues.

Granted, “some multiple” sounds a little vague. What multiple, you immediately ask, and what can I do to boost it?

Those are good questions, and we recommend that, as you and your M&A professional prepare your business for sale, you focus not on the ultimate selling price, but on how you can maximize that elusive multiple.

For many buyers (especially private equity groups, which are the buyers in 70% of our deals) the value multiple is a function of risk – i.e., the greater their confidence that the acquisition will generate the expected return, the higher the multiple they may be willing to apply to your revenues and other variables.

Following are 15 factors that, to varying degrees, are within your control and, by the time your business is ready to sell, can help raise your best-fit buyer’s confidence in its future success under their ownership.

1. Clean up your financials. While “recasting” your financials is a task we perform for you, “cleaning up” your financials is something that only you can do. As examples:

• Make sure your inventory and asset records align with what is physically there.
• Strengthen your ratios: working capital, debt-to-equity, “quick,” price-to-earnings, return on equity, etc. (This will not be accomplished overnight; if you need to improve the quality of your financial advisors, this is a good time to break them in.)
• Rid your income statement of non-business expenses. Dubious moves designed to lower your tax bill can come back to haunt you when it’s time to sell.

2. Build a team. Buyers generally aren’t interested in paying top dollar if the business is overly reliant on the owner for its success. Assemble a capable leadership team spanning all areas of operation and administration. Delegate responsibility to key employees, and involve your senior staff members in the decision-making process.

Top management should have non-compete and/or confidentiality agreements, and solid benefit plans should be in place for all employees. If a key person is nearing retirement age or otherwise perceived as being a short-term asset, recruit and groom a successor who can step in when needed. It is also beneficial to create a board of directors that has at least two outside members.

Professionalization of management and strategic oversight can remove the stigma of the “one-man band” and communicate to potential buyers that your company has viability, value and desirability apart from your involvement.

3. Broaden your customer base. Many smaller companies reduce their market value by becoming too dependent on a handful of customers. Ideally, no customer or client should represent more than 10% of sales.

If you are overly reliant on a one or two suppliers or customers, try to diversify your supplier and customer accounts. Be intentional about expanding to new markets, introducing new products, and finding new customers that align with your company’s core business.

4. Grow in size. While some corporate buyers and private equity firms see the advantages of purchasing smaller businesses, companies with less than $5 million in sales and an EBITDA of less than $1 million may require expending too many resources in the acquisition or post-sale management to justify the purchase effort. As a consequence, many buyers may perceive smaller companies as too small for acquisition or undervalue them.

5. Document what you do. Job descriptions, operation processes, and strategic plans should be well documented. Written records and plans give a buyer greater comfort that they will be able to emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records – e.g., sales and expense reports, internal income statements and balance sheets, and tax returns – clean and well-organized.

6. Grow in scope. Some smaller companies are kept small to maximize the owner’s benefits. However, if building value is the goal, it may be important to develop new products or services, build market share, and expand markets or open new ones. Achieving strong, quantifiable growth builds transferable value that justifies your investment of time and energy.

7. Demonstrate your agility. Small companies can be very adept at pivoting, i.e., changing course and implementing change. You can add value to your business by recognizing and quickly seizing opportunities to reach new markets, fill voids in existing markets, and add or change products or services.

8. Strong track record? Show it off. A demonstrable and consistent track record can both achieve a value multiple that meets your expectations and convey to buyers an attractive risk/return profile.

9. Stay on top of your market. The value of a company can be contingent on its industry, its place in that industry, and the direction of the industry itself. Be prepared to educate a buyer, to help them appreciate the added value.

• How big is the industry?
• Is it headed up or down?
• Who is the competition?
• How big is the company’s market share?
• What is (or could be) your niche?
• Do you have a solid position in an industry that has high barriers to competitive entry?
• Is it time to change direction or diversify?

10. Make a name for yourself. Name recognition, customer awareness, institutional relationships, and your reputation are all part of your business value.

You don’t have to manufacture Kleenex, Band-Aids or Coca-Cola to have a strong brand identity. While the value of becoming a household name probably wouldn’t justify the cost to your company, you should pursue positive name recognition within your industry. Through targeted advertising, trade association involvement, giving back to the community, and other strategies, your company’s name can become recognized as a leader in your industry vertical, enhancing its perceived market value to potential buyers.

11. Put your plans on paper. Business plans, financial plans, and personnel plans should all be in writing and kept current. Contracts should be reviewed and maintained on a current basis. Terms of employment agreements should be spelled out and in writing. Business planning, company objectives, etc., should also be in writing, visually communicated, and reviewed periodically. Be prepared to articulate the steps that you envision to scale the growth of your business to the next level and beyond. Every member of your leadership team should know and be able to communicate the company’s major objectives. 

12. Recognize hidden assets. Patents, brand names, copyrights, alliances, and joint ventures are all examples of potentially valuable assets. So are innovative business practices, systems, procedures, and leveraged capacity.

13. Be lean and mean. Many companies lease their real estate needs, outsource their payroll, have their manufacturing done offshore, or have UPS handle their logistical needs. If all non-core functions are performed by someone else, your company can focus its efforts on what it does best, and a buyer can see that they are free to replace one vendor with another.

14. Improve cash flows. A prospective buyer wants to see the “true cash flow.” And, of course, in the business world, cash is king. Try to drive all income to the bottom line.

15. Clean up your room. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any “business” assets that are primarily for your personal use. And make your property look nice; a well-maintained facility, whether owned or leased, can help fetch the best price.

GET STARTED

The best time to plant an orange tree is ten years ago. If that’s not an option, plant it today.

Preparing to sell a business for top dollar – i.e., at the highest achievable multiple of earnings – is a process that might take two years or more. The sooner you begin implementing the major steps described above, the sooner your business will be ready to present to a buyer who will recognize its future value and reward you for your efforts.

We can help you with that. Over our long history, IBG Business’s 1,200-plus deals have an 86% closing rate – more than three times the national average for our profession. To start the process of preparing your business for a successful sale, contact a member of the IBG Fox & Fin team of M&A professionals.