The concept of ‘maximizing value’ during a company sale is nothing new. You’ve read about it numerous times here and likely seen discussion on the Internet. Yet, in thriving M&A markets like today’s, it’s easy for entrepreneurs to figure that great timing is all that they need. You may even be told the same by generalist advisors.
Certainly, a boom market like we’re seeing will work in your favor. But, regardless of the tailwinds, getting maximum value is never a given. Good markets or bad, there are always things you can – and should – be doing to improve your return.
In every sale, the process starts with a review of the earnings/profitability, CAPEX, and prior-years’ data. While you might be able make some adjustments with addbacks, your financials are pretty hard and tangible figures that provide the basis for evaluation. But there are some things that are even more influential. Indeed, your story will determine your ultimate value.
The ability to tell the story of your business and why it has been – and will be – successful is critical. That story will help you gain interest from multiple parties, the first step in maximizing value. Your story needs to be thorough, exciting, forward-thinking, and truthful. And it needs to be evident in your business model.
As you create your story, be prepared to discuss the following five items:
You’ve run a great company for years. Your vision matters. While a solid track record is appealing, acquirers are more interested in how your company will be great down the road. How have you positioned the company for success? What do you see as its best opportunities? What people, systems, products, services, and technologies are in place to drive you forward?
Weary owners can sometimes adopt the attitude that a buyer ‘can take it from here’. While that may be true, they still want to see that you have carved out numerous pathways for growth, and that there are realistic ways to achieve them.
Business success is always about the people. They are the ones who turn ideas into results. Make sure they’re presented in the best way possible so a buyer sees that it’s getting a team rather than losing an owner. Moreover, make sure you truly have the talent, or make adjustments to better tap into their skill sets.
Everybody wants to acquire an entity with a team that can build the business long term. For a private equity acquirer or a new entrant, a proven team is a major part of the value opportunity. Conversely, any buyer may reduce its offer if it feels the team needs to be replaced.
The value of an organization depends on its existing and future customers. These are the groups that hold potential to protect the current core and build a new base.
The type of customer you serve can be viewed as a positive or negative. If your buyers order on a steady basis and ensure consistent cash flow, this allows for a more attractive offer. If you’re chasing sales in declining markets, your value will be reduced. To maximize your sell price, you need to have a strong position in growth markets – financial services, healthcare, food and beverage (especially private labels), etc. Your focus on such segments opens the door to a better future.
Your core, non-physical assets are your people and customers. Show how both will grow with you far beyond ownership transfer.
Your competitors and risk
Beyond a discussion of your local nemeses, or statement that you ‘can compete with the majors’, buyers want to understand your vulnerabilities. In the label market today, we see sale after sale of companies and the development of new competition. Also, as technology evolves, the customer is embracing new techniques and methodologies.
In light of these changes, you’ll need to have some answers. How easy is it for another firm to compete for your business? Can a new entrant come in and steal your work without any proprietary offering or market position? How well have you kept up with technology? What are the key differentiators of your products or services? How much does price play into your ability to make a sale?
These can be tough questions. Be prepared for them. If there are multiple reasons why people buy from you – and will continue to for the long-term – then you have real competitive advantage. This will give a buyer a reason to value your business beyond the traditional market multiple.
The potential of new investments
Finally, one of the most lucrative elements of an M&A transaction is the ability to accelerate profitability. If a purchase of your company is simply for accretive revenues, so be it. But, don’t expect a tremendous return. To maximize value, your company must be able to propel growth. Chart out what can happen with an acquisition. Can you triple sales by leveraging a large acquirer’s manufacturing base? Can an acquirer use your offerings to gain entry into a profitable new market, and then their platform to become a significant force within it? Think through such opportunities. Finding a good match for your potential is key to maximizing your value.
These five elements are key to a great company story. Pay careful attention to them as you craft yours.
Be it a strategic, private equity, or local buyer, a good story can be extremely compelling. But even the wisest and most well prepared owner can struggle with its development. Your business is your life’s work. Explaining your creation and why it’s successful can be difficult. Most great owner/operators are simply too close to it.
Your advisor is key in helping formulate your story. Knowing both the buyers’ interest points and your unique marketplace differentiators, your advisor can help you prepare, craft, and articulate the story that best connects them. Plus, if they have expertise in labels, they can help make sure you’re capitalizing on your most valuable markets and trajectories.
You sell your company only once. After all the work you’ve put in to build it, don’t hold back during your sale. Do your research, execute your vision, keep your teams energized, plan ahead, and continue to grow your great business. Then when you’re ready, search out the best advisors you can find. Their expertise – along with your smart business model – will be key in maximizing your return.
Bob Cronin is managing partner of The Open Approach, an M&A firm focused exclusively on the world of print
Read this opinion article in Labels & Labeling issue 4, 2017, and here