May 9, 2011: by Travis Kellett

Eleven Value Drivers That Increase the Sale Price of a Business (Part 2 of 3)

Last month we talked about Value Driver's #1 through #4. These value drivers were:
Value Driver #1: Improve Financial Statement Quality
Value Driver #2: Demonstrate Stable & Predictable Cash Flow
Value Driver #3: Delegate Personal Goodwill
Value Driver #4: Show Future Growth Potential

This month we will discuss Value Drivers 5 through 8, which are:
Value Driver #5: Strengthen Business Processes
Value Driver #6: Diversified & Loyal Customer Base
Value Driver #7: Find & Build your Niche
Value Driver #8: Consider Partial Seller Financing

With better performance in each of these areas, the greater the chance your business will sell at the higher range of the multiples normally associated with your industry.

Value Driver #5: Strengthen Business Processes
Establish and document standard business processes to show a potential buyer that the business can be maintained profitably after the sale. Buyers want to see a working system in operation. Document procedures, business practices, and anything else needed to operate the business.

Plans and manuals are a selling feature for a business as buyers often come from 'big business' where these are mainstream. Some examples of business processes that can enhance value include:

• Personnel recruitment, training and retention
• Business performance reports for management
• Customer, vendor, and employee communication
• Product or service quality control

Value Driver #6: Diversified & Loyal Customer Base
A broad customer base helps to insulate a company from the loss of any single customer.

Buyers examine a customer base to ensure a business isn't too dependent on major customers. A buyer may ask the following questions:

• How will current customers be retained?
• Are there any contractual arrangements with customers?

A rule of thumb is to avoid having one client responsible for more than 50% of revenue. High dependency on a single customer could hinder a sale, specifically if bank financing is involved.

Value Driver #7: Find & Build Your Niche
Buyers will often be willing to pay a premium for a business that has a strategic advantage over its competitors or something about it that can be leveraged for future gain.

Ask yourself - what are the barriers to entry in my business? In an acquisition, a buyer will often look for the following in a company:

• Solid market presence
• Proprietary products or processes
• Strong competitive advantage
• Scalability with capital or people

It is important to show how your competitive advantage will continue after you are gone.

Value Driver #8: Consider Partial Seller Financing
Seller financing is when a seller finances a portion of the purchase price - this plays a huge part in the successful closing of deals. If a business is selling goodwill (future profits), buyers will look to a seller to share in this risk.

The benefits of offering seller financing include:

• It often allows more buyers to qualify to buy a business, thus increasing the chances of multiple offers (about 1 in 50 interested buyers will place an offer, so it helps to have options.)
• Increased total compensation to the seller - it becomes a function to charge interest.
• A buyer is more likely to secure bank financing.

A workable structure for the majority of business sales is:

• 1/3 buyer cash, 1/3 bank financing, 1/3 seller financing

Stay tuned for the final three Value Drivers.

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