IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Robert Burger of B2B CFO Partners (www.b2bcfo.com):
Increasing the Value of Your Privately Held Company?
There are many ways to judge the value of my company. I can look at revenue, net income, steady growth, a sterling reputation, my great employees, loyal customers, or the quality of my products and services. Let’s focus on one perspective: How would a potential buyer value my company?
Five Key Value Components
For a buyer, the reasons to acquire a company are based on their strategic goals, and they will look at the strategic fit of my company with their plans. Will my company be part of a larger organization? If so, how does it fit in, and what are the expected synergies? Does the buyer have a particular expertise or targeted market that they expect to succeed with? It’s always valuable to understand a specific potential buyer’s goals and motivations.
Since virtually all buyers are going to focus on their return on investment, let’s look at some key components that are easy to quantify:
- Gross Profit: Am I selling my product or service at a price that delivers a gross margin comparable to my industry, or better?
- Net Profit: Is my overhead (operating expense) low enough to allow adequate net income after tax?
- Sustainability: What assurance do I have that my business will continue to thrive?
- Growth potential: What are my options for growth?
- Transferability: How easily can a buyer successfully take over my business?
To look a little deeper:
- Gross Profit: The keys to the kingdom. If I can build a business where my sales growth increases faster than my cost to produce products/services, I rock. But I have to deal with timing – sometimes I have to build a staff in advance of gaining customers. When I project growth, do I know the cost of growth?
- Net Profit: The thing that kills a lot of small/medium businesses is the cost of people who don’t produce revenue. If I have more than one out of five employees who don’t bill their time, I may want to look at my overhead cost.
- Sustainability: What makes me think that I can keep succeeding? Is it my skill at innovation? Do I have a unique solution that nobody can replicate? Or an array of strategic relationships that allow me to beat my competitors?
- Growth potential: Nobody would buy a business if they didn’t think they could grow it. So, how am I going to show the buyer how much growth potential there is?
- Transferability: This goes back to our pyramid of Finders, Minders and Grinders. It’s great to have a successful business that I am running, but it’s better to have a successful business that can run without me.
The more I know about potential buyers and their goals, the better I can evaluate, improve and present my company to showcase its strengths. But for any buyer, these five key value components are going to be critically important. The more I can focus on emphasizing and improving these, the more likely I can improve the value of my company to a seller.
If you have questions relating to the content of this article or strategies for increasing the value of a privately held company, Robert Burger, a Certified Business Transition Expert with B2B CFO, would welcome inquiries. Robert Burger can be reached at (425) 736-6297, robertburger@b2bcfo.com, or robertburgercfo.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.