David Tobin is the founder and Managing Partner of TobinLeffa consultancy for M&A advice and exit planning.
getty
Despite easy access to information about how many companies should sell for and how much they? to do sell for average, how come some companies can sell for above – sometimes well above – generally accepted margins or market price? Why do some companies use a higher multiple compared to others?
How much should a company sell for?
When a business owner is about to consider selling their business, they start doing some homework. They will research the market, talk to advisors and interview investment bankers to get a sense of what the market is like for their type of business.
What they will learn is that there is a range that is typically based on a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) to provide a margin of what their business could sell. That range depends on the industry and the type of business.
But those are averages, and no one wants to be average.
Nail the base.
To go beyond the average, you need to master the basics first. The fundamental building blocks must be strong before going to market. Here are some of the essential key questions that need good answers.
• Has the value proposition crystallized?
• Can the company generate profit consistently?
• Is the business growing and have growth opportunities been identified?
• Is the business reliable, sustainable and transferable?
• Has the company reduced its dependence on the selling shareholders?
• Are employees motivated and encouraged to stay with the new owner company?
But beyond these questions, what can you do to force an optimal price when it comes time to sell your business?
Position your company for an above-average price.
I’ve found that there are a number of ways to be positioned at a price that is above the market price, including providing strategic value to the buyer, eliminating buyer pain, demonstrating significant growth opportunities, and having something special that is not easy to replicate.
Identify buyers who can leverage your assets and staff. Look for companies that offer cross-selling opportunities or fill a strategic gap. Make an effort to start building relationships with these potential strategic buyers now, even if you are years away from a planned liquidity event.
In my experience, the most sophisticated strategic and financial buyers look for opportunities where they can realize a return of between 20% and 40% on their capital. A buyer may be willing to pay you a price above the market price and still achieve the desired return if they believe their investment and resources will drive growth.
Develop growth plans for your business. You can explore ways to grow within your niches and with your customer base, as well as horizontal growth in new markets. Consider assessing whether a “buy and build strategy” with strategic acquisitions will help build business value. If you are successful with an acquisition, you may be able to convince a buyer that additional acquisitions with their money will be lucrative.
If your company has reached a certain size and you have a vision for growth, you may be positioned to attract interest from financial sponsors (private equity groups or family offices) who offer the opportunity for two liquidity events. The financial sponsor can buy your company for cash and rollover equity in the platform formed by your company. The first liquidity event occurs at the time of sale when you get cash at a percentage of your equity, and the second is when the platform is sold in the future and your rollover shares are converted into cash. As you go down this road, it’s important to find the right financial sponsoring partner who has the experience, resources, and shared vision to create greater business value.
Tell your story.
Whether you’re selling to a strategic or financial buyer, it’s critical to have a vision – a story to tell. And that story needs to resonate with the potential buyer so they can clearly see their path to success and the value your business brings to them. Create and communicate a vision that clearly demonstrates that you have a unique value proposition that cannot be easily replicated by others.
If you decide to work with an advisory team, finding the right partner is also critical. (Disclosure: My company helps with this.) Find a team that can help you crystallize and present your value proposition, identify strategic buyers ready to offer an above-market price, create a competitive playing field, and tell your story in a convincing way through the M&A process.
Try to find an M&A consulting firm that has experience in your industry with companies of your size. I recommend personally spending time with potential companies before selecting the group to represent you to ensure your business practices and values align. Inquire about the types of services the companies provide to prepare the business and owners for the process and transition. Once you’ve enabled a group, you can schedule weekly video meetings for status updates.
Vision, a unique sales proposition, portability, growth opportunities and the right strategy can help you move the needle past the average ranges that define any other company that – on the surface – resembles yours, to a position above the market that reflects what you in a unique way to the negotiating table.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.
businesskinda.com Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.