Do you know what makes your company attractive to potential buyers? It’s all about growth… Right? If your company is growing beautifully and showing strong profits, you’ll have your pick of offers. The only thing left to do is count the proceeds. Not so fast. Growth alone does not equate to transferable value. If you cannot shift growth and value to a new owner, then buyers will take a pass – and your “dance in the end zone” may turn into a frantic scramble.
Growth Isn’t Enough
You need transferable value to exit successfully. Growth is, of course, an important part of the equation for buyers – but more critical still are these other elements:
#1. Decision-Making Team: Buyers look for a management team with a clear, proven track record of leading the company independent of the owner. As an owner, you need to ask:
- How strong is my management team?
- Where did they come from, and how were they developed before they joined me?
- Is there diversity on the team – of thought, background, education, age?
- Are they capable of making informed, business-building decisions on their own?
If your answers are “no,” you have to get your people into top shape. Remember, this is exit planning – you’re not leaving tomorrow afternoon. You have three to ten years to develop, upgrade, or replace the folks on your team.
#2. Owner Independence: The more smoothly your business can run without you, the more attractive it is to potential buyers.
- Can I take off for four, five, six weeks – and come back to a business that ran effectively and efficiently without me?
- Can I all but unplug my phone, remaining unreachable except for emergencies?
If you can leave, unplug, untether, and no one realizes you’re gone, then you have a critical ingredient of transferable value. On the other hand, if you’ve built a company that cannot function without you… you’ve built a company that cannot function without you. Who would want to buy that?
#3. Effective Financial Systems and Controls: Among the first words out of a prospective buyers mouth: “I’d like to see your financials for the last five years.” Contained within these documents are the facts and figures they need to determine if your business is a solid investment. With that in mind:
- Have my financials been reviewed (or audited) by a CPA firm? Are they solid?
- Are statements timely, accurate, readable, and consistent with industry standards and norms?
- Can I use my financials to predict cash flow over the next 30, 60, or 90 days?
- Do we track inventory and other assets?
- Can I forecast future financial behavior based on historical data?
No? Buyers will run, not walk, from your company. Your exit planning team should include a CPA and/or other financial experts that will help you answer these questions affirmatively.
#4. Credible Business Growth Plan. Current growth is great. For you. But potential new owners want some level of assurance that the business will continue on its upward trajectory for them.
- Does my company have a mission?
- Do we have a vision statement?
- Do we have strategies and tactics to ensure future growth?
If you are maxed out, at the peak of your growth curve, transferable value is low. Buyers need to know that you have a mission, vision, and plan going forward.
#5. Broad Customer Diversification: You may have two long-term customers that provide 75 percent of your revenues and profits. They’re integral players in your growth, and you have a strong relationship. But it’s not good news for prospective buyers. When profits are tied so closely to just a few customers, there is an increased level of risk. What if one or both of those companies go out of business? Leave when you leave? Opt for a competitor?
Buyers need a diverse customer base:
- Is it true that no single customer accounts for more than 10 percent of my revenues or profits in the past 12 months?
- Have I maximized selling opportunities with current customers?
- Are contracts assumable? Do they include provisions that reduce the buyer’s risk? In other words, will the contracts and relationships with current clients continue uninterrupted for the new owner?
#6. Compelling Reputation Strategy: Transferable value encompasses a strong reputation and brand strategy.
- Is my company name and brand registered or copyrighted?
- Are logos, domain names, etc., legally protected?
- Are significant products/services federally trademarked?
- Do we have a written list of trade secrets? What steps have we taken to protect that information?
Why does this matter? Without these protections, there is nothing to stop a competitor from using your name, your logo, your ideas. Why would buyers spend any money on your company when they could just copy it?
#7. Scalable Systems and Processes. When new owners come in, they want to make the company bigger, better, and faster. They want it to generate more money for them. To this end, it is critical that you document key systems and processes.
- Are all key systems and processes identified? Have they been captured in writing, measured, and quantified?
- Are those in key positions adequately cross-trained?
- Do we conduct regular post-mortems on key events in order to foster continuous improvement? (e.g. why did we win this bid? Why did we lose that contract? Why did we score this key hire? Why didn’t we?)
- If sales doubled, could we readily double our production and service delivery to accommodate?
Affirmative answers indicate to buyers that your business, your systems, and your people are scalable.
A successful sale is not all about growth. Your company may have a healthy cash flow; you may be making money hand over fist. But if you cannot supply positive answers to these questions, your business is too dependent on you. You cannot turn it over to anyone else. At least not yet. Working with a NAVIX consultant will help you implement strategies to change the answers to “Yes.”
