Selling Your Business Requires A Growth Story
Many business owners come to that point in their lives when they know it is time to sell their company. Whether their decision is due to health, fatigue, boredom, burnout or retirement, the fact remains they want out.
At that point, the composite characteristics and attributes of each business paints a picture that is viewed by the business community, competitors, creditors, employees, suppliers, customers and potential buyers. That picture can tell a story of dynamic growth, sedentary stability, or decline. It should be the story of a thriving company culture, perceived opportunity, and growing enterprise value.
More often than not, owners are not prepared for the rigors of a robust due-diligence process brought on from potential buyers eager to hear the “success” story – causing many deals to fail. We advise clients to think like buyers and ask themselves . . . “what do buyers look for when buying a business”?
When investors screen for and perform due diligence on businesses, they spend an inordinate amount of time analyzing the products or services, market size, competition, pricing dynamics, customer experience, financial history, proformas, and strength of the management team. They do this because these are the important factors that will help them preserve capital and earn an acceptable return on investment.
A strategic business plan including a growth plan need not be about “hockey stick” projections. In fact, it doesn’t necessarily mean getting bigger; rather, it means getting better. And, in that regard, every company should have a growth story showing the ability to analyze and overcome adversity and continue on a positive growth path.
In corporate finance language, getting better means improving the present value of future cash flows. The set of strategic actions should increase cash flows, extend their duration, and/or improve predictability. Changing the trajectory of these factors by making strategic decisions makes the business better.
Seven Actions that Improve Business Value
- Strengthening relationships with customers
- Diversifying suppliers
- Investing in technology to improve efficiency
- Putting redundant systems in place
- Making customer experiences easier, more efficient, and productive
- Accelerating new product or service offerings
- Expanding into new channels and geographies for growth or diversification.
Investing in a capable team, efficient processes, and systems that allow the business to operate independently of any one person further achieves the goals and improves the business value. The market place is dynamic, and competition makes it difficult, if not impossible, to generate superior returns on capital indefinitely unless owners and managers watch for growth opportunities.
Growth affects culture, opportunity and value
Orienting a business toward growth can empower the workforce and attract greater talent. Managers take direction from their owners and, without a directive or incentive to “think outside the box”, the future will look like the past. In our engagements, we often encourage owners to install retention plans that incentivize key employees to stay with the company through a transaction.
In almost every case, we find that aligning interests serves as a catalyst for new ideas and creates a sense of urgency. It is no surprise that cost savings are easier to find, and expansion opportunities become more attractive to managers when they perceive that owners are receptive to new ideas. Plus, it is more fun than just repeating yesterday, and that dynamic alone makes it more interesting to employees. Making this a priority ahead of, rather than during a transaction, can help the value accrue to the current owner rather than the new one.
Creating excitement for the future of the business has an added benefit. During the sale process, information is shared through statements of facts (i.e. memorandums, data sites, etc.) and through communication with management (i.e. management presentations). While it is important that the former is organized to position the business positively, the latter offers the best opportunity to form an emotional connection with the buyer. When managers have the opportunity to share their excitement in the future and can inspire a buyer’s confidence, the perception of risk decreases, and the perception of value increases.
Regardless of how it is expressed, at the end of the day, value is a function of the perceived future cash flows of the business. To illustrate the impact of growth on valuation for example, if a business is growing at 2% annually, assuming $2.5 million in operating profit and a cost of capital of 10%, the discounted cash flow analysis implies an intrinsic value of $21.75 million. Growth in cash flow, either as a result of lower costs, increased prices, or greater volumes, drives values higher.
Developing the growth plan
A good growth plan will separate revenue growth into achievable actions that have been vetted through data and analysis. The plan might include current market penetration, product or service extensions, geographic expansion, complementary acquisitions, or potential price increases. The size of each opportunity and the likelihood of success will only be limited by competition, customer demand, and business infrastructure.
Given the limited resources of middle market or small businesses, the capability to size each opportunity accurately may not exist internally. Using a third party skilled at customizing market studies and consumer research to the specific needs of a business can give owners the valuable information needed to prioritize initiatives efficiently.
Likewise, the cost structure can be affected by focusing on and continuously monitoring the cost of growth. Revenue growth by definition will provide leverage on fixed costs, while pricing, the use of new technology, and process improvements can drive down variable costs. Combined, revenue growth and operational cost improvements drive greater future margins and higher value. Increasing shareholder value is never easy and there is generally no “silver bullet.”
Rather, success requires a combination of initiatives, and by breaking down each of these growth strategies into actions, the numbers or results can follow. Business planning is a dynamic process with no target end point.
Those organizations that prioritize continuous improvement and consistent growth will be best positioned to maximize shareholder value.
As you prepare to sell your business, remember what Rod Stewart said almost 50 years ago. “Every Picture Tells a Story”. As a business owner, you can determine how your business picture will look. The picture you paint will ultimately determine your business’s enterprise value.