“When should I start to prepare my company for sale?”
When small business owners ask me this question, my reply is almost always the same. If it is a start-up business, the answer is “the day you open your doors“. If you purchase an existing business, the reply is “the day you assume ownership“.
How could this be, you ask? Since valuing any business truly is an art and not an exact science, our experience has taught us that owners whom properly plan far in advance of the sale of their company typically receive a much higher multiple relative to their earnings. Furthermore, in the process of planning properly, they usually experience higher revenues and earnings. In the interest of keeping this post concise and insightful, we will keep it simple.
On the roadmap to value creation, successful owners whom we have worked with typically emphasized these 5 points described below. By no means does this encompass the total list. There are many others and we’d love to hear from you to discuss your experiences.
1. Revenue Growth – Sales growth with new and existing accounts is one of the most important metrics for value accretion. Predictable recurring revenue is the engine that drives significant value.
2. Profit Margins – Businesses with gross and operating profit margins that consistently exceed industry averages will command higher values.
3. Customer Relationships and Patterns – Typically, it is companies with customer diversification, high levels of repeat customers, lengthy customer contracts and contract renewals, strong evidence of customer satisfaction and loyalty that receive higher values when it’s time to sell. Perhaps most importantly, there is minimal revenue concentration. (Meaning no one customer is responsible for 15% or more of total revenues)
4. Management Quality and Depth – A well rounded management team with experience and a track record of success along with a willingness to remain with a company post-sale are all positive value indicators in the eyes of most buyers.
5. Industry Diversification – A company that derives its revenue from multiple industries should command a premium multiple compared to its peers.
At IMG Business Advisors, our passion is helping clients realize maximum value for their company. Whether it’s planning for a sale, growing via acquisition or to just talk valuations and small business in general, contact us at 973-840-2200 or visit our website at www.imgbusinessadvisors.com