Build Your Business to Sell - Even If You Never Will
Begin with the End in Mind
A subject matter expert recently presented at one of my monthly Vistage meetings on the topic of preparing your business for a capital raise or eventual sale. I invited this speaker because of my belief that you should be managing your business as if you are going to sell it some day. By doing so, you are instilling disciplines that are going to serve you well even if you never sell the company. There is a lot to be gained by thinking about what it takes to optimize the value of your business and making that part of your strategy.
I’ve been involved in several transactions over the course of my career, buying and selling divisions and businesses. I took over as CEO for my family’s technology business following my father’s retirement. During my tenure, I initiated several transactions including the sale of a non-strategic division, acquisition of a fledgling competitor and entered a joint venture with a technology partner. These experiences taught me a lot about how to value businesses, how to optimize value and what buyers and sellers look for when assessing value.
Following the sale of my company, I went on to work with a Mergers & Acquisition advisory firm where I learned more about how to optimize the value of a business, and how to uncover elements of business that depress values. This “seller mindset” will lead to sustainable growth, ensure profitability during down turns in the economy and provide a work life balance that every CEO aspires to achieve.
"If you adopt this strategic mindset, you’ll have a much better shot at realizing your goal for optimum value for your company."
There are many variables when looking to sell. Below are three of the most common considerations to catch an investor’s eye:
Button up your books.
Many small and medium-sized businesses are less rigorous about financial statements and that can depress values. If your business has a formal financial reporting system in place and statements audited or reviewed by an outside CPA firm, then you have a stronger position to command a higher valuation.
Be mindful of customer concentration.
If you have high customer concentration, then you probably have fewer clientele that represent a large percentage of revenues. This lack of diversity is a red flag to a buyer because if one of those customers were to leave, a large percentage of your revenue and profits would be lost. A company that has low customer concentration typically gets a higher valuation – an example is not one client representing more than 10 percent of overall revenues.
Make the CEO or Founder irrelevant.
As a CEO you’re built to function at the highest level, but that strength can become a weakness in terms of valuation. The CEO must be made less relevant to the business so the buyer can see that the successful transition of the company is not dependent on the seller staying, post sale.
A Real-World Example
I have a great example of implementing this strategy involving a member of my Vistage group who is selling his company. The technical term for his business is 3PL (third-party logistics), essentially a warehouse and distribution company that services consumer product companies such as Amazon. They have distribution centers throughout North America, over 1,000 employees, with revenues approaching $100M.
Almost a year ago, this Vistage member recruited and hired a senior leader to mentor and eventually take over the company as president. That brings us to today, where daily operations are being run by this new CEO. That person will stay with the business and carry on with the company after the sale. My member has the option to stay or leave and the buyer understands that the continuity of the business isn’t dependent on him staying– a win all around.
If you adopt this strategic mindset, you’ll have a much better shot at realizing your goal for optimum value for your company. Even if you don’t intend on selling the business, you are well positioned for sustained growth and profitability.
There are additional strategies to consider when preparing your business for a capital raise or eventual sale that I would love to explain in greater detail. Let’s have a conversation.
About the Author:
I’m a Vistage Chair and Executive Coach helping leaders make better decisions and achieve their most ambitious definition of success. I can be reached at Mark.Thomas@VistageChair.com.