18 Feb Five Valuation Boosters Before You Divest Your Company
Nowhere is more wealth created than in deal-making. Here is a simple example. I’ve an acquaintance who sold his oxygen-supply tank business about 15 years ago or so. During the sales process he was in negotiations with a company on an acquisition streak of Medicare-funded oxygen supply businesses. They came to him with a pretty good offer and frankly one he would have gladly taken. However, he played the deal game and asked for more–$1.5 million more to be exact. They told him, “we’ll bounce it around and get back to you.”
They called back eight days later (after he went through some bullett-sweating) and accepted his offer. His sly move made him $1.5 million richer with very little effort. Again, nowhere is more wealth created for individuals than in deal-making. Unfortunately, seldom is the process that easy. There are, however, a few immediate tasks that can help to boost your company’s value just prior to a corporate divestiture.
Focus on Sales
The obvious valuation-booster for any organization is to immediately gain new clients or extend contracts (upsell) existing clients. Regain a focus on making more sales and driving more business. Boosting your bottom line by showcasing a growing company just prior to selling it can make your business appear more acquirable by strategic bidders, institutional investors and individual managers. The first and most obvious place to add value is to top-line revenue. The value will flow through to your company’s valuation.
Clean Books, Clean Management
Ensure the books and personnel are clean and void of questionable components. Lying on financial statements is fraudulent. Other management issues can get you in trouble as well. For instance, we worked with a company about two years ago that employees a great deal of foreign labor to accomplish their business objectives. We asked all the right questions. They misrepresented to the banker and eventually to a very probably acquirer, but the deal imploded because they were employing about 25 illegal aliens. Here they are, two years later still working on “cleaning up” the company. Be legit, be forthcoming and you will not only sleep better at night, but it could mean a large difference when you reach your liquidity event.
Cost Cutting Strategies
While any strategic valuation will exclude certain owner-related expenses that can be fairly hefty, there are other strategies to help boost your bottom line and get your business running more lean. First, call vendors, suppliers and partners to negotiate lower rates for all products and services the company pays for on a regular basis. Second, call them again. Eliminate unnecessary aspects of the business that may not be core to operations, especially if such components act as more of a drain on resources and do not boost the bottom line.
*Note of caution: be careful not to cut too much. There is a fine line between helping to boost the bottom-line and hurting long-term business sustainability.
Simply put, find strategic acquirers. Your company will be better valued if you work toward being acquired by larger companies who can use your niche and/or place in the market to gain a foothold in the larger game. Strategic acquirers are usually the first place your investment banker will do initial reach-out to gauge interest to sell the company. Finding strategic acquirers leads directly into point #5.
Boosting business value is greatly enhanced by creating a bidding war between multiple, large strategic acquirers. Bidding wars are accomplished by boosting demand for the company’s value among various desirable potential acquirers.
There can be a great risk with bidding wars, however. Such demand boosts can eventually cause a deal to implode and put a bad taste in everyone’s mouth when nothing seems to go according to plan. When this occurs, it can create a “tainted” mentality on your business and may slow any progress the company may have made in getting a deal done. Having a bidding war can be a great thing, unless things go sour. It’s a fine line, so tread carefully.
Selling a business is one part art and three parts science. The science part mostly happens before you decide the sell. Which is why boosting the value of your business prior to divesting it can mean big wins long-term. Remember, you’ll never make more money than when you are negotiating on deals.