Maximize the Value of Your Business:
Preparing Your Business for an Investor’s Eye
By: Mark Eiland | Managing Partner, Eminence M&A Strategies;
With introduction and additions by Sarah Goodman | Managing Partner, Eminence M&A Strategies.
As a small boutique M&A Advisory firm, Mark and I closely collaborate to help our clients, as well as partner with experts on our client’s advisory team.
A firm we enjoy working with is IronOak Wealth, local to us in Austin, Texas, but serving clients nationwide. While our specific role in the process of an exit is to prepare the business for sale, identify and verify the buyer, and facilitate the transaction to closing, we emphasize that having a complete team around you is critical. Working with a complete team, and an expert wealth management and financial planning team in tandem with your M&A advisor, tax and legal professionals, can mean a significant difference in the outcomes of a successful transaction. Please don’t hesitate to contact them or we’d be thrilled to get the conversation started with you and their team.
Business owners understand that the day will come when they’ll exit their business, typically through a sale to a third-party investor. Knowing when it's the right time to sell your business is a highly personal decision that depends on your individual circumstances, goals, and the specific dynamics of your business.
Whether you started your exit plan on day one or you’re starting today, preparing to sell your business involves careful planning and preparation to maximize its value and ensure a smooth transaction process.
An often overlooked factor in maximizing the value of your business is understanding what investors value and then taking appropriate actions in that direction in your preparations so you’re prepared to exit when the time is right for you.
An investor assesses opportunities through the lens of potential financial gains and risks. They assess their risks and potential returns and make informed decisions based on investment objectives and risk tolerance. Their perspective is driven by the desire to generate profits and increase value.
When investors consider buying a business, their decision-making process involves conducting a thorough analysis of certain key factors and attributes that make the investment opportunity attractive.
Outlined below are some aspects that investors commonly consider when evaluating a business for potential acquisition along with some actionable next steps to get you started. Attempting to take on each section simultaneously would be daunting, which is why it is important to work with an advisor, to determine which of these areas may be most limiting or impacting the value of your business the most, which actions would be best taken on with your internal teams, and when you might need to bring in an outside expert.
Here are some areas to focus on to improve your value in an investor’s eyes:
Financial Performance: Investors assess the historical financial performance of the business, including revenue growth, profitability, and cash flow. They analyze key financial ratios and metrics to understand the business's financial stability and growth potential.
Action Items:
Work with your tax and accounting team to move your financials to an accrual basis versus a cash basis.
Especially for transactions over ten million dollars, three years of audited financials give an investor confidence in the integrity of your books. These can be costly and time-consuming efforts, so it’s best to talk with a tax advisor or M&A advisor you trust to determine if this would be valuable to positioning your business.
Investors or buyers want to understand the profitability of business lines. If you offer a range of services or products it can be helpful to have those revenue streams separated on your financial statements, with a clear mapping to the direct costs associated with those revenues and your overhead items separated.
An often contentious or highly negotiated item during a transaction is the calculation of net working capital (current assets less current liabilities) and the value of this number is often particularly mystifying to a business owner. Working with a tax or financial expert can help you understand and potentially reduce this figure, which is often viewed as taking a big bite out of the proceeds of the sale.
Growth Potential: Investors seek businesses with strong growth prospects. They evaluate the market size, industry trends, competitive landscape, and the business's ability to capitalize on growth opportunities.
Action Items:
Document opportunities that arise but are not pursued for capital or human resources constraints
Make a review of your competitors and industry trends part of your active business planning process.
Competitive Advantage: Investors look for businesses that have a unique competitive advantage over their peers. This could include factors such as proprietary technology, intellectual property, strong brand recognition, established customer relationships, or a dominant market position. A competitive advantage can help protect market share and drive profitability.
Action Items:
Identify and protect what is unique and proprietary about your business. If you have a unique process, tool, or other advantage, there could be value in legally protecting this asset of your business.
For patents, trademarks, and other protected assets, a review of expirations and ongoing maintenance, and defending your intellectual property is an important part of protecting the value you have built.
Building a brand and brand recognition is termed “goodwill” and this can be a valuable asset, even for highly local companies. Increasingly, investors are interested in customer satisfaction data, in the form of reviews or the collection of net promoter scores. If you have a consumer-facing business, there may be numerous reviews on sites like Yelp, Google, or Amazon, but for B2B businesses, it usually takes a service or formal survey process to collect this data.
Strong Management Team: Investors assess the quality and experience of the management team. They look for competent leaders who have a track record of success, industry expertise, and the ability to execute business plans. A capable management team instills confidence in investors and reduces operational risks.
Action Items:
As an owner, reduce the reliance on your direct involvement in day-to-day operations of the business. If you are unable to take a 2-week vacation without significant disruption, that will limit the value to an investor. In our industry, we refer to this as “key man risk.” Identify and work to derisk significant business revenues or operational activities flowing through a single, irreplaceable individual.
