The value of a company is eventually based on future cash flow, adjusted for the likelihood of it occurring. So the actions you take to position a company for sale are nearly the same as those to grow it or obtain new capital.
So argues Kenneth H Marks, managing partner of High Rock Partners and author of Player: 5 Keys to Position Your Business to Sell at a Premium.
He advises would-be sellers to focus on the fundamentals of their businesses and their alignment. For many management teams, this begins with a shift in mindset from how we have done things in the past to how do things need to be done in a future state to generate the expected cash flow and results, he says.
Read More: Preparing Your Business for Sale Part I
Selling a company for a premium requires selling the vision and future, using the past to evidence management's credibility and the business ability to perform. It requires articulating in strategic and financial terms the outlook and expected performance along with strategic initiatives. A buyer's or investor's evaluation of the business begins with understanding the strategy. In simple terms, management needs to understand its industry and be able to articulate its relative position and performance in the market compared to competition. Then it must be able to articulate a strategy to improve its position over time.
Common questions to ask include:
- Where does the company add value in the supply chain of its customers and suppliers?
- What activities are profitable for the business and why continue those that are not?
- What is the company's secret sauce or unique or difficult to duplicate aspect of the business?
Marks says a buyer is going to look at your management team in terms of what skills and experiences are required to build the business moving forward. The team that got you through the earlier stages of the business may not be the team to get you through the next. We recommend assessing your team for industry and functional knowledge relevant to the stage and expected plans of the business moving forward. Where it makes sense, implement professional development plans and train members of the team. In other cases, it may require hiring new talent to round-out the group. Having a proven team that can operate without significant dependence on any one person reduces the risk of execution and dependence on the owner or founder.
Read More: Preparing Your Business for Sale Part II
According to Marks, another issue that commonly surfaces in evaluating a company's ability to execute on its forecast is the capability of its systems and processes to scale as the business does. Management can reduce execution risk and enhance the value of the business by having infrastructure appropriate to the go-forward plans.
If the company is considering a capital raising, Marks says proactively raising funds before you need them can put the company in the driver's seat and control of its options. Raise capital when you can, not when you need it. A clean capital structure with clearly defined expectations (i.e. valuation) among stakeholders makes structuring a deal and getting to close easier. In some cases, it makes the difference between closing and a failed transaction.
Sourced from Australian Institute of Company Directors