Posted by George Walden

Four of the many potential destroyers of value of your business when it is time to sell.

  1. As an owner, if you were to put yourself in the in the role of a buyer you would be asking “Where are the risks? Nothing introduces risk like inconsistent earnings. A buyer wants to see consistent cash flow. While windfalls, such as a large order or customer can have a positive effect on earnings most buyers will discount or give no credit to the non-normal year. Extremes are heavily discounted or ignored. While every buyer wants to own the next company with rocket growth, slow and steady increases show’s stability and for the buyer reduces risk.
  2. If you can’t go away for a month on vacation or feel the company would fall apart without your presence you have created a job not a business. Businesses are systems based. If your employees use data to make informed decisions and you are guiding the direction of the company, working on the business rather than working in the business, the market perceives greater value. If you have made yourself the center of your business, you have probably created the wrong atmosphere and need to change the face of the company.
  3. If 50- 80 % of your business comes from one customer or industry sector you probably have a concentration issue. Many industries by their nature revolve around customer concentration. My background is heavily oriented to the machining industry. Companies in the oilfield sector become known as a Haliburton, Schlumberger or a Baker “The customer’s” shop. Yet the same equipment can be used to cut aerospace, automotive, mining equipment, pump, valve, and may other types of parts, across many industry sectors. Smart business owners don’t put all their eggs in one basket. The commitment to diversification is the difficult part. Building stability in your customer base over multiple sectors can add tremendous value long term to the business.
  4. Last month I referenced one of the primary indicators of when it is time to sell is selling when the company is doing well. When industries and the companies in a sector are both doing well buyers typically are willing to be more aggressive and pay more. Being on the wrong side of either one of those cycles adds risk to the buyer which often translates to a lower valuation.

There are many other factors that impact the value and marketability of your company. Making change can be a very difficult process. Get with your team, board members or advisors early in the process to address these destroyers of value. Implemented properly you will have created a better company.

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About the Author
George Walden

George Walden

George Walden is a Managing Director and Principal in Corporate Finance Associates’ Houston office with twenty-five years experience as a middle-market investment banker. George is a member of CFA’s equipment industry practice group and an expert in the precision machining industry with special emphasis on manual machining, CNC precision machining, and gun drilling services and has been responsible for several industry-leading transactions. You can learn more about George HERE.

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