Especially with all the uncertainty of today’s political climate, how ‘saleable’ is your business? If you would like to have the choice of selling in the future, consider eight key factors buyers have in their minds when purchasing a company. Also consider what actions you should be taking in the light of this.
Companies are generally bought and sold using a multiple of earnings. Financial buyers see businesses as streams of future profits. The absolute size of your business, turnover and profit affects the value of your business. Size matters, with smaller businesses appearing riskier than larger ones. So identify and pursue strategies to increase your profits and have more predictable future profit streams.
Acquirers typically pay more for businesses that have the potential to grow. What is your business’ growth potential? Consider how scalable your business is – geographically (selling current products in other areas), horizontally (selling more products and services to your existing customers) and vertically (scaling up and selling more using existing infrastructure).
Saleable businesses are resilient – not overly reliant on any one customer, employee or supplier. If you´re too reliant on any one employee, you are at significant risk if that employee leaves. If you are too reliant on any one customer, your business risks instability. Try to reduce your overreliance – e.g. your largest customer should represent no more than 15 percent of turnover.
The more cash an acquirer must inject into your company when taking it over, the less that acquirer will pay for it. The inverse is also true: the less cash your acquirer must transfer into your business, the higher the potential price. Identify the ways you can better manage your working capital so that you are best in class in terms of cash generation in your sector.
One of the biggest factors determining the value of your company is the extent to which an acquirer can see where sales will come from in the future. If you are in a business that must start from scratch each month, the value of your company will be lower than if you have a recurring source of future revenue. A clear way to increase the levels of recurring income is to grow your service business and the revenue streams from service contracts, service works, upgrades and call outs.
Sustainable competitive advantage
Warren Buffett is famous for investing in companies that have a protective ‘moat’ – a clear point of differentiation. The deeper and wider the ‘moat’, the harder it is for competitors to compete. Think how you can increase the differentiated value you bring your customers and how you can differentiate your service offering.
The extent to which your customers are satisfied, and your ability to assess customer satisfaction in a consistent and rigorous way, is very important to acquirers. Contract attrition levels and the age of your debtors are important indicators of customer satisfaction. Consider putting in place an objective way of regularly measuring the satisfaction of your customers such as a customer survey.
Lack of dependence on owners
To be valuable to an acquirer, your business must be able to succeed and grow without the business owners being at the hub and driving all key activities. Work on systemising your business and developing a high performing management team that can operate without the owners being present on a day to day basis.
As a security installer, if you would like to develop a business that is saleable and attracts a higher price, consider these eight drivers of saleability and what actions you need to take to achieve the best value for the many years you have invested in your business.
Jim Rathbone is the Managing Director of Rathbone Results. Contact him here