What would you pay for your company ?

Did you ever look at your company from a buyer’s perspective? Would your business be attractive to a buyer? At what price?

Even if you have no plans to sell your business, these questions are relevant. If you begin to do the things that will maximize the value and attractiveness of your business to an outside buyer in the future, you will also improve your results today .

I recently helped a client with the purchase of a local manufacturing company. Had the seller considered these questions three years ago and taken action, he would have been able to easily add several million dollars to the sales price. He also would have made the transaction easier to close.

So you’re not planning on selling your business in three years, why worry about it now?

When you look at what makes your business valuable and attractive to a buyer, financial results such as cash flow, EBITA, revenue growth and consistency, and market share are some of the most obvious components of value. These are metrics that command the constant attention of most CEOs even if no sale is anticipated.

Non-Financial factors:
There are many non-financial factors that contribute to the valuation and attractiveness of a business. The following is a list of several common non-financial business issues that may reduce the value of a business and make it less attractive to prospective buyers. Improvements in these areas will add value when you go to sell and pay dividends as long as you own the business.

Dependency on you - if your presence in the business is critical to its continued health and success, you have a job and not a business. Buyers will see this as a big negative when considering the value of a company.

Dependency on one or a few customers – in most industries, if you have a client that accounts for more than 25% of annual revenues, future revenues are riskier than they would be by a more balanced customer base.

Insufficient systems, procedures and performance indicators – how well has the business been systematized. Could someone from outside the industry transition into leadership easily? If the business has adequately been systematized, the core processes of the business have been documented and possibly automated. The impact of loosing one or two key people has been reduced because the knowledge is in the business, not just in a few key employees.

Weak or inaccurate financial reporting – nothing slows down a buyer’s due diligence like poor or incomplete financial reporting. It raises immediate red flags with buyers, bankers and investors.

Action steps:
Take a break from the day to day challenges of running your company and put yourself in the shoes of a buyer from outside your industry. Make a list of the challenges you would face buying the business in its current condition. Turn that list into a roadmap for improving the current and future value of your company.

The January 2007 issue of Inc. Magazine has a business valuation guide that looks at 147 different industries. For each industry it notes the number of businesses sold in the survey period, the median annual revenue and sales price, and the industries three best valuation multiples.

Example:
For Computer Related Services, the best valuation indicator is 5.41 x Discretionary earnings (Net income + taxes + interest expense + owners compensation + non-cash charges), the second best valuation method is 1.34 x net sales. Determine your companies approximate value by averaging the 3 indictors provided for your industry. These indicators are a good starting point and the ultimate value will depend on many factors including the non-financial factors listed above.


“The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand."
--- Sun Tzu