"A bad system will beat a good person every time." W. Edwards Deming
This is a continuation of my article in the Oct. 12, 2009 issue of this publication discussing factors that increase the value and marketability of privately held businesses.
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These factors are within the control of every business owner and management team. You can use them to assess your company’s readiness if you are considering exiting in the next few years or just interested in increasing enterprise value.
Value, to a purchaser of your business, is a function of their expected financial returns, adjusted for risk. For this article, “marketability” relates to the degree to which there is a sizeable and readily accessible pool of willing buyers with the necessary experience, credentials and financial ability to purchase and assume leadership of your business. Value and marketability often go hand in hand, but it is helpful to consider them separately when your exit strategy involves selling to an external third party.
The five factors discussed in my earlier article were 1) financial results, 2) financial records, 3) scalability and growth, 4) tangible assets and 5) facilities. Now, from the viewpoint of an informed potential buyer with multiple investment options, take a fresh look at six more questions about your company:
-- Products and services: How will prospective buyers rate the variety, age, value, relevance, quality, profit margins, price elasticity, proprietary content, branding and warranty exposure of your firm’s existing products and/or services? How are new technologies affecting the need for your products or services? Will they find your new product/service pipeline adequate and promising? The right time to sell is often just before a major new product/service introduction.
-- Overall competitive position: Many businesses have declined recently due to the economy, but are new entrants, franchises or dominant industry players taking market share? Can your firm compete head-to-head with overseas producers, home-based firms or other low-cost providers? Is it capitalizing on the Internet or being eroded by it? Is the industry consolidating around you?
-- Systems, policies and procedures: Will qualified buyers clearly recognize, understand and agree with the effectiveness of your firm’s systems, procedures, policies, standards and operating agreements? Often too many of these items are informal, outdated, ineffective or even misleading.
-- Customer base: Are your customers demographically desirable, monetarily distributed and loyal to the business instead of you personally? Buyers usually discount value when a high percentage of your revenues come from a few clients, because the risk of losing a major client in an ownership change is too great. Diversify to reduce that risk. Have systems and staff for lead generation, new client development and retention. Also make sure that your customer contracts will survive a transfer of ownership.
-- Employees: Buyers will look at your employees’ skills and productivity, credentials/licenses, years to retirement, relationship to you, unionization, compensation and benefits and financial incentive to stay.
Lack of management depth is a limiting factor for most small businesses. Special attention must be given to key employees that will be vital to a smooth ownership transition and the future success of the buyer.