The End Game – When it Comes Time to Sell
It could be because it’s spring.
Or, perhaps it’s a “recession hangover” effect.
Or maybe, it’s just because none of us are getting any younger.
Whatever the reason, most of the owners that I work with these days are increasingly thinking about how they can get the best possible return on all the years of effort (and money) they’ve invested in their business, when it comes time to sell.
There is no simple answer, of course, but the best starting point is to consider how businesses (private and for that matter, public) are typically valued.
In general, 3 things factor heavily into what an investor is willing to pay for any business:
- Revenue Momentum. For a business to have any value at all, it has to reliably generate a stream of earnings even once its current ownership is no longer in place. To do this, it first has to have a certain “revenue momentum”. Its existing customer base has a lot to do with this, of course, because it generates repeat business. But of an even greater concern, I would argue, is what the “revenue momentum” is with respect to new business and new customer adds. The reality (at least in my experience over nearly 3 decades in business) is that a business is either growing or shrinking. There is really no such thing as “maintaining”. It’s just a euphemism for slow decline. So unless a business is adding customers at a reasonable rate, it has a limited future. Certainly, it’s not something any investor would pay a premium for. At best, they’ll make a “bargain basement” offer. So top-line growth is very important, but of course any valuation of the business is ultimately based on bottom-line earnings, which brings us to …
- Profitability Strength. Not all businesses, we all know, are created equal. Nor do they end up equal. In order for a business to reliably produce an earnings stream for a new owner, it has to have an adequate level of profitability as well as revenue. And here’s the thing – the higher the level of profitability, the higher the multiple of earnings the business is likely to sell for as well as the higher the number that multiple applies to. Profitability strength is therefore something of a “double-whammy”, which either drags you way down or pulls you way up, when it comes to determining what your business is worth to a potential purchaser.
- Market Share. There is no doubt about it; market share is really the proof in the pudding. It’s tangible evidence that you’ve done some significant things right. Why else would you have all those customers? And more importantly, a business that manages to achieve a position of relative dominance in any given market will find it both far easier to grow to the next stage, and far cheaper than its competitors. The reason is pretty straightforward – with market share comes market awareness. From the perspective of potential new customers, 2 things start to happen. One, they know of you, so you’re exposed to more new deals than a smaller player. Two, they are more inclined to seriously consider you, because their perceived risk of not doing so is greater (no purchaser wants to explain why a major player in their market wasn’t considered), and their perceived risk of choosing you is less (you’re just considered more reliable than a smaller player). The result – your sales and marketing costs actually decline, as a function of income, when compared to smaller competitors.
Of course, other things are important too – the nature and quality of your customer base, the quality of your management team, the controls and structures you have in place in your business to name but a few, but the message for most businesses these days looking towards their end game is pretty clear:
- Build revenue momentum.
- Strengthen profitability.
- Get on track to achieve a meaningful market share.
Now some of you reading I this will I know be saying to yourself, “Oh sure; just tell me how I do all those things at once, and with limited resources”.
But that’s for another time, and other blogs …
So stay tuned, or contact me if you just can’t wait.
– Software Delivered as Promised. No Surprises.