Top Drivers to Maximize Your Company’s Valuation

Merger and Acquisition (M&A) activity hit record highs in the United States and around the world during the first half of 2018. Energy & power, media & entertainment, and health care were the leading sectors in terms of deal value. For business owners who are considering selling their business or who have been approached by a willing buyer, a reasonable question would be “how do I increase the value of my business?”. With recent changes in tax laws, attractive valuations, and the potential for rising interest rates, now may be a good time to prepare your company to enter the market.

M&A Activity H1 2018[1]

Business owners who recognize that it may be time to sell in the near future can take steps to help maximize their company’s valuation. In an ideal scenario, the business owner and key members of the management team would begin preparing for a sale well in advance (think 5+ years). Of key focus will be valuation drivers. These drivers are factors that can help increase cash flow to the business and reduce the risks associated with operating the company. Numerous drivers exist, and some will be industry specific. We will look at few drivers that are industry agnostic and can help increase your company’s valuation.

1. Customers
Every business needs them and yours is no exception. A well-diversified customer base can help increase the value of your business. Alternatively, a high percentage of revenues being derived from a small concentration of customers could be problematic. Allowing your business to become too dependent on your largest customers will raise red flags for a potential buyer. They will not be willing to pay a premium for a business that has increased risk.

As you prepare to enter the market it is important to identify if you have any customer concentration risk. A good question to ask is what percentage do the top 5 customers contribute to the company’s revenues? The top 10?

2. Human Capital
Just like your business wouldn’t be able to succeed without customers, it also requires a skilled workforce. The knowledge, talents, skills, experience, and creativity of your team are all valuable assets. While any buyer can be expected to spend ample time going through financials, an experience buyer will spend time with various members of the team.

You should identify any key personnel who have specific knowledge that the business depends on to continue operating. If you find that one or a few people, if removed from the operation, could cause the entire company to come to a halt, then it is time to start spreading the knowledge. Buyers will be hesitant to deploy capital if it only takes a few people leaving the company to cause serious trouble.

3. Technology/IP
Business owners should recognize that technology changes at an ever-increasing pace. It is important to dedicate resources to R&D and to be catering to the developing needs of customers to ensure the company stays relevant. Once you realize that you are behind your competitors it will be difficult to keep up.

Expect buyers to inquire into your R&D practices and expenditures. They will want to see that your company has been able to change with the times and, even better, be at the forefront of new technological shifts. Admittedly, for smaller companies with tighter budgets it may be difficult to allocate the necessary resources to R&D. Developing strategic partnerships can help bridge the gap and keep the company up-to-date with their products and services.

4. Products & Services
Products and services require R&D, as previously discussed, and diversification. Some smaller companies may find themselves offering only one or two products or services. This could put them at risk of losing current customers or new business prospects due to policies that require the company to deal with vendors who offer a wide range of products. Similar to the diversification in customers, your product line should not consist of one or two items.

As buyers analyze your company they will check if your product line is diversified, if the products are exposed to economic swings, and opportunities that exist for vertical or horizontal integration.

5. Company Roadmap
Having a budget and strategy for the next year is great. However, having a roadmap outlining where the company will be in five years and how they will get there is even better. Sellers should remember that valuation exercises look to the future and expectations of how the company will perform. Having a strategic plan that can be passed to a new owner that can help assure them that the business will continue and could even grow will be critical.

6. Financial Performance and Metrics
It would be difficult to discuss valuation without bringing up financials. Buyers will look at data including financial statements, trend analysis, and margins. It is important to show growth in areas such as revenue and improvements in margins, such as EBITDA. It should also be expected that buyers won’t look at your company alone. They will want to know how you compare to competitors. Growing revenues at 3% YoY may be good, but if your competitors are all growing revenues at 6% YoY then you may have a problem.

While your company may employ an internal accountant, having your financials reviewed by an external CPA will help make buyers more comfortable. If it makes sense, audited financials are even better. Finally, having financial controls in place is one more sign to a potential buyer that you are serious about keeping your company in order.

It should be stressed that the above are by no means an exhaustive list of valuation drivers. These should serve as a starting point for business owners who are considering selling their business. Once the appropriate drivers have been identified it is necessary to constantly be reviewing and improving them. If you are unsure of how to value your business, it could well be worth the cost and effort to work with experienced valuation experts to understand the real intrinsic value of your company. In another article, we discuss the importance of always keeping your business valuation current.


[1] Primack, D. (2018, July 05). Corporate M&A activity hits all-time high. Retrieved August 9, 2018, from https://www.axios.com/mergers-and-acquisitions-all-time-high-first-half-2018-5fde1567-0b81-44d9-b438-42c250681399.html

Corbin Bridge on Linkedin
Corbin Bridge
Corbin Bridge is a licensed investment banker at InvestmentBank.com. He has prior experience assisting private companies in developing and executing acquisition strategies. Corbin works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. His areas of interest include Blockchain, AdTech, and Entertainment. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Corbin resides in Las Vegas, Nevada.
No Comments

Post A Comment