Develop a succession plan for key management positions to demonstrate stability and scalability for the business.
Invest in leadership training and professional development to enhance your team’s capabilities.
Ensure there is clear and open communication with your management team about business priorities and goals.
Business Model: Investors analyze the business model of a company to understand its revenue streams, cost structure, and sustainability. They look for innovative and scalable models that can generate profits and maintain a competitive advantage.
Action Items:
Conduct a thorough analysis of your revenue streams, to identify areas for optimization and expansion.
Review your cost structure for efficiency gains, potentially through technology or process improvements.
Explore new business models that could offer competitive advantages, such as subscription services, partnerships, or new related lines of business. One of our clients distributed industrial cleaning equipment and detergents. He was able to capture a new market segment and open a very high-profit line of business, by establishing a rental segment of their business.
Valuation: Investors analyze the valuation of an investment opportunity to determine if it offers an attractive price relative to its potential returns. Establishing a fair market valuation of the business is critical for business owners to get right before presenting the opportunity to an investor.
Action Items:
Get an opinion of value from a firm with the relevant experience to do so at least annually, for 3-5 years in advance of an exit.
“Multiples” are a frequent term that is discussed around valuation. Often, we see that there is either misinformation or a misunderstanding about what multiples are relevant to a particular business, or what figure of financial performance the multiple should be applied. Particularly in the Lower Middle Market, owners are planning for a multiplier on revenue rather than what is much more common, earnings or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Getting a valuation well in advance of your planned exit can uncover opportunities to increase your value, provide comparative information to other businesses in similar industries, and identify areas that are limiting or hurting value.nities.
Eminence M&A Strategies provides a no-pitch, hassle-free, complimentary opinion of valuation for business owners.
Diversified Customer Base: A well-diversified customer base reduces the risk associated with heavy reliance on a few key customers. Investors prefer businesses that have a broad and stable customer portfolio, reducing the potential negative impact if one or a few customers are lost.
Action Items:
Analyze your customer portfolio to identify concentration risks and develop strategies to diversify.
Expand into new markets or segments to reduce dependency on a limited number of customers.
Foster relationships with a broader range of clients through networking, marketing or strategic partnerships.
Market Analysis: Investors assess factors such as the size of the market, market trends, competitive landscape, growth potential, barriers to entry, and any regulatory or technological changes.
Action Items:
Keep abreast of market trends and industry changes through regular research and analysis.
Conduct customer surveys or obtain market studies to better understand your market position and opportunities.
Analyze competitors regularly to identify market gaps and identify and protect your competitive differentiation.
Eminence M&A Strategies has an extensive database of industry reports that we would be thrilled to share and review with you.
Risk Assessment: Investors must carefully assess the risks associated with an opportunity. They consider industry-specific risks, market volatility, regulatory hurdles, competitive risks, and operational risks. Understanding and quantifying risks helps investors develop risk mitigation strategies.
Action Items:
Develop a comprehensive risk management plan, identifying potential risks and outlining mitigation strategies.
Complete a cybersecurity and IT vulnerability audit, one of the largest risks to companies is the rise of cybercrime, which is only aided by recent advances in AI technologies.
Consider how technology or innovation near your industry might impact your business in the future. An example would be smartphones and the camera film. Smartphones mean we take a much larger volume of photos, so the industries for cloud storage and social media sharing have exploded, but film processing and film sales plummeted.
Synergies and Integration: For a strategic Investor, they often seek synergies between the target business and their existing portfolio or strategic objectives. They assess how the acquisition can create value through cost savings, revenue synergies, access to new markets, or complementary product lines. The potential for integration and the ability to capture synergies can significantly influence investment decisions.
Action Items:
Identify potential strategic partners or acquisition targets that align with your business goals and offer synergistic opportunities.
Evaluate the operational, cultural, and technological compatibility of potential partners or acquisition targets.
Develop a clear integration plan that outlines how to realize synergies, manage change, and align the combined operations post-acquisition.
Clear and Transparent Information: Investors require accurate and transparent information about the business. They value clear communication and access to relevant data during the due diligence process. Investors expect complete and reliable information to make informed investment decisions.
Action Items:
Implement robust systems and processes for data management and reporting to ensure the accuracy and accessibility of business information.
Prepare a comprehensive due diligence package that includes financials, business plans, risk assessments, and other relevant information.
Foster a culture of transparency and open communication within the organization to ensure that information is shared effectively and accurately.
In addition to these factors, an investor also pays attention to macro environment factors such as interest rates, inflation, geopolitical stability, technological advancements, and policy changes. These factors play as much, if not more, a part in the investor’s decision-making process and investment timeline.
It's important to understand that different investors may prioritize these factors differently based on their investment criteria and strategy, risk appetite, and specific objectives. Therefore, it's essential to understand the specific preferences and criteria of the potential investor or investment group so you present your business compellingly and attractively.
