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Thinking About Cashing Out? How to Create Value in Your Business
By Laura Kevghas, President, Mirus Capital Advisors There are many factors that you cannot control about your company's value, such as the impact of market fluctuations; however, there are a number of factors within your control that can improve value in the eyes of a potential buyer. In general, value is driven by maximizing a buyer's perception of opportunity and/or minimizing a buyer's perception of risk. There are five key factors that effect a buyer's perception of opportunity: synergies; strategy; intellectual property; scalability; and market characteristics. Synergy can represent cost savings for a buyer through the elimination of duplicative overhead functions, duplicate manufacturing plants or other infrastructure, but it can also arise when a buyer can leverage the various strategic assets of the seller. Look at your products, best practices, proprietary processes, geographic coverage, domain expertise, unique skill sets, distribution channels and brand. How do they fit your customer's needs? Could your offering be improved by a merger? In terms of strategy, it is critical that you know where the market is headed at a very high level and can identify where your company fits into broader industry trends. Being able to articulate how you're going to double in size over the next five years and pointing to the resources you have put in place to execute that plan enhances value. Intellectual property, if properly positioned and protected, can be highly leveraged by buyers to create new markets, new products and better systems. The research talent, systems and processes in and of themselves may be highly valuable. Companies that have created business models that are capable of scaling rapidly and profitably are more valuable than businesses that grow revenues and expenses in a linear fashion. If your business has the ability to grow profits at a faster rate than revenue, you should strongly consider making that type of investment. Market characteristics are often overlooked as a value-creation factor. However, the size and growth rate of a market can have significant valuation implications since it provides a framework for buyers to think about the overall opportunity presented by the seller. For example, the growth opportunity for the automotive industry was great in 1958, but not so great today. Growth is more difficult in markets with limited size or growth themselves, and if you're in this position, it would be wise to consider how your market position and strategic assets can be leveraged to attack new or adjacent markets. Secondly, there are five key factors that affect perceived risk: financial visibility; performance; operational excellence; barriers to entry; and size. You can reduce the risk from financial visibility by having a revenue model that involves recurring, long-term contracts and having a business model that is "sticky" or differentiated. Is your product or service mission-critical, or just nice-to-have? Revenue mix is another key component of financial visibility. Do you have a heavy concentration of your business with a particular customer or industry? Are you dependent upon one sales person (or owner) for a significant amount of your sales? In terms of performance, it's critical to understand that buyers believe history will repeat itself. Look at the trends in your revenue and profitability – are they trending up, down or flat? How does your company stack up against your peers in terms of growth, margins and balance sheet ratios? There are two sides to operational excellence: the way in which a business operates (including the depth and quality of its management team), and its financial results. Management teams that institutionalize best practices create value. Additionally, a buyer is going to look at key metrics that determine operational excellence. These differ by industry and company type, so you need to understand the key operating metrics for your particular business and how your company stacks up competitively. Barriers to entry can be absolute, such as regulatory barriers, or they can be more subtle, such as proprietary intellectual property, or high switching costs for your customers. The more barriers to entry you can demonstrate to the buyer, the higher value your business will have. The size of your business has a real bearing on its value. Big companies are worth more than smaller companies on a "multiples" basis. Buyers look at small businesses as being more risky, and having fewer economies of scale to impact the potential opportunity for synergy. Finally, buying a smaller company is just as difficult and expensive as buying a larger one. When you allocate the cost and time spent to acquire them, larger companies often make more sense for the buyer, leading to a smaller number of potential buyers for a smaller company, which can ultimately lead to a lower price. Given these components of value, it's critical to start planning for your eventual exit far in advance to ensure that you have the critical value drivers in place in your organization. When you're ready to consider selling all or a part of your business, be sure to engage professionals who can work with you to position your company for sale in a way that strongly highlights its full potential. Laura Kevghas is a Principal at Mirus Capital Advisors, Inc. with over twenty years of experience in mergers and acquisitions, as both an intermediary and a corporate development professional. Mirus is a middle-market investment bank that specializes in advising companies in strategic mergers and acquisitions. By combining a proven process, industry and transactional expertise, creative thought, and personalized service, Mirus has completed hundreds of transactions for both public and private companies. Mirus is a registered broker-dealer and FINRA member. For more information, visit http://www.merger.com/. 
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