Posts Tagged ‘consolidation’

Focus On The Drivers And Get The Best Price!

Tuesday, January 11th, 2011

Last month I talked about increasing the value of a company being an output of executing a strategy/ running a company, well. (See Selling Price of Your Company – Goal or Output?)

This week I had the opportunity to speak to a group of accountants, lawyers and financial planners about how business owners view their companies as an asset for retirement. As it turned out, I couldn’t do the talk because I was sick (hopefully they’ll invite me back).

But here are some of the points I was going to cover.

In our experience getting entrepreneurs to focus on building value in their companies can be difficult. Many assume that they’ll only have to think about selling 6 or 9 months before they retire – ignoring several reasons why a sale may occur well before then.

For example, someone from a larger competitor could walk in one day and make the owner an offer. We see this in industries which are consolidating or when our client has intellectual property, or some other asset, the larger competitor considers to be strategic.

It’s also not unknown for one principal in a partnership to trigger a shotgun clause either in an effort to buy out the others or because he/she is ready to move on.

So, as service providers – consultants, accountants, lawyers, financial planners – it falls on us to make our clients aware of these potential surprises.

It’s purely an observation on our part but younger entrepreneurs appear more focused on the price for which they can ultimately sell their companies. As are those owners who have attracted angel or other investors.

The former want to fund another, more relaxed lifestyle and have a relatively short time frame before cashing out. The latter realize that a liquidity event is a certainty at some point in the not too distant future.

The value of most companies – including those purchased for so called strategic reasons – is a function of the size and continuity of the future stream of operating income they will generate.

To get the best price for the company the seller has to demonstrate, particularly during due diligence, that;

  • The drivers of great operating profits are in place and that
  • They will continue to produce those profits after the current owner rides off into the sunset either immediately or after a transition period. 

I talked in my earlier post about those drivers falling into 2 categories – the ones the owner can control and the ones he/she can’t.

Many service providers know from training, experience or both what those drivers are. And they share them with their clients, particularly if the accountant, lawyer or other professional believes there’s room for improvement.

But that advice/input may not be taken.

Why? There are 3 reasons.

First, the service provider may not be able to tell their client/the owner how to put the drivers in place. Second, if the owner knew how to put them in place he/she would have done so already. And third, there may not be enough time to get all of them fully implemented.

There is a solution for the first two. Consultants with the relevant knowledge and experience will work with owner to put the missing links in place. We’re certainly not the only firm who can do this but, if you want to know how it would be done, give me a call and I’ll be happy to give you some examples.

But the solution to the third lies solely in the hands of the owners – including younger entrepreneurs (investors tend to take care of their own). It can take as much as 2 or 3 years to prepare/optimize a company for sale. But it needn’t. The things that will bring the best price are the same things that will optimize operating profits this year and next year. 

If they aren’t in place now why wouldn’t they be put in place – now?


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