While market conditions favor sellers, business owners must have their affairs in order to attract a reasonable deal
Steve Rosvold
KRM Business Solutions
he business recovery over the past three years, booming growth in home equity and a strong stock market have combined to fill the private investment pipeline with cash. Over the past 25 years investors have shifted their portfolios from holding 85 percent publicly traded securities to 60 percent. This has given a big boost to investment in private equity, real estate and hedge funds.
The combination of our short-term economic boom and the long-term investor portfolio shift puts the owners of well run businesses in great position to earn a premium over historical values for selling their business.
In the past two years sales price multiples for industrial companies based on earnings have increased by 10 percent to 25 percent. Well run businesses with earnings improvements over the past few years and good prospects for the future have a "market value" much higher today than just 36 or even 24 months ago. It is a great time to find out the value of your business.
What factors are buyers using to judge a "well run business"? Norm Duffett, managing director of D.A. Davidson’s Investment Banking business in Portland, highlights factors that are critical to buyers:
• The business must be professionally run.
• The business must have a good track record of earnings.
• The future of the business is laid out in a clear business plan supported by financial projections.
• Management exhibits a good understanding of the marketplace and articulates how to capture opportunities and minimize threats.
What can you do to make your business attractive to a buyer?
First, make certain your legal positions are sound. This includes an ownership structure that is clear, board meeting minutes are on hand, significant contracts are properly documented. Corporate policies and procedures should be up to date and in practice. If you have vision or mission statements or a Web site make certain they are current and reflect your business today.
Second, prepare a summary of your last three years of financial statements.
When putting the financial package together explain all significant figures and changes from year to year. Keep adjustments to a minimum and consider the buyers perspective when making them. There is no quicker means to chase a buyer away than to have them believe you are deceiving them. Many small and medium sized businesses will not have audited financial statements. In those cases, buyers will be interested in reviewing income tax returns to verify the financial information you provide.
Third, a plan that highlights the changes you foresee in the business over the next three to five years allows the buyer to see the future. A balanced plan, including both the opportunities for and threats to the business, will make it more credible. There is no better marketing pitch than one allowing the buyer to picture future operational and financial success. Even if you are not contemplating the sale of your business, building a concise plan with targets give direction and purpose to your company.
Finally, growth plans built on supportable market intelligence will provide the buyer confidence in you, ultimately improving the odds they will see themselves as a successful owner of your business.
The simple fact is, preparing your business for sale is exactly like preparing your business to be well run. Professional practices, an understanding of your market and a well thought out plan to capture opportunities in your market will make your business profitable and attractive to buyers. With buyers in today’s market outnumbering sellers, it is a good time to be a seller.
Steve Rosvold spent 22 years in finance and strategic planning at Cargill Inc. and ConAgra Foods. He now owns KRM Business Solutions, providing financial intelligence to industrial businesses. Learn more about KRM at krmbusinesssolutions.com.
