How can two companies in the same industry that are similar in size have significantly different valuations? Knowing the answer can help you to increase your company’s value.
Go after Low Hanging Fruit
The best way to start is by taking an objective look at the company’s operations and identify any inefficiencies or redundancies.
One effective way to accomplish this step is by involving employees. Ask for their opinions on what’s working and what’s not. Solicit suggestions on how to improve the company’s efficiency, operations and capacity.
You might even consider offering incentives (gift cards, company-wide acknowledgement, etc.) to employees (or even customers or suppliers) whose suggestions resulted in money or time saving processes.
Get into the 21st century! Let technology be your friend by upgrading your equipment and utilizing software that can eliminate redundancies. While it may seem like a high upfront cost, the benefits often far outweigh the expenditure.
Review your service/product lines. Focus on what you do best and what services/products drive sales and margins. Consider eliminating low margin product lines unless they truly open the door to better quality sales.
Get your vendors/suppliers into the act! Request additional discounts and re-bid some of the larger line items. A dollar saved flows right to the bottom line.
Fire clients!! Some business may not be worth keeping. The double whammy of high maintenance clients that generate low margins takes the company’s attention away from quality clients.
Know where you are vulnerable.
Being dependent on customers, people, suppliers or products can result in increased risk and reduce value. Eliminating these dependencies takes time.
An organization dependent on its founding entrepreneur needs to build a management team capable of running and growing the company. Finding and training the right people doesn’t happen overnight.
Asking for help might just be the most important step you take! Engage outside consultants who are experts in the areas where your company may be coming up short.
Don’t be afraid to admit that the company may be deficient in certain areas and take steps to address those areas. The end result can be an improved bottom line.
Another good source of information are industry groups. Learn from the industry leaders. What have they been doing that keeps them on top?
Step back and take a 30,000 foot view to understand the big picture to guide business strategy. Too many businesses are busy putting out fires.
Be proactive rather than reactive. Take time and plan where you want to be in the next 3, 5 and 10 years. Setting goals is the first step to success. Constant adjustment is required. Regular planning meetings are needed to keep on your goal path.
Buyers of businesses always ask the question “What’s in it for me?” They measure the future in large part by looking at the past. Being able to show them that you’ve been able to accomplish your past goals gives greater confidence in your ability to achieve future goals. You’ll compare favorably to and command a higher valuation multiple than the companies that do little planning.
Follow in the footsteps of private equity and other professional investors. Make sure your financial “house” is in order.
The closely-held business owner often tries to maximize return by minimizing taxes. You can’t sell what you don’t show. Accurate reporting of all items is necessary. In any sale, the buyer wants to verify the financial statements and any adjustments to them. Prepare for this. It’s best to have audited (or at least reviewed) statements for the last 2 or 3 years.
If your company’s financial statements are less than an audit, a “Quality of Earnings Report” might be considered. This report provides a detailed analysis of all the components of a company’s revenue and expenses. It has become more frequently requested by board of directors of strategic buyers or investment committees of private equity buyers. Its objective is to assess the sustainability and accuracy of historical earnings as well as achievability of future projections.
Tax implications of a sale should also be carefully considered. Many a deal has failed when the seller realized that the net proceeds were significantly different than the gross selling price. Early consideration and action is required to manage the seller’s tax consequences.
Rome wasn’t built in a day!!
Timing impacts value so be sure to plan ahead. It’s never too early to start planning in anticipation of selling your company. First, it will give you ample time to implement the changes/suggestions outlined above to increase your stock’s value. Also, markets and valuation multiples change over time.
It’s worthwhile keeping your pulse on the market place to take advantage of ideal market conditions.
Value Management Inc. works with a number of clients in helping to plan for an eventual liquidity event. Contact us to help you work toward a successful sale!