Unlocking Value: The Art of Mergers and Acquisitions

Unlock the value in your company to ensure a successful exit

Unlocking Value: The Art of Mergers and Acquisitions

You’ve owned a small business for over ten years and plan to sell it in the next five. However, you might not have considered what steps are necessary to make your business attractive to potential buyers. Many small businesses, especially those run as lifestyle ventures, often lack scalability and primarily appeal to individual buyers eliminating strategic or financial buyer interest. Despite this, your business has inherent value; it just needs to be unlocked.

 

Here are five steps to take to ensure your business attracts multiple buyers willing to pay top dollar:

  1. Build a Stronger Management Team

The goal is to make your business operate independently of you. Put your ego and inner control freak aside and review all of the things you, as the owner, do and how you can begin to delegate these duties to your employees. Promote from within and support your team as they take on new responsibilities, understanding that mistakes will happen. If you do not have the right employees, hire new ones. Buyers want a business that can run smoothly without the owner. You’ll know you’ve succeeded if you can take a month-long vacation without any disruptions to your business operations.

  1. Develop Standard Operating Procedures (SOP)

Once you have a strong management team, document the standard operating procedures for each role. Have employees write up their tasks and then review and refine these processes with management. Efficient, documented procedures not only streamline operations but also serve as training manuals for new hires. This demonstrates to buyers that the business can run smoothly without your direct involvement.

  1. Invest in Taxes

Instead of minimizing taxes, focus on showing a highly profitable business. Buyers look at the past three to five years of financial performance, with an emphasis on net income growth. Avoid having your business cover personal expenses. For example, showing an additional $100,000 in net income can increase your business’s sale price by $400,000 if it sells at a 4X multiple; despite the additional $40,000 tax. That’s a $360,000 difference!

  1. Reduce Customer Concentration

A good, steady customer may be low-hanging fruit but may also send buyers and their lenders running if the concentration is too high. Diversify your customer base to ensure no single customer accounts for more than 15% of your revenue. While having a major customer can be beneficial, it can also deter buyers and lenders if that customer represents too large a portion of your revenue. Invest in sales and marketing to attract new customers and offer more services to existing ones.

  1. Create Recurring Revenue

Establishing a recurring revenue model can significantly enhance your business’s attractiveness. For example, an HVAC company could introduce maintenance plans with regular, automated payments. Recurring revenue is highly valued by buyers, who may offer a multiple of revenue rather than net income.

Conclusion

To sell your business for the highest price, it needs to be attractive to potential buyers, which often requires significant changes. Implementing these five strategies can ensure your business sells faster and for a higher price. While these changes might incur additional costs, they will unlock your business’s full potential.