Viewing Your Company from the Perspective of an Investor Provides Insight 

Key Takeaways: 
  • Many factors that don’t show up on a financial statement can impact the value of your business. 
  • Step back and view your company from the perspective of an outside investor for insight into how to increase the company’s value. 
  • Above all, buyers want to see value in a business that will be transferable to them. 

 

For a business owner who has invested a lot of money and hard work into their company, and is now planning to sell it, stepping back and viewing their company from the perspective of an outside investor can provide valuable guidance. 

What would an outside buyer see when they look at your company? What would their most important considerations be? What factors will increase the value of your company, and what factors may decrease the value? 

Buyers want to see value in a business that will be transferable to them. For instance, you may be proud to have a leadership team of people who helped you start the company and who are as invested in it as you are. Now that you are thinking about retirement, they are, too. 

For a buyer, that’s a negative. A buyer wants to know that the leadership team that helped make your business successful will stay and help take it to the next level. 

Not all factors that increase or decrease the value of a company are contained in a financial statement. Some aspects relate to culture, the quality of customer groups and other considerations, all of which become points of discussion and assessment during a professional business valuation. 

Factors that Can Increase Value 

  • Growth and profitability — Buyers are looking for an expanding revenue stream and evidence that there are ways to increase profitability while maintaining top-line revenue growth. So a seller must consider whether the company’s strategic plan and financial forecasting provide assurance that continued growth and profitability are likely. 
  • Processes — Do you have established processes in place that guide the company’s operations? Or is it all in your head? Buyers want to see documented processes that guide initiatives such as operations, diversification and research & development, which can protect a company against sudden disruptions in the marketplace. Documented processes that were created by senior leadership can set the stage for a smooth ownership transition and set the cadence for regular meetings and identifying efficiencies. 
  • Clean financial records — Financial records that are in disarray or are hard to understand are a big red flag to potential buyers, in part because they may negatively impact the ability to get bank financing. Clean, complete financial records can exponentially increase the value of your company, in part because they can speed up the negotiation process. There’s a saying that “time kills deals,” and it’s true. Poor financial records not only slow the financing process, but they also introduce doubt in the minds of potential buyers. Financial records should go back at least three years and should show year-over-year improvement in revenue growth and cash flow. 
  • Strategic plan — If you have a strategic plan for your company, the buyer will want to see it. The company’s performance against the goals laid out in the plan will indicate how well you and the key management team have worked together to bring the plan to fruition. If you’re in year three of a five-year plan, the prospective buyer will want to see how you are performing against the year three objectives in the plan. 
  • Culture — How your employees see the company and how committed they are to staying with the company will tell a prospective buyer a lot. Are your employees at all levels excited about their work? Do they feel valued and heard? Are they committed to staying with the company for the long term? Are your retention rates healthy at all levels? Company culture is a key metric that business appraisers consider when putting together a business valuation, and it is a factor that prospective buyers know is important. 
  • Customer relations — Is your customer list growing at a healthy rate, and is the retention rate among long-time customers strong? Prospective buyers want to see that your company is a pacesetter or leader, and the company’s reputation in its industry, as well as customer retention, tells buyers whether you are a leader or a laggard. Leaders in their industries command higher prices when companies are sold.  

Factors that Can Decrease Value 

  • Stagnant or plateaued growth — A company that is at a standstill with diminishing profitability will result in a lower sale price. Buyers see that it could take a lot of work and strategic planning to bring the company back to profitability and a leadership position in its industry. Valuation professionals will factor into the valuation, characterizing the financial stagnation as a risk factor. 
  • Risk — A valuation professional will assess several areas of risk in determining a value range for your company. One significant area of risk is concentration. If your company relies on just two or three customers for 70% of its sales, that’s a major red flag to prospective buyers. The loss of just one customer could significantly diminish revenue and profitability. Another area of risk is your leadership team. If the team revolves closely around you as an owner, and certain key managers may leave the company when you do, then the value they bring to the company is not transferable to the new owner. Additionally, there is industry risk. If your company sells primarily to one industry, the valuation professional will look at forecasts for that industry and determine what the risk is to your business. Certain industries are considered volatile, such as aerospace and technology.  
  • Lack of vision — Have you stepped back and looked at your company from the perspective of an outside investor? If not, this is the time to do it. Sometimes companies can become mired in outdated processes, or in the day-to-day demands of getting the product out. They fail to envision the future and strategize on how to take the company to the next level. A lack of vision can lower the price your company can command in the marketplace. 
  • Corporate governance — A board of directors or board of advisors (less formal) provides guardrails that ensure company leadership is getting knowledgeable advice about how to run the business. Of course, that requires having knowledgeable, objective people on the board. This is particularly important, and particularly difficult, in family-run businesses. Uncle Ned may have co-founded the company with your grandfather, but his industry knowledge and ideas about technology, growth and customer relations may be woefully out of date. Your board should reliably give you advice on the company’s long-range direction and growth. A board that is ineffective or hamstrung by family drama will decrease the value of your business and possibly scare off prospective buyers. 
  • Pending litigation — Clear up any pending litigation your business is involved in before taking the company to market. Most prospective buyers will walk away or insist on a large discount if there is pending litigation on the table.  
Questions? 

Many factors that don’t show up on the financial statement can impact the value of your business. If you would like to talk about how you can prepare your business for sale in the next three to five years, contact an Adams Brown advisor.