How to Position Your Firm For Maximum Exit Value

What color of car would you rather buy? Based on your personal preference, the answer to this question will affect how much you are willing to pay for a vehicle that is identical in all aspects other than color. What has this got to do with the market value of your business? Put simply, traditional valuation techniques generally ignore one important factor in their calculation, the buyer.

Don't get me wrong, a traditional valuation has its uses, particularly for IRS and litigation cases, such as determining value for a divorce settlement. However, typical valuations assume a willing buyer exists and that this buyer doesn't have any personal preferences outside of normal industry standards.

Let's go back to the car example. Assuming a dealer has two used cars that are the same make, model, year, etc., but one is blue and the other is silver. The pricing is likely the same. But if you prefer a blue car, you'll probably buy the blue car. In fact, the dealer would have to discount the silver car for you to consider that as an option. Therefore, your preference has effectively determined a higher value for the blue car, despite the market suggesting that they are both worth the same.

So how do you apply this logic to the value of a business? If you're considering selling your business sometime in the future, you probably have no idea who will buy it and what their preferences are. That said, there are ways to position your company to maximize value from an exit.

Here's where you should start. Business acquisitions, generally, are made by two types of buyers, each with very different views of what is important. One is the financial buyer. The other, the strategic buyer. Financial buyers are either individuals or groups of individuals looking to invest in a business. A strategic buyer is normally a company looking to add to its existing operations.  

Let's assume that after some initial research you determine that the most logical and likely buyer for your business is a strategic buyer. You must then determine, based on other recent acquisitions in your industry, that the primary focus of the buyer is the quality of the customer base being acquired, rather than say the management team, who will most likely be surplus to requirements after the deal. Therefore, if the last five years have been spent investing and training a good management team these efforts could be ignored by the buyer who will discount this aspect of the business. However, if those efforts had been channeled into increasing and maintaining quality customers over the same time frame, the buyer would most likely pay a higher price for the business.

The above example highlights the effect of focusing attention on the right aspects, or value drivers, of the business to make it the most attractive to likely buyers when it comes time to sell in the future. Value drivers can include, among other things:

• Customer Base
• Management Team
• Products & Services
• Competitive Advantages
• Location
• Quality of Financial Reports
• Financial Performance

While you can control and manage most of the value drivers of your business, other aspects specific to a buyer will also determine the potential value that they can justify paying, including:

• Risk Tolerance
• Required Rate of Return on Investment
• Ratio of Equity and Debt used to purchase the business
• Cost of Debt

The impact of these factors is not possible to plan for but are buyer specific and will result in different values being placed on exactly the same business by different buyers. They should be considered when negotiating an actual sale with actual buyers. In order to position your business to maximize value when the time is right, go through the following exercises:

1.   Undertake a market analysis of who is buying similar businesses to determine the most likely buyer type for your business.
2.   Review recent transactions to determine what values are being achieved.
3.   If possible, contact typical' buyers anonymously to understand the value drivers they are primarily looking for in an acquisition.
4.   Understand the level and source of debt that could reasonably be secured to finance an acquisition of your business so that you can estimate the likely ratio of debt and equity.
5.   Perform a strategic planning session for your business to ensure long term goals for the company are focused on growing the right value drivers based on the analysis above.
6.   Create key performance indicators to track specific value drivers on a monthly basis. Include those as part of your monthly financial package to ensure those efforts are maintained over time.
7.   Review the process on an annual basis to ensure any changes in buyer types and value drivers are known and addressed in a timely manner.

Gaining a better understanding of how different buyers might value your business can benefit you, and help you build a more valuable, saleable company.

Chris Blees is president and CEO of BiggsKofford Certified Public Accountants and BiggsKofford Capital Investment Bank. He is on the board of advisors for the Alliance of Merger & Acquisition Advisors, where he chairs the certification committee and serves as lead instructor for the Certified in Merger & Acquisition Advisor designation. Blees is co-author of Middle Market M&A: Handbook for Investment Banking and Business Consulting, scheduled for releas in 2012. For more information, visit www.amaaonline.com.