This story was originally published in Spanish on Alto Nivel, a leading business news outlet
The value of your business depends on a myriad of factors, although several are out of your control (e.g. economic policy, industry dynamics, and even personal issues), there are certain habits or attributes of companies that are worth paying attention to and proactively working on.
Throughout the last decade I have dedicated to buying and selling companies in various industries and geographies. Although my role in these transactions has evolved (from analyst to managing director) the attributes and habits that renders better valuations remains constant.
Below, you will find a list of the characteristics that frequently are manifested in various merger and acquisition processes, regardless of size, type of business, industry or geography in which they participate.
Think like the great companies: Manage your business as if it was a multinational. Prioritize planning and hold planning sessions frequently (once a year is not enough). Pivot and adapt as your market reacts. Do not overthink (if possible) about performance this year but rather think about future cash flows. Research competition and implement tactics and strategies used by leaders in your sector. It pays to think and act like multinationals do. The power of self-fulfilling prophecies is greater than we think and is immediately reflected in business. There are multi-billion dollar businesses that do not escape the thought that they are family businesses and they operate as such and truly attract less interest (or less value in their valuations). Similarly, we have plenty of small / family business success stories that behave as if they were the next Amazon.
Define and communicate your value proposition: It is worth taking some time to reflect on your company’s value proposition. When was the last time you carved out two hours to think about your business and what makes it special? Some questions to start this reflection may include: What exactly is it that makes my business better vis-a-vis competitors? Is it clear where we come from and where we are going? What characteristics does my business have that make it attractive? Whatever your responses, be sure to communicate your value proposition not only to your team, but also to your customers, competitors, collaborators and even suppliers.
Talent — the team’s talent is latent and the business does not depend on the founder and/or individual shareholders. The team is highly motivated, morale is high, and its incentives and rewards are competitive. Everyone knows the growth goals and the commitment to achieve these is evident. Think about how difficult and time consuming it was for you to find and hire someone who fits with the culture of your business. Successful companies and investors interested in acquiring companies are always looking for talent and they are willing to pay for it. Similarly, they will discount unfilled positions or deficiencies to be solved.
Strategic focus — the business is focused on creating value and not on evading taxes or just generally distracted. The team is focused on growing sales and increasing profits and not on generating petty cash to justify the owners’ lifestyle. This is, of course, the prerogative of business owners, but it demonstrates a low ability to resist the temptation of immediate reward to wait for a much larger subsequent reward.
Sacrificing wealth in the short term and dedicating these resources to improving production lines and systems, or adding talent to the company, generally results in annual sales growth. Commonly, businesses are valued by a multiple of their annual profits (specifically EBITDA) so these short-term sacrifices are never in vain and any improvement or growth in profits will be multiplied X number of times to determine the price of your company.
Profitability Path — Nothing is more attractive than a business that generates recurring cash flows. It is not enough that owners affirm that the business has generated a lot of cash, it is important that the accounting books can support it. Greater predictability in sales and greater cash generation generally equate to higher company value. Of course, there are exceptions; industry seasonality, relevant changes in the environment, periods of high investment and other non-recurring or extraordinary events. Whatever the case is, it is important to have these events clearly identified as these are completely standard when buying or selling a business.
Clearly identify growth opportunities — outlay new markets to tap into, new sales channels, new equipment or systems that will reduce costs, as well as any new tactics or strategies that will take your business to the next level. If you have something to show for tackling these opportunities even better, but solely identifying these growth avenues is a phenomenal incentive for investors.
Sell when you don’t have to sell — it may be contrarian to think about selling when your business is experiencing record sales and profits, or when you finally achieve a leading market position and at last you are enjoying the fruits of your hard work. However, the best time to sell (and when you will get the best value) is precisely when everything is in your favor. Let me emphasize this point and illustrate the opposite case. Imagine you have excess cash and already have several opportunities to invest in. Suddenly, your old neighbor urgently wants to sell you his/her old house that is in need of repairs; surely as a buyer you would feel you have a lot of bargaining power over the seller. It happens exactly the same in my profession. Distressed businesses (that once generated tremendous cash flows) are often disadvantaged once they decide to explore a sale process.
You don’t need to have invented Uber of Microsoft to command high valuations. The odds that your business can be attractive to potential investors are greater than you think. Be sure to implement these suggestions and reap the benefits.
A. Sierra