Throughout the course of this series we have discussed key factors impacting business value and strategies to increase the worth of your business. In the final installment of this series we will provide tips on setting your business apart and managing risk.
Setting Your Business Apart
Increasing value is important, but efforts will be wasted if there is nothing unique about the business. Developing a differentiated and dynamic value proposition isn’t always easy, but it is critical to securing long-term growth and success.
Remember, once Apple introduced the iPhone, exceeding the capabilities of the popular Blackberry, it quickly rose to the top of the pack. Blackberry once had an interesting value proposition: the phone for professionals. But iPhone’s superior features appealed to a broad market of customers.
A business can evaluate several areas and functions to determine where its differentiators lie. In the case of Apple and Blackberry, value proposition is tightly linked to their products. But companies can compete on a variety of attributes, including the expertise of their professionals, quality, customer service, specialization, cutting-edge technology, geographic reach and more. Sellers should look at what sets them apart and focus on enhancing that unique aspect of their business.
To assess and improve their value proposition, sellers should ask key customers to critically evaluate their pricing, quality, service, features and benefits, ease of doing business, and terms and conditions compared to their competitors. If customers don’t rate the company as superior in several of these areas, sellers should look to improve.
A business with high risk exposure could see significant contraction in their valuation multiple. If, for example, 60 percent of sales is derived from just three customers, buyers will likely be nervous about the risk of losing a key customer. Other types of concentration could result in similar risk exposure. Reliance on a single supplier increases the potential for lost revenues if materials are not delivered on time, and sales limited to a narrow geographic area can inhibit growth. Reducing these risks lowers the expected rate of return and help increase business value.
A strong management team with a sufficient depth of expertise can reduce risk and drive business value. When a business is too dependent upon the skills and network of a sole owner, it may be less attractive to potential buyers.
Sellers that do a thorough risk evaluation in advance of a sale—and who put procedures in place to mitigate major risks—will likely see their multiples increase.
Setting Realistic Expectations
The most common pitfall associated with the seller’s asking price is an inflated sense of worth. It’s important to focus on tangible, quantifiable differentiators backed up by proof points. Without that, the perceived value of a business may be very different from the actual value. Most private equity buyers, who make up a high percentage of business buyers today, hire outside experts to help them conduct due diligence on profitability, products, markets, people and IT. Likewise, many sellers now hire their own experts in these areas well before the sale process begins to understand their weaknesses and remediate them before the buyer flags them.
When it comes to valuations, many buyers and investors remain focused on EBITDA. But there are many less measurable factors that can influence multiples and must be addressed, as well—including demonstrated growth potential, competitive differentiation and risk exposure. Sellers should take a critical, thorough look at their business to tease out all possibilities for value enhancement. Taking a holistic approach to preparing your business for sale can be the difference between a mediocre deal and a great deal.
Larry Goddard is a principal and practice leader in the management consulting practice at BDO USA, LLP. Larry has more than 30 years of management and advisory experience, helping hundreds of organizations throughout North America improve performance. He advises clients on strategic planning, operational and profitability improvement, turnarounds, bankruptcy, workouts, business restructuring and growth.
Larry Goddard, CTP
Management Consulting Principal, BDO USA, LLP
32125 Solon Road Cleveland, OH 44139
Dr. Tami Bolder is a Senior Manager in the Cleveland office of BDO Consulting and supports the Valuation and Business Analytics practice. She has over 12 years of experience performing business valuations for various purposes, including estate and income tax planning, litigation and marital dissolutions, as well as providing litigation services for multiple purposes such as wrongful death, fraud and breach-of-contract cases. Tami is currently focused on expanding BDO’s Healthcare Valuation practice, and she is one of 40 professionals nationwide who has successfully completed the American Society of Appraisers’ Multidisciplinary Advanced Education in Healthcare Valuation Program.
Tami Bolder, CPA, ABV, ASA, MBA, DBA
Consulting Senior Manager, BDO USA, LLP
BDO Cleveland - Solon Road Office