VALUATION and VALUE ENHANCEMENT: The Reality Check and the Remedy

by | April 24, 2012

Our guest blog post this week comes from Bob King, C.O.O Services, LLC

What is your business worth?

How much do you need to retire?

Is there a gap between these two numbers? If so, how big is the gap? How do you close the gap?

1.  VALUATION – a dose of Reality:

For most business owners, the idea of having a valuation completed on their business is an exciting prospect……..until the valuation comes back!! If you’re like most business owners, you’ve spent the better part of your adult life working on, and in, your business. You have sacrificed time with your family, vacations and various activities, all in the interest of building value in your business and making a name in the market you serve. You have worked countless hours, made payroll on a shoe string and spent many a sleepless night to get to this point……….it’s time to cash out, time to sell!!

However, most valuations deliver a dose of sobering reality, not a shot of exuberant adrenaline. The reality is that most business owners think their company is worth a whole lot more than it is. In all of the work I’ve done with business owners in preparing their businesses for sale, I have NEVER encountered a situation where a buyer has valued the business higher than the seller, never.

2. SELLER and BUYER: you are selling an Asset…….they are buying a Bond:

Let’s look at this in more detail: First, you, the business owner and seller, have worked in the business for years. You’ve earned a nice salary and maybe even taken out a few distributions along the way. The risk of running your business, to you, is very low. After all, you have grown up in the business, know all the nuances and understand the business from the ground up and are very familiar with the customer base.

When you sell your company, you are selling your biggest asset.

A buyer looks at this from an entirely different perspective. They are looking are RISK vs. REWARD………..How much can I spend to buy an earnings stream?? What is my ROI? They will be analyzing the purchase of your business as if they are buying a BOND.

Your job is to reduce the perceived and actual risk in the business through proper Value Enhancement Activities. (Preparation, Performance and Risk Reduction)

3. Value Enhancement Activities:    “The Failure to do pre-sale preparation is the number one reason deals fail” PriceWaterhouseCoopers

The most important concept in Value Enhancement is Preparation.

In order to achieve maximum value for your company, business owners must Prepare, Perform and take Action.

Here are a few questions all business owners should consider when addressing a value gap or prior to any consideration of a sale:

  • Financial:
    • Are we maximizing cash flow?
    • Are your books in compliance with GAAP?
    • Have your statements been audited or reviewed by an outside CPA firm?
    • Do your sales reports match your P&L?
    • Is your financial reporting accurate and timely?
    • Do you have adequate ‘internal controls’?
  • Corporate:
    • Are all your corporate documents up-to-date?
    • Shareholder agreements in place?
    • Board minutes, meetings and decisions all documented?
  • Leadership team:
    • Do you have a successor?
    • Is your team able to run the business without you?
    • Do you have a rigorous evaluation system?
    • Will a buyer be ‘impressed’ with your team?
  • Customer base:
    • What is the concentration of your customer base?
    • What is the ‘churn’ of your client base?
    • Is your sales team a top quartile group?
    • What are your margins? Can they be improved?
  • Markets:
    • Are your markets growing?
    • What are the long term prospects?
    • Do we have the right products?

In conclusion, a valuation is just the beginning. In order to maximize value, business owners must prepare. Proper preparation can take 2-4 years.

When your time comes, be ready!!