The drivers of a company enterprise value are a company’s strengths — internally, in how they operate, and externally, in the marketplace. They’re also of critical importance to buyers as they look for companies to acquire.
During due diligence, a company’s strengths and weaknesses will be scrutinized.
“Due diligence is run essentially to find out if what an owner says drives value in his or her company actually does,” says Steve Ford, director at Brady Ware Capital.
That’s why owners should clearly understand their company’s value drivers. Doing so helps them see their company through the eyes of an outsider, and that perspective can help them maximize the value of their company. However, this can only be done if they start preparing for a transaction well ahead of a planned sale.
Smart Business spoke with Ford about how a clear understanding of a company’s value drivers can help owners prepare their business for a sale.
How well do business owners understand the drivers of value in their company?
Business owners tend to know their value drivers instinctively by operating a business for years. However, when an owner meets with potential buyers, they must be able to articulate and communicate those value drivers clearly and succinctly. Most owners don’t get too many opportunities to take a step back and view the company through the eyes of an outsider. That can make those values drivers tricky to articulate.
Because buyers are basing much of their acquisition decision on a company’s unique value drivers, it’s important for business owners to present them clearly and define how they differentiate the company in the marketplace in which they operate.
How can business owners ensure they understand their company’s drivers of value?
Business owners can start by asking themselves questions about their business. For example, they could ask questions about the depth of the management team, the strength of their financial data, their customer concentration and more. By asking these types of questions, business owners can better identify their strengths and areas that need improvement — it’s better that owners discover they don’t have a strong answer than a buyer discovering an unaddressed weakness.
While not recognizing a weakness is an issue, understanding where the company could improve and addressing it with potential buyers is a good move that shows candor and a willingness to work together with a new owner/partner. Owners should articulate their position and be direct. But if a buyer has to inform an owner what’s wrong with their company, the owner has little chance of maximizing value.
When should business owners begin preparing their company for a sale?
It’s better that owners start the process when they want to, rather than when they have few other choices. Often owners really start thinking about an exit when they find themselves emotionally struggling, when there’s no one in the company to succeed into ownership, or when the industry dynamics change in such a way that the company would need to significantly alter its approach to stay competitive. When those signs arrive, it’s probably time to consider an alternative strategy. And that’s when owners should consult their trusted advisers about a path forward.
At a minimum, owners should start preparing their business for a sale two years ahead of a planned exit date. Lean on trusted service professionals to help address weaknesses and get the company sale-ready.
Business owners also need to prepare themselves to leave the business. They should take an honest assessment of why they feel they’re ready to exit. Look to see if there’s anything that can be done to get re-energized, such as bringing someone on to handle more of the day-to-day operations, or adding a partner to share some of the risk and find new avenues for growth. But, if all signs seem to suggest that there’s no more joy in operating the business, it’s clearly time for a change.
When the time comes for an exit, there’s a significant amount of work to be done to maximize its value. Fortunately, business owners don’t, and shouldn’t, do this in isolation. By engaging with their own internal team and their trusted service professionals, owners can make a successful transition into whatever comes next.
Insights Accounting is brought to you by Brady Ware & Company