Most successful middle-market business owners are optimistic and confident in nature. While these traits are important to growing an enterprise, they often cause an owner to have a false sense of security regarding the value of their business. In my thirty years of advising business owners on the sale of their business, most owners incorrectly believe their businesses are worth more than the market will bear. This misconception frequently keeps the owner from even considering important changes to the business that will support a higher valuation at the time of a sale.
Important Takeaway: In most cases, a business that has strong revenue growth rates over the past two and current year with outstanding profitability margins for their industry and meets three or more of the factors driving value as listed below, will be poised to receive a premium valuation. This assumes the right buyer is found, the company is positioned for sale correctly and a competitive bid sales process is utilized. While an owner might think they know who the right buyer is, merger and acquisition studies have shown that most of the time, the buyer was unknown prior to engaging in the sale process.
The buyer has strong strategic reasons for acquiring your company. A few examples are the buyer has a compelling need to diversify into new geographic or product/service markets or to eliminate a key competitor in order to increase market pricing power.
The acquisition will enable considerable economies of scale expense savings such as the elimination of duplicative overhead or perhaps larger vendor discounts, etc. Meaningful cross-selling opportunities are available.
Your company is recognized by its peers as one of the top five industry leaders.
A significant portion of your company’s revenue is recurring, predictable and sustainable.
Your business owns patents and proprietary technology. It has developed key processes that would benefit the acquirer. The company has a recognizable product or service brand(s) that impacts your customers’ buying decisions. Rapid expansion of revenue and profitability is possible under new ownership.
Your business has a strong, deep, cross-trained, proven management team growing the business and is not dependent on the owner for the continuation of its success.
Strong Growth Rate
Revenue and operating profits are growing at 20 percent or more a year.
Your company has a history of generating among the highest gross margins and operating margins in the industry.
Your company has revenue of at least $50 million or EBITDA of $10 million plus.
Customer Base and Concentration
The customer base is highly diversified and the loss of any customer would have an immaterial effect on revenue.
Audited financial statements are available for the past three years. A compelling business plan is in place incorporating a thoughtful, defensible, three year financial forecast that supports continued high growth.