The 10 Steps to Increase Value

This is the last of a three part series on how to maximize the value of your company in the event you elect to sell at some point. Each business has its own unique set of strengths, weaknesses, opportunities and threats, none of which can be captured by EBITDA or any other single metric. You must be aware of the following:

“There is NO fair value for illiquid assets.”

“Fair valuation” of illiquid assets in the context of a SME business owner can be an elusive concept. Consider what one of the world’s foremost negotiators, Dr. Chester Karrass, has to say. “In business, you don’t get what you deserve, you get what you negotiate”. Start examining your priorities today, to increase your negotiating power tomorrow!

The owners of SMEs have worked hard for years to build their business. It has provided income, satisfaction, prestige and purpose. If you decide to sell the company at some future point, now is the time to make sure that that you get what you deserve. Here is a 10-step plan to maximize your return on the sale of your SME distribution business.

1. Target market. For many SMEs, there are very few individual buyers capable of financing this type of deal on personal credit. The most likely acquirer is a Private Equity Firm, another private company or a public company. If the decision is made to sell the company, a competent M&A advisor should be retained to approach and negotiate with those aforementioned professional buyers who have experience from multiple deals. Acquirers tend to think in terms of multiples of EBITDA for comparable companies when it comes to valuation.
2. Documented Plan. Understand and have a documented plan for your growth. A good growth plan makes sales projections more credible. How do you plan to grow? Wider product lines? More services? Increasing geographic coverage? What part of your business is online? How good is your website? Do you do business outside of the immediate geographic area?
3. Accounting Records. Ensure that your financial statements are in order and have been audited. Confirm that your bookkeeping practices and tax structure are optimally designed. Some companies may set up things to minimize taxes on an operating basis but they may not be right for exiting your business. If your accounting firm does not have any deal making experience, consider working with a firm that has the experience.
4. Correct Attorney. Be prepared to retain the right lawyer for the deal. An attorney with transactional experience as opposed to litigation experience is more likely to help put together a successful deal. Many deals collapse due to attorneys who are not familiar with transaction negotiations.
5. Competitive Intelligence. Understand how your competition is performing and how you measure up. Some of the value in the deal comes from the acquirer’s perception of how you rate in your peer group. How good are your profit margins? How about inventory turns? Is your equipment outdated? Do you have a lot of dead inventory on the books? Excellent companies get excellent valuations and mediocre companies get mediocre valuations.
6. Reduce risk. Take steps to diversify the customer and supplier base. What percent of your business is tied to one customer? What percentage is tied to the top 5 customers? What percent of your business is under contracts? Are they long term? How much of your business is recurring? Do you have any maintenance contracts? How dependent are you on one supplier? Do any of the supplier contracts provide meaningful exclusivity?
7. Turn Key Operation. Take steps to ensure that your business transitions easily to the acquirer. Do you have a reliable sales team or do the customer relationships begin and end with you? What can you do to ensure the customers and suppliers will continue to stay with the business after the business sale? Are your contracts being written so that they can stay with the business regardless of ownership changes.
8. Manage Liabilities. Do you have any known latent liabilities? Key employees or customers threatening to leave? Legal actions? Workers comp issues? Do you have reasonable insurance coverage or are you exposed to that one shipment or warehouse catching fire and taking you down with it? Can you convert some of the liabilities into assets? For example, can you convert your product supports liability into maintenance contracts with revenue streams?
9. Key Drivers. Be cognizant of the fact that business valuations are not written in stone and there is a huge variability in what you can get for your business. The more you would like to get for your business, the more planning and work your deal making team needs to do and the longer it is likely to take. Address potential negatives before putting the business up for sale.
10. Plan Early. If you want to maximize your return, get started now.

Turn Ideas into Action

1. Stop waiting and deferring this exercise. If you do, you likely will not get started until you have a sudden and urgent need – the worst time to sell.
2. Create that documented plan. If you need help starting this process, contact us to get the process started.
3. Turn the plan into actionable and measurable steps. Engage your management team and start working on putting the right things in place to create a Turn Key Operation.