If you’re thinking of selling your business in the next 3-5 years, you may want to consider possible risk drivers that could affect the purchase price of your company. Assessing these factors is key for sellers seeking to maximize the value of their business in preparation of a sale.
Some of the key risk factors sellers should consider include:
- Financial Performance: Potential buyers will consider how well a company uses its assets to generate profits. Profitability is a measurement of efficiency and a key indicator of a company’s success or failure. High profitability margins will often draw higher pricing multiples from potential buyers.
- Growth Opportunities: Buyers are interested in the growth potential of a business. The presence of clear growth opportunities for a company is likely to impact the price in a sale. Purchasers might look at untapped markets, expansion possibilities, additional product lines, etc. that can drive growth and additional revenue for the business.
- Customer concentration: When assessing the value of a business, prospective buyers look at how total revenue is spread across a company’s customer base. Typically, a business generating revenue from a few main customers is considered riskier, as losing those few customers could have a significant impact on revenue.
- Key man reliance: This risk arises when the organization depends too heavily on the knowledge or ability of one person/ a few people. A key man risk could sway purchasers to drive down the price of a deal to account for potential negative effects on business operations should a key person leave the company. To get the most value in a sale, it is crucial to have plans in place to reduce this risk, such as cross-training employees or developing suitable succession plans.
- Financial reporting: A company’s quality of financial reporting is of high interest to a potential buyer. Buyers rely on accurate financial statements to evaluate business performance. Questionable financial reporting may raise concerns about the perceived value of a business and will likely have a negative impact on price during a sale.
- EBITDA trend & growth: Growth trends in EBITDA and other profitability measures in a business are indicators that the business will continue to be successful post-sale. Growth trends are valuable to potential buyers as they give confidence that current financial targets are attainable post-sale. Sellers should continue maximizing business growth even during the sale process to maximize the selling price for their business.
- Competitive Advantages: What gives your company an edge over its peers? If a purchaser can understand how a business delivers goods/services in a better way than its competitors, it may be willing to attach a higher price to the sale. Competitive advantages like brand awareness, proprietary technology, location, etc. can go a long way in affecting the purchase price of a company.
- Management Team: Purchasers ideally look for a strong management team when acquiring a company. Preferably one that is independent of the owner.A strong management unit assures a buyer that effectively running the day-to-day operations of a business will not be severely impacted should there be a transition in ownership. The stronger the management team in place, the higher the multiple a purchaser would be willing to accept.
- Unutilized Capacity: Unutilized/excess capacity occurs when a company is producing output at less than the optimum level. Potential buyers will likely pay a higher amount for a company with excess capacity, as there would typically be a clearer path to growing the business output/performance using the resources already available to the company.
- Business Size: The larger the size of a company (in terms of its earnings), the higher the multiple a potential purchaser would be willing to pay. With a larger business often comes a larger customer base, lower customer concentration, economies of scale, etc. These are all main drivers that will influence purchasers to pay a higher multiple for a given company.
It is best practice to engage an M&A firm 3-5 years prior to a potential sale. An M&A team can help negotiate pricing, reach out to buyers, and identify key risk drivers that can impact a future sale. At Portage, we offer a Value Enhancement Program which examines your business for weaknesses that can drive the price of your business down and together we work with you to improve them. Our goal is to get your business to where it needs to be when you are prepared to sell.
Laryssa Rollo, CPA, CA, CBV | VP Portage M&A Advisory