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HOW DO I BUILD A VALUABLE BUSINESS

Guest post by: Howard Shore

Article Overview: If you would like to learn how to build a valuable business and get top dollar for your efforts, read further. Many business owners spend years building and working in their business with little or no thought about their value creation. One of my responsibilities at a Fortune 500 company was building one of its divisions through acquisition. While we successfully grew the division from $400 million to $600 million in revenue, I am most proud of the fact that we received almost $1 billion when selling it. This price was 38% higher than anything imagined internally or by investment banks we hired to explore alternatives. This had everything to do with how value was created.

HOW DO I BUILD A VALUABLE BUSINESS

If you would like to learn how to build a valuable business and get top dollar for your efforts, read further. Many business owners spend years building and working in their business with little or no thought about their value creation. One of my responsibilities at a Fortune 500 company was building one of its divisions through acquisition. While we successfully grew the division from $400 million to $600 million in revenue, I am most proud of the fact that we received almost $1 billion when selling it. This price was 38% higher than anything imagined internally or by investment banks we hired to explore alternatives. This had everything to do with how value was created.

There are a many factors to consider when building value. In this article I want to address the following:
- What are motivations for selling and buying?
- What can my business do without me?
- What should I be doing while I am going through the process?
- When is it the right time?
- What do I do when I think it is time to sell?

What are motivations for selling and buying?
To build value it is important to understand why selling and buying occurs. This understanding can be the difference between receiving top dollar for your financial and “sweat” investment, selling in a position of need, or worst of all, getting nothing. For example, by positioning yourself to appeal to more types of buyers you can be more selective in your suitor and auction your company to a higher bidder rather take the only offer that comes to the table.

The top reasons to sell:
-Lack of operating capital
- Need for growth capital
- Elimination of personal guarantees
- Age
- Health
- Boredom/burnout
- Liquidity/cash out
- Perceived incongruence between risk and reward
- Market opportunity

The primary reason people buy a business is for return on investment. The justification for a return will include:
- Remove a barrier to entry
- Eliminate competition
- Strategic fit
- Geography
- Customers
- Employees
- Tangible and/or intangible assets

What can my business do without me?
Imagine going to buy a used car, and the existing owner wants to sell it to you for top dollar. There is a catch, you can only have it without the engine and the seats. In this scenario, it is likely you are going to look for a different vehicle. It is not that you cannot put a new engine and/or seats in the car, but why buy that car in the first place? If your business success is primarily dependent on 1 or 2 people, and you are one of them, you are going to have a very hard time selling your business, if you can sell it at all. It is common to find a business that has not invested in finding, developing, and nurturing the best talent. As when buying a used car, you want to know that you are buying a reliable car that will run long after you take over the keys and title.

What should I be doing while I am going through the process?
For those of you who have children, have you had one of those moments where you took your eye off the baby, and he or she disappears? You felt fortunate nothing terrible happened. Well, watch your baby. Whether you have a strong business or one that is on life support, I recommend that you continue to run your business as if your life depends on it. On average, it takes 12 to 18 months to sell a business. Worse, sometimes they do not sell at all. Your competition, customer, and employee needs do not change or go away because you decided that you want to sell. The last thing you want is to lose a major customer or key employee while going through this process. In addition, some of the things you are going to be evaluated on include: how strong your growth potential is, customer and employee retention, strength of employees, and operating effectiveness. While they do look at the past, buyers will give more attention to today and will pay more when the trajectory is upward.

Most of us have gone house hunting and would agree that you are willing to pay more for a house that you think is going to appreciate more in value than others, has all the extras, is on a great lot, nice paint job, no clutter, good lighting, happy atmosphere, and great landscaping. Invest in your business like never before. I would invest in people development, brightening the atmosphere, team building, paint job, and signage. Hopefully you have been doing these things all along. If you haven’t, you are going to be pleasantly surprised by the results you have been missing.

When is the time right?
Sell when the market is ready. Waiting until you are ready can be a big mistake. The idea is to sell high and be careful that you are not overpaying to keep working. I attended a seminar offered by SmithBarney Citigroup, and they presented a very interesting analysis about paying for the privilege of working. The Geneva Capital Strategies group did an analysis of historical transactions and showed where owners were actually losing money by keeping their businesses. They actually would have been better off reinvesting the net after-tax proceeds from their sale into other investments and not working at all.

It is typically not a good idea for you to sell your business when it is down, or if you think that prospects are not good. Buyers see the same things you do and rarely buy what the seller thinks he is selling. Even if they don’t agree, buyers are usually going to try to take advantage in terms of price. It is always best to sell when business is good (e.g. market share and sales are growing, margins are expanding, and business climate is strong).

What do I do when I think it is time?
Do not try to go this alone. I can tell you from first-hand experience that people who hired the wrong type of advisors or none at all cost themselves 20% or more in sale price. There are reasons why people make a living in this arena. For example, structuring your deal incorrectly can cost you 20-50% of the cash in your pocket. In addition, it is very important to get assistance to bring multiple qualified buyers to the table and to have someone very experienced at negotiating the sale of a business. There have been cases where sellers have been able to more than double their price by bringing in competitive parties and having a seasoned negotiator working on their behalf. Just because you have good negotiation skills does not make you qualified to sell your business.

The following are some of the different advisors you should consider when selling:

Business Valuation Experts – Independent of any business intermediary, hire a valuation expert to determine what your business is worth. Contrary to common opinion, there are no rules of thumb that can be used to determine worth. Every business is different, and you need to know what you are worth before you get into the emotions of the process.

Business Consultant – Before you hire someone to market the business for sale, you should do all you can to increase value. Bringing in a consultant to look objectively at how to increase profits and strengthen your team can yield huge dividends. Depending on how the buyer is valuing your business, every $1 you increase in profit through revenue growth or cost savings may multiply by $10 in sales price.

Mergers and Acquisitions Experts/Investment Banks – They will help you at every step of the acquisition process. They will help develop your offering circular, develop a selling strategy, identify potential suitors, provide advice on pricing, packaging and positions, and most important give your business maximum exposure in a confidential way. They typically have ready and qualified buyers, access to the right people, highly qualified staff, and excellent negotiation skills.

Business Brokers – In the case of smaller deals, a business broker can help you market the sale of your business. You are not going to get the same quality as Mergers and Acquisitions or Investment Bank experts. You want someone that is going to bring you multiple buyers and negotiate effectively on your behalf. Many in this industry are not working on this full time and act very much like real estate brokers. However, the good ones can bring a lot of value, help you dramatically reduce the time it takes, and increase the value you get for your business.

Accountants and Lawyers - Obtaining good legal and accounting advice is a must. However, many people place too much trust in their accountants and lawyers to consult on value creation, finding the deals, and evaluating the deals. These are not their areas of expertise, and they are not best suited to help you in these areas. In some cases your lawyers can be helpful in negotiations, but that depends on their practice specialty.

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Article Tags: acquisition, business owners, fortune 500 company, investment banks, top dollar



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