What’s your business going to be worth next year or in five years?
If you were to try to sell your business today, you would probably have a good idea of what it’s worth, largely according to your financial statements and your market research. But that only tells buyers what your business WAS worth when you generated that revenue last quarter or last year. It’s a look in the rearview mirror, which no one is interested in buying.
That’s what buyers want to know when they assess the value of a business. So, if I asked you to remove your company’s financial history from the picture, what would prove its current and potential value? If you’re coming up short in any of the categories below, you can bet buyers and their agents will use this to discount the value of your business and reduce the amount they’ll be willing to pay for it.
1. Weak Contract Backlog and Sales Pipeline
A major indication of future value is revealed in the current contract backlog: how many active, long-term contracts are being serviced? The backlog shows signed contracts, their size and duration, and the quality of the customer. This may include contracts you signed or orders you paid for but have not yet serviced. It also shows whether the work is recurring business, project-based or one-off engagements/sales. This is an indication of the relative health of the business and its current ability to generate and service contracts.
Nearly equal in importance is the pipeline of sales opportunities. This can be an indicator of the health of the market, the quality of the sales force and the company’s potential for growth. Without a robust and promising pipeline, buyers will have to factor in the cost of changing the business model or staff – investments that will be detracted from the asking price for your company.
2. Inconsistency of Earnings and Execution
Consistent performance and execution offer encouraging insight into the vitality of your operations. Unpredictable earnings may be a sign of fundamental structural weaknesses within the business and a hint of unpleasant surprises for a potential buyer. Ultimately, buyers are looking for positive and consistent future revenue streams and will be highly suspicious of businesses that don’t deliver this.
3. Lack of Strategic Planning and Financial Modeling
Having well-thought-out and documented strategic plans and financial models are evidence of a mature company that is on track for continued growth and success. These include:
- A marketing strategy based on thorough research of the competition, the target market and the perceived value of the company’s products or services;
- An operations plan that is sustainable and scalable; and
- Financial modeling that demonstrates high-level thinking about budgeting, forecasting, allocation of resources, the impact of corporate finance projects, etc.
Buyers want evidence of marketing strategies that are based on more than experience and a series of best guesses. They want an operations plan that assures quality control and shows no potential “breaking point” as the company grows. And they will push to see evidence that your company has an established and detailed plan for continued growth.
As a seller, you must have well-reasoned strategies and objectives in place to defend the value you assign to your business and to convince a buyer of future earnings potential.
4. Over-Involved CEO and Missing CFO
A CEO who is too hands-on and involved in the daily operations of their business will signal to a potential buyer a lack of faith in the senior management team. Remember (and this is sometimes hard for CEOs who are founders of their companies), key members of the management team are often one of the prime assets being purchased, so they must project a high value.
An over-involved CEO also raises the following questions to the buyer, “What will happen to the business when the CEO departs? Is the management team robust enough to continue running the business after they depart? Are future business leads solely in the hands of the CEO? What does that mean for business development or other relationships among existing clients, suppliers, partners, etc.?”
Another common problem I have found is that many small- to medium-sized businesses lack someone who performs the CFO function. Most businesses have strong controllers, but they don’t have strong financial reporting, projecting or modeling capabilities that should be undertaken month by month to truly understand where the business is and where it’s going. This is most evident among companies that do not have a month-end closing process with a clean book or do not perform monthly business reviews to analyze performance. These are big red flags to buyers.
Two-to-three years in advance of the potential sale of your company is the time to be sure that a CFO and a strong back-office function are in place before these weaknesses are uncovered during a financial audit or due diligence.
5. Inexperienced Decision-Making Prior to and During the Sale
Clearly, it takes time to prepare a business for sale from the viewpoint of a buyer. If you don’t have experience selling companies, it is crucial to bring on advisors who can help you identify gaps and fix structural weaknesses, assess your management team, develop growth strategies and show solid financial projections for success.
Beyond preparing your company, an advisor can help you navigate the process of a sale, pick the right buyer, and optimize the structure of the offer. For instance, he/she may be able to read the buyer’s motivation and sense an opportunity that could actually increase your asking price.
Selling a business is a complex process and sadly, most companies either do not sell at all or sell for considerably less than expected by their owners. You can preserve and enhance your business’s value by planning ahead and investing in experienced guides who can provide objective advice for maximizing the value of your company.
About the Author
Tom Springer has over 20 years of experience providing strategic planning, business development, interim management and technical advisory services for private equity firms, portfolio companies and public and private enterprises. Tom is skilled at growing enterprise value by creating highly productive sales and service teams, developing new lines of business and fostering client relationships. He is known for solving complex business problems by aligning technology with business and operations.
You can contact Tom at [email protected].
About SD Capital
SD Capital is a premier, full-service, value advisory and investment banking practice that assists middle-market companies in creating and maximizing business value. We provide strategic evaluation and execution of various downstream sales and monetization pathways. With decades of combined executive experience running, owning and advising private companies our team is uniquely positioned to guide owners through the complex process of growing and selling their companies.
Learn more at www.sdcapital.com or contact the team directly at [email protected].
Schneider Downs Capital LLC is a subsidiary of Schneider Downs & Co., Inc.
