LUTZ BUSINESS INSIGHTS
Manage These Risks to Create More Value
RYAN MCGREGOR, LUTZ M&A MANAGER
Most businesses that don’t sell for their maximum price lack the planning needed for a successful transition. A clear and realistic strategy will not only help with the right time to sell but also what needs to happen pre and post transition. It is just as important to understand tax implications from the sale as the marketing of your business prior to sale. A succession plan needs to be fluid enough that you can adjust to unforeseen factors but detailed enough to have specific goals that you can build value around.
Valuation is greatly impacted by risk. There are certain risks that are within your control and others that need to be managed. The following are risk factors that all business owners need to be aware of and attempt to manage to achieve maximal value from the sale process.
- Customer concentration – It is important to understand the makeup of your customers to see if you have exposure related to concentration. If there is revenue concentration in your customer base (one customer generating 10% or more of revenue), there is a greater risk to recurring revenue. Typically more recurring revenue from a well dispersed customer base is more valuable to a perspective buyer. If you have a large customer that will be hard to replace, buyers will typically reduce the amount they are willing to pay.
- Supplier concentration – If you are reliant on a specific supplier or suppliers that can’t be easily replaced then there tends be a discount associated with dependency.
- Competition – Even though this is an uncontrollable factor it is important to understand your competition. Maximize what you do better and minimize the risk that is within your control. If you keep your customers happy they will be less likely to care about the competition. That being said, they might be the best information on competition since they are being solicited for their business. Try to keep an open dialogue with your customers to make sure you are aware of the changes going on in your industry.
- Technology – This factor is ever changing but needs to be clearly understood for your industry. With today’s advances in technology and automation, a company’s systems and process chain requires evolution. Owners that embrace change and adapt to more efficient and productive ways to operate their business will not only increase profits, but allow for their business to grow and expand. This also adds to the perception of a well-run and organized business. On the other hand, buyers tend to pay less for businesses that need significant capital expenditures related to technology.
- Economic and industry conditions – Staying current on your industry can impact the right time to sell your business. It is important to know if your industry is expanding or contracting. In addition to economic and industry factors, buyers tend to pay for more businesses that are less regulated.
- Management ability and depth – Businesses with strong management and a strong support staff are lower risk. If the owner is the primary revenue generator and client contact there is significant risk to a prospective buyer. Also, a business owner shouldn’t forget about key employees as a potential buyer pool.
- Maintain clean financial books and records – Keeping business and personal expenses separate is the best policy. Small business owners tend to have non-essential expenses included in their financial statements. When preparing a business to sell, these expenses will need to be explained in order to add them back into the cash flow. Keeping these types of expenses separate is beneficial because you avoid buyer scrutiny. Studies have indicated that companies with audited or reviewed financials, or at least professionally managed books for small businesses, tend to result in a higher purchase price than those not well maintained.
- Profit maximization – As part of your succession plan you should discuss with your accountant the benefits of changing the accounting policy from minimizing your taxes to maximizing your profits a couple of years in advance of the sale. Prior to marketing your business it is important to maximize your profits and show a stable earnings base. Buyers are more likely to pay a higher price for a business with recent strong earnings results.
Address these areas by developing a strategy for each risk factor. You will never be able to eliminate all risk but by understanding the impact of how a future buyer would perceive the risk is very important. Perception is so important when it comes to selling business. Similar to selling a house that isn’t clean or properly maintained. The buyer will pay a lot less because they don’t know what other issues exist that can’t be seen.
In addition, a key exercise for a business owner is documenting why your business is valuable. You know your business better than anyone so you should be the best marketer. Perform a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis. When you go to market with your business, highlight all the strengths and opportunities but be prepared to combat the weaknesses and threats with solutions.
ABOUT THE AUTHOR
RYAN MCGREGOR + CONSULTING DIRECTOR
Ryan McGregor is a Consulting Director at Lutz M&A with a combined 14 years of related experience. He specializes in business consulting, valuation, and sell-side advisory services.
AFFILIATIONS AND CREDENTIALS
- Alliance of Merger & Acquisition Advisors, Member
- National Association of Certified Valuators and Analysts, Member
- Certified Merger & Acquisition Advisor
- Certified Valuation Analyst
- BSBA in Management, University of Nebraska, Kearney, NE
- Master of Investment Management and Financial Analysis, Creighton University, Omaha, NE
- Master’s in Business Administration, Creighton University, Omaha, NE
- Past volunteer for various local nonprofit organizations including: Juvenile Diabetes Research Foundation (JDRF), Habitat for Humanity, Red Cross and Open Door Mission
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