One of the toughest concepts you will need to address as you begin to formulate your company’s succession plan is how to think like buyers about your business. This can be challenging for many entrepreneurs because they are so close to the daily operations of the company that they have trouble seeing and understanding some of the risk factors that buyers might see. And since most entrepreneurs have never sold a company before, having a viewpoint of a buyer is nearly impossible to construct.
Frankly, this issue alone is one of the key reasons you need to hire an M&A professional to guide you because if he/she is experienced, they will have the ability to frankly and honestly give you the truth about how a buyer might see the risk associated with your opportunity.
And that is really what this all boils down to: How much risk will buyers see in your company and what impact will that risk have on their confidence in your projected forecasts? The more you can mitigate key risk factors, the better your opportunity will be seen by buyers. Keep in mind that most buyers use some version of a discounted cash flow method of valuation. The discount rate used is directly associated with the level of perceived risk they see in your business.
So the question we often get is this: What can I do now to begin operating my company using strategies that will benefit me later as I discuss my business with buyers? What is the secret sauce? The good news is that we see four common risk areas that are often associated with privately held companies; being aware of these today so you can begin impacting them tomorrow will greatly benefit you. Here they are:
If you step back and look at these individually and objectively, it is pretty clear from a buyer’s view why these might be an issue with certain and specific buyers. The key word is “objectively.” Far too often business owners have trouble understanding why generating 50% of revenue from one source is seen as risky by buyers. You believe that concentration like this is a positive because it shows that your business provides tremendous customer service.
Although true, a buyer has to ask, what happens if this client disappears after a year or two? And this is especially the case if the second issue is also present: Are all the accounts closely tied to the owner? Do they do business with the company because of a relationship with the owner alone? When the owner is gone, will they go as well?
Likewise, if due diligence grinds to a halt because you are unable to produce financials, answer questions, or demonstrate that anyone in your organization has a grasp on the financial reporting system, buyers will be concerned.
And finally, if your revenue base needs to be re-built every year, if your sales team is forced to find business every year, and you don’t have a base of clients that place orders with you on an annual basis, some buyers (especially those outside of your industry) will also have issues.
So each of these can add risk to your transaction and as you add more risk, your discount rate also rises, impacting the value and possibly your deal structure. How much risk does each equate to in impact on your discount rate you might ask? Well that is tough to determine because it will vary from buyer to buyer. Some folks, especially those who are in your industry and are aware that some of these issues may be standard, will have less concern than others. Generally speaking, a discount rate of 20% will generate a much higher value than a discount rate of 45%. You want to be closer to 20%!
The great news is that with some hard work, diligence and persistence, you can dramatically impact each of these and in short order make your company far more attractive to buyers. Keep in mind that buyers are not going to reward you and pay a premium for your business if you have not focused on or even considered addressing these key areas. So focus and address them!
Drive your sales teams to diversify the client base, begin to delegate some key decisions, ensure that your accounting team has the necessary software to adequately track/report/control expenses, and finally, find sources of revenue that are so dependent on your company that they wouldn’t think of going elsewhere.
If you do these simple things, you will be in a far better position. And, the really good news is that you don’t have to delay your exit for several years while you focus on these because the reality is these are goals that you never fully achieve; you should be proactively working on these four areas all the time. Your business will be seen as more attractive as long as buyers see that you are making progress towards these goals.
The Generational Group is one of the leading M&A consulting firms in North America. Our deal teams specialize in helping business owners achieve maximum deal value even if one (or more) of these four risk factors are present.
To learn more about us, follow these links:
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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