creating Value in your business to get top dollar When you leave it HOW TO PREPARE FOR SELLING YOUR COMPANY 22 hbma billing • may. june.2013 By Stephen Klein, CPA id you ever wonder why one business has buyers lined up willing to pay top dollar while another sits on the market for months – or even years? What do buyers look for in a prospective business acquisition? there are many opinions about what attributes or characteristics buyers seek, but here is what we know: the characteristics buyers search for must exist before the sale process even begins and it is your job as the owner to create value within your business prior to the sale. We call the characteristics that impact value the “value drivers.” Walk a Mile in a Buyer’s Shoes to get an idea of the importance of value drivers when preparing to sell your business, it is important to put on the buyer’s shoes for a minute. let’s look at a hypothetical case study that illustrates how a buyer might compare two similar companies with a different emphasis on value drivers. The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of $2 million, an owner who runs the business, and the systems and processes that create growth. The A Factor Company does not have a real management team in place and the owner generates a majority of its sales. The owner is the center point of the company, holding both the CEO and CFO positions. With this level of responsibility, the owner is burning out quickly. In comparison, The B Factor Company also has EBITDA of $2 million and a solid management team that runs the business, systems, and processes. The management team creates efficiencies within the business and the owner vacations for six weeks a year. if you were a buyer comparing these two companies, which would provide a more attractive business opportunity? how much more would you pay for a business with a strong management team (one of the most important value drivers)? Would you even be interested in buying a business whose management team (the owner) walks out when you walk in? investment bankers understand that companies that lack strong value drivers also lack a bevy of buyers. those buyers who are willing to negotiate for these companies do not typically come to the table with pockets full of cash. let’s look at several of the more important value drivers common to all industries: • A stable and motivated management team – if you can wait a year to sell your business, we suggest that you consider an incentive compensation system, cash or stock-based, that rewards key employees as the company performs (usually measured by increases in pre-tax income). sophisticated buyers know that with a solid management team in place, prospects are good for continued business success. Without a strong management team, it may be very difficult to sell your business to a third party or transfer it to an insider. • Operating systems that improve cash flow sustainability – operating systems include the computerized and manual procedures used in the business to generate its revenue and control expenses (i.e., create cash flow), as well as the methodologies used to track how customers are identified and how products or services are delivered. the establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale. D
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