If you read any of the hundreds of articles on the topic of valuation of privately owned companies, you’ll get a laundry list of important but often esoteric measurements that your investment banker will quote to tell you what they think your company might be worth. Your head will spin as you try to translate all that jargon about ratios, metrics and multiples into the kind of action you should take to make your company more valuable. This blog from a career CFO is simpler and more direct, and hopefully more helpful if you’re thinking that time may be approaching. By the way, if you think your time is now, no need to read further – you’re probably already too late.
So here, in my opinion, are the things you want to be able to demonstrate when you start the exploration. And I really mean ‘demonstrate’ because talking about how great tomorrow is will get you nowhere unless that great tomorrow is a clear continuation of what’s happening today.
- Profit. Duh! You must have a pattern of profitability over the past 3 to 5 years that is based on steady growth of the business, not one-time events or home runs that aren’t a normal part of your business. That doesn’t mean you can’t have a loss year in there that can be explained away by an anomaly, e.g. COVID-19, but you only get to play that card once. You want a buyer to see potential for future profits based on the business you’ve built.
- Top line growth. A buyer is going to want the benefit of what is to come, not what you’ve already gotten, and that’s best demonstrated by steady revenue growth over the recent past. Profitability generated by cost cutting and productivity improvements is certainly a good thing, but it only gets you so far because at some point you can’t get any more mileage out of it. The most desirable source of profits is consistent revenue growth.
- An ample market size. A market presence that is sustainable with a product line that will continue to be relevant in your marketplace. Having the best DVD rental service didn’t save Blockbuster and a great history didn’t save Sears. Again, your buyer wants to buy the promising future, not the glorious past, and they’d like to believe that market already knows about your company and what you do.
- Solid, dependable accounting. The one thing you don’t hear enough about. A financial reporting system and solid accounting are the tools you will use to prove the first two items on this list. If your accounting has holes in it because you (a) save money by employing an underpowered accounting staff, or (b) don’t believe in paying income taxes on your profits, or (c) need to hide some pain points you don’t want anyone to see, your hopes for a high end selling price will quickly evaporate during due diligence.
- A credible planning system. You have a budget, or a forecasting methodology that you actually use, that is fed by your accounting history and that shows you know where your money is coming from and going to, and you know how to manage it.
Now you’re ready to call that ibanker and start the process, with all the ratios, metrics and multiples they want to bring to the table. If you’re not there yet but want to be, call us. We can help.
We are Your CFO for Rent.
