Understanding the Essential Value Drivers of a Small Business. I.E. How to tell if Your Listing Will Actually Sell And for How Much

Transcription

1 Understanding the Essential Value Drivers of a Small Business I.E. How to tell if Your Listing Will Actually Sell And for How Much Presenter: Randy J. Bring, P.A., CBI, CMAP

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3 Why are value drivers important? Value drivers are the key elements of a business that shape how a Buyer views a business. They must be understood by both Buyer and Seller because they have a clear and decisive impact on the two universal concerns of all Buyers & Sellers: Risk Potential Price Simply put, there is a finite list of value driving characteristics that determine: Whether a business will ever sell How quickly a business will sell How much a business will sell for

4 Assigning Values to the Value Drivers Point value method for each of 12 important value drivers. Assign a point value to each value driver. Scale: Strong No Light No Neutral Light Yes Strong Yes

5 Deal Structure Are Seller s expectations about the process of Selling realistic? Is Seller receptive to the idea of Seller financing for a significant portion of the transaction? Will Seller/Seller s accountant actively participate in a Buyer s due diligence? Does Seller understand the need to stay on after closing to train and transition? Is Seller agreeable to a reasonable non-compete to protect the interests of the Buyer? Driver #1

6 Depth of Management Is there a strong layer of middle management in place that will allow the Buyer to focus his efforts on building the business as opposed to running the business? Do key employees have employment contracts and non-compete agreements in place? What is the owner s role in the business and to what extent is the business s success tied to the owner s personal relationships with his customers, employees and suppliers? Driver #2

7 Diverse Customer, Product & Vendor Base Overall absence of customer concentration concerns where the loss of the largest one or two customers would have no significant impact on the business? Does the business have a depth to their product line or service menu? Does the company rely on multiple vendors & suppliers such that the loss of one or more would have little or no adverse effect on the business? Are there substantial new market/channel opportunities for the Buyer? Driver #3

8 Financial Statements Are the revenues and expenses on the books? Has the company historically timely filed its Corporate Federal and State Tax Returns, Sales Tax and Employer s payroll reports? Are the numbers easy to understand and generally tie into industry conformance? Are financial statements prepared by a CPA or qualified accountant (vs. internally generated)? Does the business utilize an accounting software program and if so, will the owner allow full access to the same for a smooth post closing financial transition? Is the company a high margin business? Is the company a stable/non seasonal-non cyclical business? Driver #4

9 Seller s Outside Influencers Absence of Seller s spouse, child, parent, swami, etc. that needs to be consulted for all deal related decisions? Are all partners in synch with both the process of selling and the potential terms of a sale? Role and involvement of Seller s lawyer, accountant, etc. Driver #5

10 Barrier to Entry All business s have competition. The question is, how easily and quickly can either a start-up company or a business in a parallel industry either ramp up or modify their products or services to compete with your business? Are there specific government licenses or other operating authorities held by the business that are not easily obtained thus keeping would be competitors at bay? Does the business employ certain proprietary knowledge or technologies making it difficult for a competitor to gain a competitive footing? Does the company have an industry brand recognition which has served to date to leave competitors at a disadvantage? Driver #6

11 Operating Systems, Equipment & Assets Has the business owner invested sufficiently in the necessary equipment, whether computers, software, forklifts or office furniture or left this as a hidden and expensive surprise for the Buyer to discover after closing? Is it likely the business owner will continue to invest in his company as needed and run the business as usual right up to the general time of sale. Driver #7

12 Strength of Lease If the business is location sensitive as in the retail or food & beverage sectors, are there acceptable lease renewal options in place or do they have to be negotiated as a contingency of the sale? Does the Seller have an exclusive use clause? Are the fees (if any) associated with the lease assignment reasonable and how strong is the assignment provision language in the Seller s lease which will give some indication as to the Landlord s overall tolerance for a proposed lease assignment? Absence of Seller s adverse dealings with the Landlord or property management firm which might prejudice an application for assignment or renegotiation of the lease? Driver #8

13 Licensed, Legal & Compliance Does the business operate legally and in compliance with all regulatory authorities, trade licenses and zoning codes? Absence of any history of non compliance with any regulating body that might make it difficult to operate any aspect of the business legally in the future? Has the company been granted any difficult to obtain permits, grandfathering status, Certificates of Necessity or other operating authorities that, if successfully transferred to the Buyer, would represent significant value? Driver #9

14 Recurring Revenue Stream Businesses with certain recurring revenue streams will often sell for more than comparable businesses that are absent the same. Added value is often associated with those companies with customer maintenance contracts or service agreements and for those that collect licensing, recurring retainer, technology and/or patent fees. Does the business have casual or contractual recurring revenue? What is the general history of recurring revenue (as a predictor of future performance)? What is the company s overall history of customer retention/loyalty? Driver #10

15 A Written Operation & Growth Plan Buyers often see value if the Selling company has a clear and defined operations playbook which will serve to both aid in a smooth closing transition as well as to help the new owner more easily identify the company s strengths and weaknesses. The business owner s ability to document and support future opportunities for growth (whether organic or incremental) can create value for a Buyer who at the time of negotiations has not fully realized the company s untapped potential. The upside of a business or lack thereof has always factored heavily in assessing what a Buyer will pay for the business. Does company have a written business plan? Is future growth achievable without excess additional capital? Daily operations manual? Compliance Manuals? Employment manual? Driver #11

16 Overall Transferability The ability of a business to easily withstand the pressures of a change in command can often have a significant impact on the value of that business. Is the work space neat and organized and up to the standards of a typical Buyer? Are the company s technical systems operating properly (vs. needing an immediate upgrade)? Are the employees aware of the pending sale (often, they are not) and, if not, how do the parties perceive they will react to a new owner? Driver #12

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18 Tony s Steak House Score Card