Business cycles have run 7.9 years on average over the past 75 years. This means we are overdue for a downturn in the economy, partially due to the Federal Reserve extending this business cycle with sustained historically low interest rates. Today, valuations are extremely high once again and M&A activity is strong for now. The primary limiting factor to deals getting done are demanding CEOs and business owners that require extremely high prices for companies that were not sellable just five years ago, despite a lot of interest and cash from potential buyers.
Whether you decide to sell your company in today's hot market, or prefer to hold and grow your business further (and risk another drop in the market), there are certain key areas that you need to focus on to build value and make your business more attractive to current and future buyers. Seek advice from a business advisor that is experienced in mergers and acquisitions and that can guide you through the process with seasoned negotiating skills.
Simply stated, make your business irresistible to strategic buyers and private equity firms. A strategy to make your business irresistible to prospective acquirers may generate the greatest return in your life time. After all, I tell our clients on a regular basis, you never know when the perfect buyer will knock on your door. Now (and on-going) is the time to prepare for the sale of your business - especially when this will also result in higher sales and profits along the way.
Below are key factors that you must employ in your business to build value, make your company sellable and attractive to current and future buyers.
The growth rate of your business is critical to the value of your business and the attractiveness of an acquirer. Businesses that grow at 10% - 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, there are issues that you need to address in your business if you expect to A) maximize your profits and B) exit at some point in the future. This key factor applies to all types of businesses all the time.
Size of Your Company and the Markets You Serve
Companies that are dedicating people and resources to acquiring other companies tend to focus on larger companies. It takes just as much (actually more) time to secure a buyer and perform an acquisition on a small company than it does to acquire a mid-size or large company. Acquirers are looking for revenue and profits that will move the needle on their business. They want strong management, large markets served for future growth and revenue that is substantial and predictable. Kick into growth mode to generate your golden opportunity to sell.
If you are only as good as your last project, you are in trouble today. Acquirers see value in recurring, contracted revenue. Not just loyal customers that buy semi-regularly, but a strategy and business model with long-term, contracted customers that is forecastable and predictable. Not all customers need to be this sure bet, but you need to have a business that has sticky products and services and staying power to attract buyers in order to have them pay you handsomely for your many years of hard work.
Gross Profit and Gross Margins
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 product or service (before overhead/expenses). Acquirers are attracted to businesses with high GPM as this will typically result in high Net Profit, Net Profit Margin and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
Depending on your type of business (manufacturing vs. services vs. software have very different Gross Profit Margins), you need to have GPM that is at or higher than other companies in your industry to optimize your value. If your Gross Margins are low, seek advice from a business advisor as you are leaving a lot of profits on the table, as well as, penalizing your business value substantially.
Strong management is a key factor in running and growing a sustainable business that is attractive to buyers. Interim management (business advisors, CPAs, attorneys, etc.) work well for smaller companies until they reach a certain size where permanent management team members can be hired. If you are the lone senior executive in your company, you need to reposition things to enable growth and build value in your business.
Mergers & Acquisitions Advisor
In my last deal, the buyer thanked me for being involved and making the deal come together. He stated that without an M&A advisor, they simply can't get deals done. He added that CEOs and business owners frankly don't have the time, expertise, perspective, deal knowledge and process orientation to get through an acquisition and it is a shame. Buyers pass on many opportunities due to these factors, especially given the many owners that actually want to sell but sabotage their own exit because the owner or CEO doesn't have the experience, expertise or time to manage and negotiate the sales process.
CEO Advisor, Inc. has decades of expertise in hands-on advising of CEOs, presidents and owners of small and mid-size businesses, including building value and buying and selling companies. Contact Mark Hartsell, a trusted business advisor, today for a no cost initial consultation by calling (949) 629-2520 or emailing MHartsell@CEOAdvisor.com.