CEO Advisor Newsletter November 2017
Five Factors in Making Your Company More Valuable and Attractive to Buyers
Today, valuations are frothy again and M&A activity is strong. The primary limiting factor to deals getting done is not the availability of money, but CEOs and business owners that demand extremely high prices for companies that were not sellable just five years ago.
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.
A strategy to make your business irresistible to prospective acquirers may generate the greatest return on investment 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.
Below are 5 key factors to build value, and not only make your company sellable but more attractive to buyers. CEO Advisor, Inc. works with its clients on these critical factors, as well as, the hands-on M&A advisory services to facilitate the sale.
1. Growth RateThe growth rate of your company is critical to the value of your business and the attractiveness of an acquirer. Businesses that grow at 10% 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 such as sales, marketing, management team, product offerings etc. if you expect to exit at some point in the future. This key factor applies to all types of businesses all the time.
2. Size of Your Company and the Markets You ServeCompanies that are dedicating people and resources to acquiring other companies tend to focus on acquiring 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.
Acquirers are looking for revenue and profits that will move their needle on their business. They want strong management, large markets served for future growth and recurring revenue that is substantial and predictable (contracted).
3. Recurring RevenueIf 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 a sure bet, but you need to have a business that has staying power to attract buyers and have them pay you handsomely for your many years of hard work.
4. Gross Profit and Gross Profit MarginsYour 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 to customers. Acquirers are attracted to businesses with high GPM as this will typically result in high Net Profits, Net Profit Margin and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Trailing twelve months (TTM) EBITDA times a multiple for your type of business is the primary method of valuing privately-held companies and GPM is critical to profitability.
Depending on your type of business (manufacturing vs. service vs. software have very different Gross Profit Margins), you need to have a 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.
5. ManagementStrong 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 bring in an outside advisor and reposition things to enable growth and build value in your business.
CEO Advisor, Inc. has decades of experience and expertise in hands-on advising CEOs and business owners of small and mid-size business, including building value and buying and selling companies.
Contact Mark Hartsell, MBA, President today for a no cost consultation by calling (949) 629-2520 or emailing MHartsell@CEOAdvisor.com.
Planning for Success
We are hands-on and ask CEOs critical questions about planning and managing their business such as: Does your company have a strategic plan? Does your company have a defined sales strategy to maximize sales? A marketing plan and budget to optimize leads and fuel sales? A clear path to increased Net Profits? An exit strategy that enables you to maximize the sale of your company at the right time for you?
Every business needs to plan. Unfortunately, there is a myth that associates planning with start-ups. As an owner of a small or mid-size business, can you afford not to plan? Do you prioritize, focus and manage your time, resources and growth proactively?
Benefits of Planning
1. Proactively Guide Your Growth: Your business will grow or not depending on many factors, including overall economic trends, size of the industry, growth of the industry, specific market needs, your products/services, hard work and other elements. Businesses that plan do it to guide and accelerate their growth so they move proactively towards defined objectives rather than just reacting to business events, which is very risky and costly.
2. Manage Priorities:Goal setting involves focusing and allocating resources where they will generate the most sales and profit. Manage the company by prioritizing your most important goals according to your long-term objectives and plan.
3. Assign Responsibilities: A plan gives your company efficiency, accountability and develops organizational responsibilities. Clear accountability and responsibilities drive businesses forward.
4. Track Progress: With a written plan, you can track your progress towards your defined goals and measure results. Without a plan, how do you tell whether or not you are moving in the right direction or measuring success? In addition to your financials, create a management dashboard to consolidate your reporting to optimize your decision-making and success.
5. Manage Your Cash Needs: Most businesses don't plan well for their cash needs, yet this is critical to all companies. Financial forecasting is not only strategic to your business, but critical to setting goals for Sales, Gross Profits and Net Profits which are at the core of every business.
Business Planning is Critical to All Sizes of Companies
A. Strategy: Strategy involves taking a hard look at your products and services, your core competencies and management teams, your target markets, sales strategy, geographic sales coverage, your customers, pricing, operations, sales and marketing. Bring in the needed expertise to ensure your strategy yields success and optimizes sales, profits and the value of your business.
B. Define Responsibilities, Goals, Tasks, Deadlines and Budgets: We call these Milestones. These key aspects of business planning are critical to business success.
C. Financial Forecast: One of the most important aspects of strategic planning is the financial forecast. A business needs to set financial goals and targets to truly measure its success and drive the business forward.CEO Advisor, Inc. has the expertise, coupled with hands-on advice to help you plan, strategize, grow and succeed.
Contact Mark Hartsell, MBA, CEO at (949) 629-2520, by email at mhartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.