How do I Make My Business More Marketable to Buyers?

If you are in the minority of business owners thinking years down the road about an exit, you’ve taken a crucial first step that many others do not take. And, if executed correctly, it could pay immense dividends not only at the time of your exit but throughout the ongoing operations and growth of the business.

The Myth of Profit Maximization

Your first question may be, “What do I do to prepare?” I often tell business owners the real question is, “How do you make your business more marketable?”

I often encounter the assumption that increasing profits is the way to increase business value. While it’s true that it typically increases value, it’s not the only avenue.

When you sell your business, you typically will hire an investment banker who will create a buyer’s list to find as many credible buyers for your business as possible in what’s commonly called a “broad auction.” It’s not the only way to sell a business, but it’s common. And, as in any auction, one typically expects that with a larger group of interested buyers, the higher the top offer. In this case, you want as many qualified buyers at the table, to a point.

The question then becomes, “How do I get more buyers to the table?”

A Case Study in Value Creation

I have an example that explains this well.

When I was a sell-side investment banker, almost all our clients were the “I’m ready to sell now” type. However, a particular client still sticks out.

A client took the initiative years in advance to prepare to sell their business. In my opinion, they did everything they reasonably could to get top dollar.

Our client was a family-owned manufacturing business. They were niche manufacturers with excellent EBITDA margins, somewhere between 20% and 30%. While their business was “project-based” with little to no recurring revenue, they did well for themselves and consistently grew the business. In our first meeting with our client, he laid out what he did.

• First, he accepted that he had not done this before and needed guidance. He developed a paid advisory board for his company of about 3-5 people. Different backgrounds including bankers, consultants, business owners, and other advisors.
• He then realized, to sell his business to “top-dollar” buyers, he needed a management team that would transition to the buyers. Years in advance, he began looking for a general manager. After years of searching, he finally found his GM. He ensured the GM knew his plans and was on board with a sale. When the owner was ready to sell, the GM had years of experience working and managing the business with little oversight from the owner.
• He then found a reputable accounting firm which had experience working with business owners, M&A activity and a transactional perspective to review his financials. While audited financials may stand up better in due diligence, the buyer was satisfied and impressed with the quality of the financials. Top-dollar buyers often want “squeaky clean” financial statements and will engage an accounting firm to conduct due diligence on statements and tax returns. Typically, having three years of reviewed or audited financial statements will be enough for diligence, although depending on the industry or economic cycle, this may differ.
• He removed all personal transactions and non-operating assets from the business. Substantial addbacks, such as personal expenses, often make buyers wary of how solid an EBITDA number is. I’ve heard from a few buyers that they often want addbacks to be 10-20% of EBITDA, maximum.
• The most critical component was that this business had a story. Private equity firms and strategic buyers want a clear initiative and well-thought-out value thesis for the acquisition. Our client said, “We are branching out into government contracts. With your assistance and contacts, we believe we could expedite market penetration in the government space and grow more quickly.” Other value drivers, such as economies of scale with metals purchases, were also discussed. It was an attractive business to many buyers.

We felt the initiatives our client completed made a considerable difference in value. In the end, the buyers stated they could buy the company, specifically because the business had a general manager who would transition with the buyer. Without these initiatives, this transaction likely would not have happened.

If you’re contemplating the ROI on this, in our example, the seller received 7x EBITDA. The next highest bid was 5.5x EBITDA, and the difference was millions of dollars.

Is this worth your time?