Controlling Your Value

Obviously, you should always be trying to enhance the value of your firm. However, when it comes to a potential sale, there are additional considerations you must take to ensure that your present and future value is maximized. Before you pursue a buyer, you should have a reasonable idea of how a third party will value your business. Many owners know the “rules of thumb” common in their industries. But these only provide a rough approximation of value, and can be misleading for a business whose financial parameters do not line up with those of its competitors.

Value is a dynamic concept, and as a seller you have great control over it. Here are several ways in which you can increase it:

Cash Flow is King – Private companies usually sale on a multiple of EBIT (Earnings before interest expense and taxes). Therefore, the most fundamental method for adding value to a company is to clean up the income statement towards the purpose of maximizing EBIT.

Asset Quality – If you want to beef up the cash at closing in the sale of your company, beef up its assets. Reinvest earnings into assets that directly relate to producing cash flow. Sell or divest assets that are unrelated to your cash flows, such as raw land, redundant warehousing capacity, or headquarters art collections.

Avoid Surprises – Buyers and banks hate surprises. It may surprise you to learn that the more information you disclose, the better it is for you. Uncertainty in the mind of a buyer in a private deal results in hold-back escrow accounts and less cash at the closing.

Get Audited Financial Statements – Because audited (or reviewed) financial statements reduce uncertainty and risk on the part of the buyers, having your statements audited can actually impact the purchase price and terms you can command.

Address Off-Balance Sheet Assets – Off-balance sheet assets can include intellectual property, licenses or proprietary techniques, patents in process, research and development innovations, undervalued assets, or just plain good people. If you don’t tell the buyer about these off-balance sheet assets, who will?

Focus on Strengths – Eliminating weak product lines should increase your overall profit margins and improve your return on assets. Buyers typically don’t want diversified businesses; they want resources concentrated in your strongest activity.

Management Depth and Employee Teamwork – A business that is excessively dependent on the owner is risky for a prospective buyer. Appointing a second-in-command and department managers enhances a company’s value by alleviating that risk.

There are, of course, many other factors that influence your value. Some of which have very little to do with your operations, but you should been keenly aware of nonetheless. Examples of these are your strategic value to a particular buyer and the level of competition between motivated buyers.

Brereton, Hanley and Company, Inc. - 1500 East Hamilton Ave., Suite 102 - Campbell, CA 95008
www.breretonhanley.com - Phone (408) 938-9255 - Fax (408) 938-9259

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