Webinar Recording and Recap
Maximize Your Valuation Today; Sell Your Company on Your Terms Tomorrow
Key Points
Strategic Financial Planning
Creating and adhering to a strategic financial plan is crucial for a business owner looking to sell their company for several reasons:
1. A prospective buyer will do their due diligence, which always begins with the financial plan. If a company’s financials are not accurate and consistent, it’s a major red flag, and the sale may end right there.
2. It helps optimize the company’s financial health and performance, making it more attractive to potential buyers.
3. It provides a clear and transparent picture of the company’s financial history and future projections. This transparency builds trust with potential buyers and increases the likelihood of a successful sale.
4. A solid financial plan identifies and addresses any financial challenges or risks, demonstrating the owner’s proactive approach to mitigating potential issues. This can boost the company’s value and negotiating position during the sale process.
Performance and Process Improvement
It is important to leverage performance and process improvement strategies to reduce operating costs by 3% to 5%. Companies can improve earnings, more specifically EBITDA, through structured process improvement. Valuations are usually based on multiple earnings, typically 4 to 8 times earnings, depending on the type of business and its size. SaaS companies or new technologies are an exception to this kind of valuation.
· Example 1: When a company works to reduce operating costs by 5% through process and performance improvement, the result can lead to a 25% increase in EBITDA.
· Example 2: A $10 million company with 20% EBITDA or $2 million, at five times EBITDA, would be a $10 million valuation. This same $10 million company used process improvements to increase EBITDA by 25% or $2.5 million. At five times EBITDA, it now has a valuation of $12.5 million, or a 25% increase in valuation.
The professional management team plays a critical role in building the valuation of a company. Potential buyers, especially private equity investors, need assurance their acquisition can continue without the owner. Too often, the owner/CEO either has difficulty delegating authority and responsibility to their management team or does not trust their management team. This owner spends time ‘playing referee’ to resolve conflicts within the executive and management teams.
Cybersecurity
What would happen if a company getting ready to sell was hacked? The company can be held for ransom, its data is stolen, and its financial records posted online. For example, a CFO in the middle of a sale negotiation with a buyer clicked a link to reset his password. Unknowingly, he gave his password to a cybercriminal. These criminals encrypted all the company’s files and demanded $140,000 to unlock them. The cyber-criminal was paid, but never unlocked the files. The company never recovered.
47% of businesses have no cybersecurity budget. Only 8% of small businesses have a formal, dedicated budget to ward off cyberattacks. That’s not going to cut it today. Especially when 60% of those that get attacked go out of business a year later. This is about managing risk. How well do you manage risk impacts the value of your company?
Succession Planning
Few companies have a succession plan; many say they will do it, and it never gets done. Tips for building a succession plan include:
1. Commitment: It all starts with a clear decision and commitment from the top.
2. Plan Building: Identify key roles, assess the available talent, and conduct a gap analysis.
3. Start Small: Break the plan into manageable, bite-sized objectives with set due dates.
4. Competency and Skills Gap: Address both competencies and skills gaps in the plan.
5. Plan Management: Treat this as a corporate initiative and consistently manage and monitor the plan's progress.
Driving Revenue and Client Acquisition
Marketing is the key to dynamic growth. Examples of companies that experienced dynamic growth include:
· A small software company whose revenue grew from $1.5 million to $5 million in one year to $15 million in the next year.
· A mid-sized company whose revenue grew from $40 million to $120 million in 2 years.
· A 20-year-old company that acquired 1,000 new clients over five years.
Marketing vehicles that drove this kind of growth include target mass marketing, content marketing, and digital marketing. Companies need to adopt insight-selling techniques and replace solution-selling with relationship-selling. The combination of becoming a marketing-driven company and insight selling is the key to dramatic revenue growth.
Concluding Thoughts
Company ownership must:
· Integrate financial planning, process, and performance improvement
· Embrace technology and security
· Conduct succession planning and leadership training;
· Develop a strategic marketing and sales strategy into a strategic business plan.
These items are the blueprint to maximize valuation and are the ‘story’ for prospective buyers as they implement due diligence.
To learn more about how your company can prepare itself for growth or sale, feel free to set an appointment to talk with a DSB expert (https://dsbexitstrategy.com/contact).