NINE WAYS TO INCREASE A BUSINESSES SELLING PRICE
1. The revenue and EBITDA in overall dollars.
There are typically valuation step-ups as a company’s earnings increase. These EBITDA size thresholds tend to occur at very predictable levels, typically occurring at $1,000,000, $2,000,000, and $3,000,000. At each threshold, the complexity of the business, including the complexity of the accounting, finance and operations needs to move in lockstep with the increase in earnings. In addition, the type(s) of strategic and financial buyers interested in a business shift with each stepwise increase in earnings to increase a businesses selling price.
2. Diverse customer base.
When business operations are overly dependent on key customers or suppliers this increases the risk associated with the business. For example, if one customer makes up more than 80% of the company’s revenues, the future earnings stream will be contingent on their purchases. Similarly, if a sizable part of your purchases is from one key supplier, what happens if that supplier decides to raise prices or is not able to supply the volumes you require? The risk associated with your company’s future cash flows increases significantly and your valuation multiple decreases accordingly.
3. Predictable, durable, sticky, re-occurring revenue.
A loyal and recurring customer base implies a regular flow of operations and consistent income. This is beneficial to the company’s valuation as it reduces the risk associated with future revenue generation. Having long-term contracts with customers or a renewable subscription-based revenue business will help to further maximize your company’s valuation multiple.
4. Year-over-year gross margin growth.
Potential purchasers are attracted to companies that are scalable and have high growth potential. Future growth implies increased revenues and annual earnings. A plan for future growth will help to increase your valuation multiple but proven historical growth with a clear plan for future growth will have a greater positive impact on your valuation multiple.
5. Differentiated advantages that give your business a "Moat".
This refers to a business' ability to keep competitive advantages over its competitors to protect its long-term profits and market share from competing firms. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders.
Remember that a competitive advantage is any factor that allows a company to supply a good or service that is like those offered by its competitors and, at the same time, outperform those competitors in profits. A good example of a competitive advantage would be a low-cost advantage, such as cheap access to raw materials.
6. Business is not reliant on the owner.
If your business is overly dependent on your personal skills, abilities and contacts in the industry, the transferability of your customers and future cash flow stream to new owners becomes questionable. This “personal goodwill” is not commercially transferrable and will significantly reduce the valuation multiple that a potential purchaser would be willing to pay for your business.
A strong management team and engaged workforce are extremely difficult to find and even harder to motivate and keep. A management team with deep bench strength can carry out much more than a company that is dependent on its sole owner and is much more attractive to a potential purchaser.
7. Dependable financial statements.
Audits, Review Engagements and Notice to Reader are the typical services offered by Accountants.
The goal of an audit engagement is to enable the independent professional public accountant to issue an opinion on the fairness of the client’s financial statements. An audit provides “reasonable assurance” that the financial statements are free of material misstatement and are per accounting standards. The term “reasonable” is necessary because absolute assurance is not possible. It acknowledges that limitations exist in all systems of internal control, and that uncertainties and risks may exist, which no one can confidently predict with precision.
Auditors use a variety of methods to figure out if the financial statements are free of material misstatement, including study and evaluation of internal controls, inspection of documents, physical counts of assets, making enquiries inside and outside the company, and other procedures that support the accepted auditing standards.
While an audit is meant to give some assurance that the financial statements are free of material misstatements, a review engagement is only meant to learn whether the financial statements are believable or plausible.
A review supplies limited assurance that the financial statements conform to accepted accounting principles. This is negative assurance. This means that as the professional accountant is only supplying assurance that nothing has come to their attention that would show the financial information is not presented following accounting standards. An audit, on the other hand enables a positive assurance allowing the accountant to say in their auditor’s report that the financial statements are following Canadian accounting standards.
A notice to reader or compilation is simply a compiling of information into financial statements, based on information provided by the client. No assurance is provided. Therefore, a compilation is only proper where users do not need assurance that the financial information conforms in all respects to accounting standards.
8. Owner willing to supply vendor financing.
Seller financing is not right in all transactions, and it is a necessity in other situations for the business to be sold. Nonetheless, a good argument can be made that at least some amount of seller financing should be offered in most business sale transactions, for the benefit of the seller as much as the buyer. The seller who agrees to seller financing will inspire greater confidence in the buyer, who knows that the seller will remain interested in her success. Confidence lowers perceived risk, which in turn results in buyers willing to pay a higher price for the business. Financing the transaction as primary lender may not be interesting to most sellers, but the benefit of offering some seller financing should be considered carefully.
9. Owner will stay on with an earn out.
An earn-out is an indispensable tool to close more transactions. However, selling a business in this way has its share of risks, and buyers and sellers should take precautions when using an earn-out. Hire the absolute best advisers you can and carefully draft the purchase agreement to address accurately and completely the earn-out. When used properly, earn-outs are a powerful tool to bridge price gaps and sell businesses in a way that helps all parties involved.
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