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Guide

Boost Your Business Valuation By Focusing On Value Drivers

Boost your Business by Focusing on Value Drivers. Get tips for how to focus on value drivers via Fresh Insights and Cadence Bank. Learn more.

As we discussed in a recent article, the ultimate goal of many closely held business owners is to exit the company by selling to an acquirer at the highest possible price. Owners may then use the proceeds from the sale to fund their retirement or perhaps launch another business.

Maximizing the sale price of your business requires years of planning and preparation. “Potential buyers will be looking for certain characteristics in your business that will increase their potential return on investment,” notes Cadence Bank Senior Vice President and Business Banker Andrew Smith. These characteristics are referred to in the M&A world as business value drivers.

How to Value a Business

According to Smith, business buyers and sellers often don’t see eye to eye when it comes to the value of a closely held business. “Typically, sellers think their company is worth more than it actually might be because they have worked hard for many years nurturing and growing it,” he says. Buyers, on the other hand, usually view companies less emotionally — they are looking at objective criteria that can be measured and monitored so they can project their future ROI.

There are three primary metrics most buyers look at when examining companies they might want to acquire and determining how much they will pay for them:

1. What are the projected future cash flow and earnings?

2. When will these earnings and cash flow materialize?

3. How certain are these earnings and cash flow projections?

Therefore, a key to increasing the value and selling price of your company from the perspective of acquirers is to maximize and accelerate potential future cash flow and earnings and reduce their uncertainty. One way to do this is to diversify your sales and revenue streams among different types of products and services, customers and geographic sales areas. “Diversification is the first value driver,” says Smith.

 

More Value Drivers

Not surprisingly, business acquirers also want to see strong financial performance in companies they’re considering buying, which makes this another significant value driver. Specifically, they will usually be looking for steady sales and revenue growth, strong cash flow, and high margins. Smith recommends that owners measure and monitor key performance indicators (or KPIs) during the months or even years leading up to a planned sale and strive to improve them. These KPIs might include your debt-to-equity ratio, inventory turnover rate, or accounts receivable (AR) and accounts payable (AP) days.
 
A key to maximizing ROI on a business acquisition is growing the acquired company, so buyers also will look closely at a business’ future growth prospects when gauging its value. One way to maximize the value of your company to acquirers is to present a strategic growth plan that details the company’s short- and long-term growth prospects. For example, is the business well positioned to expand into new territories, tap into new niches or capitalize on emerging new technologies?
 
In addition, buyers usually will want to see that your company has a strong executive management team and a skilled and stable workforce. So be prepared to demonstrate your executive “bench” strength and strive to stabilize your employee base in advance of a planned business sale. Also, don’t cut corners when it comes to investing in the training and equipment your employees need to continue moving your company forward.
 

 

Helping Smooth the Transition

Smith points out that in many small, closely held businesses, the owner possesses all of the key client and vendor relationships and holds much of the proprietary product and industry knowledge in his or her head.
 
“Therefore, buyers will often require the owner to stay on board for a period of time after the acquisition is complete,” he says. “This could be for a period of several months or even several years, during which time the owner will share his or her knowledge with the buyer and help ensure that the transition to new ownership goes smoothly.”
 
It’s really never too early to start planning for your eventual exit from and sale of your business. The sooner you do, the more time you’ll have to focus on value drivers that can help increase the eventual sale price of the business.
 
Read this Fresh Insights for tips on getting started with a succession plan

 

 

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

 
 

 



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