We do a great deal of consulting work before the inevitable sale of a business. There are numerous qualitative and quantitative methods for increasing the value of your company before you eventually sell. Ignoring some or all of them will mean money left on the table.
Internal Business Factors
In college, I lived in squalor. If there’s one thing I learned, there’s only so much cleaning that can make a pigsty look good. So, if you’ve a trashy business to begin with, then cleaning up the financials, the marketing and the sales may actually not have that large of an impact on value. There are however, those who’ll need such a face-lift and the work will be well worth it in the end. Some of the internal areas that will
In the course of business entrepreneurs willingly run as many personal expenses through the business they legally (or sometimes illegally can). While this can sometimes lead to a pierce of the corporate veil, it certainly needs addressing at the time of business sale as it could have an immediate impact on the bottom-line profit produced by the company P&L.
External Strategy, Negotiations
The third, and perhaps best way to truly influence the value of a business is to increase the demand through a strategic business auction. In B-school, we spent long hours stewing over company Betas in order to peg the right WACC on a business valuation. In the real world and in private business, things work much differently.
In most cases, private WACCs and Betas can be just as easily calculated by licking your index finger and waving it in the air. We typically pick something between 20 and 30%. In addition, when it comes to a buyer placing value on a business for an acquisition, it’s more dependent on willingness to pay (WTP) than on actual value.
Some buyers will know what the inherent fair market value (FMV) of the business is and try their very best to push their purchase price below that number–knowing full well that they mitigate their risk and increase their eventual upside when they cash out their position in a couple of years. Moreover, other buyers are much more keen on seeing a strategic opportunity to plug a business, its assets and intellectual property into a venture that could yield some fruit from existing relationships, networks and distribution.
This is where the real money is created for middle-market business owners who’re looking to cash out. We’ve seen many a substantial premium paid for companies whose actual FMV is well below what a strategic and hungry buyer paid for the business. It also helps that today’s private equity funds are flush with cash, interest rates are at all-time lows and sentiments are back up (in spite of yesterday’s sell-off).
If there’s at least one take-away: value is relative and the eye of the beholder can change if there is an indication of a potential loss or take-away of a great opportunity.