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There is an old saying that Companies are Bought, Not Sold….however, this should not be mistaken as a recommendation to passively wait around and take a reactive approach to a large company knocking on your door to buy your business. This is a failed formula for one prospective buyer corralling you and your company, consuming your time in a captive manner, with the one buyer knowing they are the only game in town, and is a path to a long sale process and a low-ball price with very challenging terms.
The proper approach for business owners is to have a proactive approach to selling your company by preparing for a sale to maximize your value, and targeting many prospective buyers in a competitive sale process to strive for multiple offers and the best price and terms. This proper approach takes additional work and requires expertise and experience from an M&A advisory firm like CEO Advisor, Inc. that will ensure you the optimal results you are looking for given your many years of hard work.
Back to our topic of Companies are Bought, Not Sold. What this phrase really implies is that strong, well managed, growing companies are more attractive to buyers and therefore multiple buyers will express interest in and commit the time needed to buy a strong, well run company. Given that you have a team of a seasoned M&A advisor, an experienced corporate / transaction attorney and CPA or tax advisor, A) These advisors all enhance your ability to sell your company at an optimal value and reasonable time-frame, and B) Make it more efficient and practical for buyers to invest their time into delving into prepared information about your company, making an offer, completing due diligence and working through legal agreements.
Today, valuations remain relatively high, and M&A activity is relatively strong. And despite the public equities markets being strong, valuations of smaller, privately-held companies have stabilized depending on the size and strength of their metrics, such as Revenue, Growth Rate, Gross Margins, Net Profit and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which better represents the free cash flow of the business.
A strategy to make your business irresistible to prospective acquirers may generate the greatest return in your lifetime. To maximize your sale price, we advise CEOs to, 1.) Take a proactive approach to preparation for a sale, 2.) Optimize your growth and company KPIs/metrics, and 3.) Conduct a competitive sale process. A seasoned M&A advisory firm will help you with all three critical steps above.
Below are key factors that you must employ in your business to build value, make your company attractive to buyers.
Growth Rate
The growth rate of your business is critical to the value of your business and the attractiveness to an acquirer. Small to mid-size businesses that grow 10% or 15% per year are not attractive to buyers given the many other options they have to acquire faster growing businesses. If your growth rate is slow or stagnant (and less than your industry growth rate), there are issues that you need to address in your business if you expect to exit at some point in the future. This key factor applies to all types of businesses all the time, and an M&A advisory firm such as CEO Advisor, Inc. are experts in growing, preparing and then selling small to mid-size companies.
Size Matters
Strategic buyers and Private Equity firms that are dedicating people and resources (their M&A or investment team) to acquiring a majority or 100% of companies tend to focus on larger companies. It takes just as much (actually more) time to acquire a small company than it does to acquire a mid-size or large company. CEO Advisor, Inc. has relationships with both strategic buyers and Private Equity firms to seek out the best buyer for you.
Acquirers are looking for Revenue and Profits that will move the needle on their businesses. They want strong management, large markets served for future growth, and Revenue that is substantial, forecastable, recurring and predictable. Kick into growth mode to increase Sales, Profits, the value of your business, and formulate an exit strategy to generate your golden opportunity to sell.
Recurring Revenue
If you are only as good as your last project, you are in the Non-recurring Services category valuation-wise and not optimizing your value. Acquirers see value in contracted, recurring Revenue. Not just loyal customers that buy semi-regularly (re-occurring Revenue), but a strategy and business model with long-term, contracted customers that is forecastable and predictable. You need to have a business model for high valuations and that has staying power to attract buyers in order to have them pay you optimally for the customers you have secured and for your many years of hard work.
Gross Profit Margin
Your Gross Profit Margin (GPM), or Sales less Cost of Goods Sold divided by Sales, is the number one factor that points to the profitability of providing your products and services (before overhead/expenses). Acquirers are attracted to businesses with high GPM as this will typically result in high Net Profit, Net Profit Margin and EBITDA.
Depending on your type of business (resellers vs. manufacturing vs. services vs. software) have very different Gross Profit Margins, you need to have a GPM that is at or higher than the average of other companies in your industry to optimize your value. If your Gross Margins are low, seek advice from a business and M&A advisory firm as you are, 1) Leaving a lot of Profits on the table, 2) Penalizing your business value substantially, and 3) Greatly limiting your ability to find a buyer.
Churn Rate
Churn Rate is a critical metric in the value of a recurring Revenue businesses. Both Revenue Churn and Customer Churn must be tracked and improved on continuously. Churn Rate for each of these metrics should be below 1% per month, and Renewal Rates should be targeted at the gold standard of 93% annually.
Management
Strong management is always a key factor in running and growing a sustainable business that is valuable and attractive to buyers. Interim management (business advisors, CPAs, attorneys, etc.) work well for smaller and mid-size companies until they reach a certain size where a full-time permanent management team can be hired. If you are the lone senior executive in your company or your management team is lacking a team of seasoned expertise, you need to gain additional expertise and experience from a seasoned, hands-on business advisor to help you grow and build value in your business.
CEO Advisor, Inc. has over 160 years of combined experience and expertise in hands-on advising of CEOs of small and mid-size businesses and over 85 years of mergers and acquisitions experience. To address your exit strategy and mergers and acquisitions needs, contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
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