At Beyond, we often find that young businesses want to know what value they have. Unfortunately, the answer will not always be good news! Having a registered company with a couple of employees, a website, a handful of clients and intellectual property still doesn’t necessarily translate into real market value.
Why? Well, as we said in our previous blog, How to conduct a company valuation, the value a company has is what a willing purchaser is prepared to pay for it. What is valuable to you may have zero value for a buyer. The venture capital community is typically only interested in companies with a value of €5 million or above, which makes sense from their point of view because there is a lot of hassle involved when buying a company. They will tend to target companies that have proved their stability over several years and have value independent of the principal shareholders.
So, if you are thinking about selling your company, don’t be surprised if a bit of preparation is in order…
Build a management team
A company needs to be prepared to sell, which at the very least requires it to have a standalone value independent of the main business owners. That is why it is important to have a strong management team in place that doesn’t include you. This is the best way to prove to potential buyers that the company’s value is not dependent on you. However, it is worth noting that if the business is reliant on the owner, some buyers will be open to a condition of the sale being that the owner stays as an employee of the company during a one to two year transferal period. It can take a couple of years to get your company to the saleable position of not being reliant on any one person, but this can only begin if you stop doing everything! Business owners tend to spread themselves thin by micromanaging every function and process in the company. It makes sense because you know the company inside out, but if you’re serious about selling, then you need to stop doing and start delegating.
Nurture recurring revenue
Recurring revenue is essentially your goodwill, and it is one of the chief reasons buyers prefer companies that have been knocking around for a few years. By analysing not only the amount of revenue your company generates but where that revenue comes from and how reliable these channels are, the potential buyer can determine the stability of your business. Therefore, strengthening your client portfolio is a sure-fire way to boost the value of your company. It may sound like a lot of work to start attracting new clients when your ultimate goal is to sell your company, but that’s why giving yourself a few years of preparation is so important. Being able to show that your revenue isn’t a once off and doesn’t have dramatic fluctuations from one year to the next will help the buyer envision a profitable future with the company. So before selling, it is a good idea to increase revenue streams that are recurring against revenue streams that are once off in nature.
Offer an attractive payback period
When you sell a business, the buyer is essentially getting the earnings of the company. However, they know that they are only going to begin to enjoy these earnings after the payback period. Therefore, the shorter a payback period is the better. In our experience at Beyond, we have noticed that American buyers tend to be more aggressive than European. They expect to be paid back within 3 or 4 years. In Europe, 7 to 10 years is more normal. That’s why it helps to be in a strong enough position to provide an attractive, yet realistic, forecast for the payback period.
It is possible that a price may be agreed for a business which is based upon the company achieving certain sales or profits over the next few years. In this scenario, there would be a provision that if those profits are not achieved, then the sale price can be adjusted downwards, or the owner of the company owes that money back. Another method a seller might use to ensure their investment is sound would be by offering tranche payments. They’ll agree on a price, and there will be a payment after year 1, year 2 and year 3. These payments will only be confirmed when targets and sales figures are achieved. This is a way for the buyer to check if the seller is inflating the facts or being overly optimistic.
Get your financial accounts in order
Nothing speaks louder to investors than numbers. Not only do they provide proof of the pudding but financial reports are a fantastic way to highlight the underlying value in a company. With time on your side, you can outsource the expertise of a CFO to implement robust financial controls for improving cash flow, reducing expenditure and streamlining processes. There is no doubt that when the buyer is conducting due diligence, they will request reliable and accurate financial statements, so take the time to get your accounts in order and identify areas for improvement before the company goes on sale. If you’re hoping for a high company valuation, the best advice we can give you is to not sell your company when you’re sick of it! Sell when you still have money coming in each month which allows you to take bonuses and salaries, when your company is a pleasant environment to do business in, and you have a healthy customer satisfaction rating. As they say, the best way to go out is on a high, and in this case, it’s a lot more profitable too!