As 2020’s challenges resulted in a significant drop in M&A activity, deal flow is expected to pick up big time in 2021 and 2022 because of the suppressed workings of supply and demand. There’s a lot of money on the sidelines waiting to be put to work. There are a lot of business owners who were close to the decision to sell in 2019 – remember our earlier articles on the demographics of business owners – and are now very ready to retire. So my question: If this is going to be a seller’s market for the next year or two (or three?), how can you drive the value of your company so that you get the best possible price, even in the face of other business owners equally anxious to sell? Remember, a seller’s market means the average prices paid for good businesses could be higher than any time in the past decade. In our research, here are the key factors that we favor to drive value:
1. Asset Quality: Are the assets that the business depends on of good quality and long life so as to avoid the need to recapitalize the business in the near future? This applies to physical assets – equipment, facilities, etc. – but also intellectual property, the secret sauce that drove your success to this point.
2. Human Capital: Do your people have the skills and tenure to keep the business growing? Is the morale of the team strong enough to ensure retention when you’re no longer there?
3. Depth and Quality of Management: How good is the leadership team you will leave behind? Can they run and build the business without you? Do they have the knowledge of your processes, the relationships with your customers and suppliers, and the leadership abilities to carry on without you?
4. Financial Performance: Is the company’s history of profitability appealing to the next owner? Not just in admiring the profits you created, but in recognizing the presence of trends that will continue to deliver positive top and bottom line results into the future.
5. Scalability: Is it clear the business model can be scaled up without a major retrofit? Is the market there? Is what you sell valuable enough to have appeal to that market into the future so that the business has an inherent ability to grow and a market that will continue to want what it has to offer?
6. And finally, Risk: Is there inherent risk in your business that could negate the value of some of those factors above? Are you in bricks and mortar retail as ecommerce takes a greater and greater market share in the years ahead? Is it particularly susceptible to visible trends that exist today – climate change, consumer tastes, international competition, etc.?
That’s my list. If you have some thoughts on what else should be on the list, or removed, I’d love to hear from you. And let me know if we can help. We are Your CFO for Rent©.
